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New Zealand police raided several homes and businesses linked to the founder of Megaupload.com, a giant Internet file-sharing site shut down by U.S. authorities, on Friday and seized guns, millions of dollars, and nearly $5 million in luxury cars, officials said.

Police arrested founder Kim Dotcom and three Megaupload employees on U.S. accusations that they facilitated millions of illegal downloads of films, music and other content costing copyright holders at least $500 million in lost revenue. Extradition proceedings against them could last a year or more.

With 150 million registered users, about 50 million hits daily and endorsements from music superstars, Megaupload.com was among the world’s biggest file-sharing sites. According to a U.S. indictment, the site, which was shut down Thursday, earned Dotcom $42 million in 2010 alone.

Although the company is based in Hong Kong and Dotcom lives in New Zealand, some of the alleged pirated content was hosted on leased servers in Virginia, and that was enough for U.S. prosecutors to act.

New Zealand police served 10 search warrants at several businesses and homes around the city of Auckland.

Police spokesman Grant Ogilvie said the seized cars include a Rolls Royce Phantom Drophead Coupe worth more than $400,000 as well as several Mercedes. Two short-barreled shotguns and a number of valuable artworks were also confiscated, he added.

He said police seized more than $8 million, money that was invested in various New Zealand financial institutions and which has now been placed in a trust pending the outcome of the cases.

New Zealand’s Fairfax Media reported that the four defendants stood together in an Auckland courtroom in the first step of the extradition proceedings.

Dotcom’s lawyer raised objections to a media request to take photographs and video, but then Dotcom spoke out from the dock, saying he didn’t mind photos or video “because we have nothing to hide.” The judge granted the media access, and ruled that the four would remain in custody until a second hearing Monday.

Dotcom, Megaupload’s former CEO and current chief innovation officer, is a resident of Hong Kong and New Zealand and a dual citizen of Finland and Germany who had his name legally changed. The 37-year-old was previously known as Kim Schmitz and Kim Tim Jim Vestor.

Two other German citizens and one Dutch citizen also were arrested and three other defendants _ another German, a Slovakian and an Estonian _ remain at large.

Megaupload has retained Washington power attorney Bob Bennett to defend it, according to a person inside the company. Bennett is best known for representing former President Bill Clinton during the Monica Lewinsky scandal. The person within Megaupload spoke on condition of anonymity because he was not authorized to discuss the company’s plans.

The Electronic Frontier Foundation, which defends free speech and digital rights online, said in a statement that the arrests set “a terrifying precedent. If the United States can seize a Dutch citizen in New Zealand over a copyright claim, what is next?”

The indictment was unsealed one day after websites including Wikipedia and Craigslist shut down in protest of two congressional proposals intended to make it easier for authorities to go after sites with pirated material, especially those with overseas headquarters and servers.

Before Megaupload was taken down, the company posted a statement saying allegations that it facilitated massive breaches of copyright laws were “grotesquely overblown.”

“The fact is that the vast majority of Mega’s Internet traffic is legitimate, and we are here to stay. If the content industry would like to take advantage of our popularity, we are happy to enter into a dialogue. We have some good ideas. Please get in touch,” the statement said.

Several sister sites were also shut down, including one dedicated to sharing pornography files.

News of the shutdown seemed to bring retaliation from hackers who claimed credit for attacking the Justice Department’s website. Federal officials confirmed it was down for hours Thursday evening and that the disruption was being “treated as a malicious act payday loans online.”

A loose affiliation of hackers known as “Anonymous” claimed credit for the attack. Also hacked was the site for the Motion Picture Association of America, which has campaigned for a crackdown on piracy.

According to the indictment, Megaupload was estimated at one point to be the 13th most frequently visited website on the Internet. Current estimates by companies that monitor Web traffic place it in the top 100.

Megaupload is considered a “cyberlocker,” in which users can upload and transfer files that are too large to send by email. Such sites can have perfectly legitimate uses. But the Motion Picture Association of America estimated that the vast majority of content being shared on Megaupload was in violation of copyright laws.

