Scandal spreads to Murdoch TV empire

Allegations of corporate espionage in satellite broadcasting may attract unwanted attention from US authorities

Rupert Murdoch’s media empire has been dragged into allegations of corporate espionage in the lucrative satellite television market dominated by News Corp companies.

An Italian computer expert who is the prime suspect in a piracy ring on trial on Italy for the alleged targeting of pay-TV companies was working as a consultant for a News Corp subsidiary involved in the industry.

Documents obtained by The Independent show that Pasquale Caiazza was receiving regular payments from a bank account controlled by News International, Mr Murdoch’s British newspaper business.

The American Department of Justice is understood to be monitoring the Italian court proceedings as part of a wider review of evidence of potential wrongdoing within the News Corp empire.

The DoJ probe was triggered by Britain’s phone hacking scandal and could lead to Mr Murdoch and the News Corp board being formally investigated under US anti-corruption laws.

But problems facing Mr Murdoch’s vast conglomerate are now in danger of spreading beyond his UK newspaper interests to his vast television holdings.

Mr Caiazza, a Naples-based computer security expert, received nearly £12,000 in monthly instalments during 2003 and 2004 from a News International bank account in London. Using the hacking nickname “Linixone”, he is accused of pirating satellite TV encryption cards produced by Nagra France, a company which held a contract to supply the technology to Sky Italia, a News Corp company.

After the discovery of the hacking of Nagra France’s smart cards, Sky Italia’s then chief executive Tom Mockridge, who is now in charge of NI in London, ripped up a multi-year contract with the company. A new encryption card contract was then awarded by Sky Italia to NDS, another News Corp subsidiary which was employing Mr Caiazza as a consultant, it says, for intelligence on pirating against it.

NDS technology is used by 85 pay-TV broadcasters around the world, including Britain’s BSkyB, DirectTV in the US and Foxtel in Australia.

Neither NI, NDS nor Sky Italia are defendants in the Italian proceedings and all deny any wrongdoing. Indeed, because the piracy circle on trial in Sicily also targeted NDS smart cards, NDS and Sky Italia are listed as “injured parties”.

But Italian surveillance evidence leads to uncomfortable scrutiny of the Murdoch empire and its dealings with Mr Caiazza and the shady world of pay-TV hacking where satellite broadcasters spend heavily to ensure the technology protecting their encrypted channels is secure.

In 2003, Sky Italia, which had been formed a year earlier by the merger of two failing Italian pay-TV businesses, was dealing with a significant pirating problem. In the words of Mr Mockridge, who had been brought in from Australia by Mr Murdoch with a brief to turn $300m annual losses in Italy into profit within three years, both Telepiu and Stream, the two broadcasters merged to form Sky Italia, “had been extensively hacked”.

Mr Mockridge told the Wall Street Journal in October 2002 that one solution to the problem would be to change existing Telepiu and Stream technology to run encryption cards provided by NDS. There is no suggestion that he was aware of the activities of the alleged hackers.

Established by academics in Israel in 1988, NDS was acquired in 1992 by News Corp and has since grown into a global leader in satellite television access technology. Its headquarters is in Staines, west London.

It was announced last week that NDS is being sold to American computing giant Cisco in a $5bn deal which will net News Corp an estimated $1bn.

One of the targets given to Mr Mockridge when he arrived in Italy in the autumn of 2002 was to achieve five million Sky Italia subscribers by 2007. But the widespread use in Italy of pirated smart cards meant this was ambitious.

Nagra France had a long-standing contract inherited by Sky Italia to supply its latest encryption card, known as the Seca 2, which the broadcaster was obliged to honour. The continued integrity of Seca 2 was therefore crucial to Sky Italia’s plans for expansion.

Italian prosecutors have outlined evidence which shows that Mr Caiazza, a computer expert based in Naples, was in close contact with Davide Rossi, at the time the secretary general of a pan-European anti-piracy body known as AEPOC.

Mr Rossi, who was also recruited as a consultant by NDS to work with it in Italy, is one of Mr Caiazza’s co-defendants along with 24 others accused of involvement in smart card hacking in the Sicily piracy trial.

He is accused of providing support to the hackers which, in words of the Italian authorities, was carried out “in the exclusive interest of the company NDS which was operating in a competitive system on the Italian market by providing Caiazza with materials, money, credit and cover including with the judicial authorities and the police”.

Mr Rossi, who has strongly denied any wrongdoing and was involved in the framing of Italian anti-piracy laws now being used against him, insists that he was in touch with Mr Caiazza to gather information about the techniques used by hackers to ensure legal safeguards were effective and he was forwarding his evidence to the authorities.