The website allowed users to download some content for free, but made money by charging subscriptions to people who wanted access to faster download speeds or extra content. The website also sold advertising.

Megaupload was unique not only because of its massive size and the volume of downloaded content, but also because it had high-profile support from celebrities, musicians and other content producers who are most often the victims of copyright infringement and piracy. Before the website was taken down, it contained endorsements from Kim Kardashian, Alicia Keys and Kanye West, among others.

The company listed Swizz Beatz, a musician who married Keys in 2010, as its CEO. He was not named in the indictment and declined to comment through a representative.

The five-count indictment, which alleges copyright infringement as well as conspiracy to commit money laundering and racketeering, described a site designed specifically to reward users who uploaded pirated content for sharing, and turned a blind eye to requests from copyright holders to remove copyright-protected files.

For instance, users received cash bonuses if they uploaded content popular enough to generate massive numbers of downloads, according to the indictment. Such content was almost always copyright protected, the indictment said.

The Justice Department said it was illegal for anyone to download pirated content, but their investigation focused on the leaders of the company, not end users who may have downloaded a few movies for personal viewing.

A lawyer who represented the company in a lawsuit last year declined to comment Thursday. Efforts to reach an attorney representing Dotcom were unsuccessful.

Although Megaupload is based in Hong Kong, the size of its operation in the southern Chinese city was unclear. The administrative contact listed in its domain registration, Bonnie Lam, did not respond immediately for a request for comment sent to a fax number and email address listed.

The indictment was returned in the Eastern District of Virginia, which claimed jurisdiction in part because some of the alleged pirated materials were hosted on leased servers in Ashburn, Virginia. Prosecutors there have pursued multiple piracy investigations.

The Justice Department also was investigating the “significant increase in activity” that disrupted its website. It said in a statement that it was working to “investigate the origins of this activity, which is being treated as a malicious act until we can fully identify the root cause.”

The site appeared to be working again late Thursday. A spokesman for the Motion Picture Association of America said in an emailed statement that the group’s site also had been hacked, but it too appeared to be working later in the evening.

“The motion picture and television industry has always been a strong supporter of free speech,” the spokesman said. “We strongly condemn any attempts to silence any groups or individuals.”

____

Matthew Barakat reported from McLean, Virginia. AP Business Writer Daniel Wagner in Washington contributed to this report.

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President Barack Obama is considering nominating Lawrence Summers, his former National Economic Council director, to lead the World Bank when Robert Zoellick

Opening arguments are to resume today in the trial of three former Nortel Networks Corp. senior executives accused of fabricating profits to trigger multi-million dollar bonus payouts.

Chief prosecutor Robert Hubbard is expected to continue laying out the Crown

European Central Bank Governing Council member Ewald Nowotny said Standard & Poor

Credit card rewards are the new social currency.

Citibank customers can now use Facebook to pool their rewards points online.

The bank on Tuesday launched a Facebook application that lets users team up to use their points, whether it’s for charity, a group gift or a personal goal. Citi says it’s the first bank to offer such a feature.

The app builds on a service Citi introduced last year that lets customers transfer points to one another on the bank’s homepage. After getting feedback, executives decided to expand the rewards sharing capability and offer it through social media.

“Now we’re delivering it to where customers are every day,” said Ralph Andretta, who heads Citi’s loyalty programs and co-branded cards.

Andretta noted that customers will have far more flexibility with their points, whether it’s to help a friend fly home from college or team up for a big-ticket reward. The company is giving away 2,500 free rewards points to each of the first 4,000 customers to sign up.

To get started, customers download the ThankYou Point Sharing App, which is linked on Citi’s Facebook page at http://www payday loan.facebook.com/citibank.

Customers can then start a rewards pool by naming a recipient and explaining its purpose. The recipient of the points maintains control of any contributions, so it’s best if you know and trust that person.

Pool recipients must be individuals and cannot be an organization, even if the intended goal is a charitable donation.

Users can promote their goals by sharing links on their Facebook pages or privately inviting other Citi customers to contribute. Donors can see the total number of points a cause has amassed.