But prosecutors in Italy suggest the relationship between the Murdoch empire and the alleged hackers was more complex.

In a court document seen by The Independent, Italian investigators said: “The interception activity, despite not providing unequivocal proof against Rossi, has however allowed us to gather evidence leading to the reasonable hypothesis that NDS, presumably, gave Caiazza, via its Italian consultant Rossi, access codes to transmission systems, codes which should have remained secret and were instead used by hackers to create a programme HACK V7.”

The document adds that HACK V7 was used to decode Seca 2 “with very serious financial and reputation losses caused to Nagra”.

Phone taps by the Italian police include a conversation in which Mr Rossi expressed concern that it would be thought that NDS had paid Mr Caiazza to conduct piracy against a rival once the computer hacker’s links to NDS were discovered by police.

On 7 December 2004, Mr Rossi, who pointed out that NDS had itself been hacked, said to the alleged hacker: “So it seems easy that the link will be made that NDS paid you to do the pirating against a rival.”

In response, Mr Caiazza said: “We must try to not let anyone find anything.”

In a subsequent conversation, Mr Caiazza complained that Len Withall, a former detective chief inspector in Surrey police, who was head of security in Europe for NDS, had stopped paying his expenses. Italian investigators cite these intercepted conversations in support of their presumptive case against Rossi and Caiazza.

Documents obtained by The Independent show that payments from NDS reached Mr Caiazza via an unusual route. On 17 December 2003, he was paid 1,000 euros (£836) from an account with the international division of HSBC at its headquarters in London’s Docklands. The account holder is recorded as “News International Limited”.

The payment was the first of 11 transfers, varying from 1,000 euros to 2,050 euro, from the same account made to Mr Caiazza until October 2004. One notice, issued by Mr Caiazza’s UniCredit Banca on 24 September 2004, records the reason for the deposit as: “NDS payment.”

NDS told The Independent that like most companies in the fight against pay-TV piracy, it used “industry contacts” to track and catch hackers and pirates. The company said this strategy was neither illegal nor unethical.

The company, which by 2003 was a sizable operation with at least 1,000 employees, an Italian office and its own London headquarters, confirmed a News International bank account was used to pay Mr Caiazza, saying it was “common practice” for sister companies such as NI to provide payroll services.

It added that the payments were made to Mr Caiazza “in return for intelligence against other pirates” and said it wholly refuted any allegation that either Mr Caiazza or Mr Rossi acted illegally on its behalf.

In a statement, NDS said: “NDS is a global leader in the fight against pay-TV piracy, having repeatedly and successfully assisted law enforcement in that important effort.

Like most companies in the conditional access industry - and many law enforcement agencies - NDS uses industry contacts to track and catch both hackers and pirates. This is neither illegal nor unethical. And, to ensure that all activity remains completely within legal bounds, NDS staff and their contacts operate under a clear code of conduct for operating undercover.

These allegations were the subject of a long-running court case in the United States. This concluded with NDS being totally vindicated of all piracy charges and its accuser having to pay almost $19m in costs. NDS is not a defendant in the ongoing legal action in Sicily. Indeed, the Italian court lists NDS as an injured party to the action.”

NI said last night that Mr Caiazza has never been one of its employees. A spokeswoman said: “These payments were made by NDS. News International provided payroll services for NDS, in line with common practice between sister companies. “

There is no suggestion that Mr Mockridge, who was transferred to London by Mr Murdoch last July to turn around NI following the departure of former chief executive Rebekah Brooks during the phone hacking scandal, had knowledge of the activities of the alleged hackers.

But in the same year as a fresh wave of piracy attacks on Seca 2 cards from January 2004 onwards, during which the hacking ringing is alleged to have obtained 40,000 of the smart cards from Sky Italia’s Milan headquarters, Mr Mockridge announced that the broadcaster was ending its Nagra France contract and moving uniquely to NDS.

Speaking in April 2004, Mr Mockridge said: “To ensure ongoing security of transmission and to achieve the efficiency and stability of a common software platform, it is necessary to use only a single encryption system and Sky [Italia] has chosen NDS to be its single encryption system in the future.”

NDS, which has 5,000 employees worldwide, is no stranger to lawsuits accusing it of targeting the smart card systems of its rivals. To date, it has faced four legal claims and, after spending an estimated £50m in lawyers’ fees, has successfully defended all of them.

In a statement, News Corp said: “We are proud to have worked with NDS whose industry-leading technology has transformed TV viewing for millions of people across the world and to have supported them in their aggressive fight against piracy and copyright infringement.”