The app can collect personal information from Facebook profiles. But Citi says it does not share any customer account information with Facebook.

The program isn’t only for credit card holders either. Citi checking account customers can also earn ThankYou points. Citi introduced its lineup of ThankYou credit cards last year.

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Manufacturing in India and China improved in December, a sign the world

Manufacturing in India and China improved in December, a sign the world

The so-called January effect, in which small-cap stocks have tended to outperform large-cap stocks at the start of each year, is not evoking the same bold confidence that it has during more predictable market periods.

“Small-cap stocks do tend to benefit from the increased attention that investors pay to their stock portfolios at the beginning of each year,” acknowledged Tom Jacobs, lead adviser for Motley Fool Special Ops (a special situations and opportunistic value service) in Marfa, Texas. “Having said that, however, a number of factors such as Europe’s problems are really freaking out investors right now.”

For example, his current favorite small-cap stock, Canadian-based Primero Mining Corp. (PPP), is actually a play on precious metals. That company owns Mexico’s highly productive San Dimas gold and silver mine; its cash flow equals its market capitalization; it carries little debt; and it has stated its intention to expand its metals assets in the Americas.

Investor nervousness about stocks of all sizes has encouraged the managers of some of the better-performing small-cap portfolios to aggressively seek out stocks they consider currently undervalued.

“Investors should remember that, in an improving economic environment, small caps tend to outperform large-cap stocks,” said Matthew Hart, portfolio manager of the $1.1 billion Invesco Van Kampen Small Cap Growth Fund A (VASCX), which has a three-year annualized return of 13 percent.

But while small caps are capable of supplying high growth and high returns, the economic sensitivity of these companies can never be disregarded, Hart cautioned.

“Small-cap stocks still look good and their valuations are reasonable when compared to large-cap stocks,” said William McVail, portfolio manager of the Turner Small Cap Growth Fund (TSCEX), which has a three-year annualized return of 21 percent. “We like the energy sector and especially the natural gas plays.”

The small-cap choices they prefer feature unique characteristics.

One example owned by both Hart and McVail is Clean Harbors Inc. (CLH), one of the nation’s largest providers of environmental services. As the largest operator of non-nuclear hazardous waste disposal in North America, Clean Harbors serves more than 50,000 customers.

Strong financially with modest debt, Clean Harbors has the assets, facilities and expertise that are difficult for competitors to match. McVail considers Clean Harbors especially well-positioned to profit from hydraulic fracturing — the method by which natural gas is released from shale rock. That practice has evoked controversy as its environmental, health and safety impacts are debated.

Insight Capital Research and Management Inc. in Walnut Creek, Calif., also recommends Clean Harbors. Insight Capital’s CEO and CIO Jim Collins, a longtime small-cap expert, predicts that “2012 will be a stock picker’s market,” requiring “discipline and patience.” Health care, technology and energy are Collins’ favored small-cap themes for the year.

Collins’ two other favorite small-caps are unique: Questcor Pharmaceuticals (QCOR), which develops medications for central nervous system disorders such as epilepsy and multiple sclerosis, and Silicon Motion Technology Corp. (SIMO), which manufactures graphics, video and audio applications for products ranging from handheld devices to LCD products and whose clients include the likes of Hewlett-Packard and Intel.

“I see the employment picture improving in 2012, and I believe we’re in the sixth or seventh inning of the bad housing environment,” said McVail of Turner Small Cap Growth. “For example, we have a portfolio holding in TrueBlue Inc. (TBI), a blue-collar staffing company in Tacoma, Wash., and any turn in the economy is going to be reflected in a company like this.”

TrueBlue, with most of its branch offices located in the U.S., primarily sends manual-labor temps to small and midsize businesses. With strong finances, no debt and plenty of cash, its business model and brand are well-respected.

The top portfolio holdings of Turner Small Cap Growth were recently Healthspring Inc., Taleo Corp. A, Genesee & Wyoming Inc., The Finish Line Inc., Clean Harbors Inc., Questcor Pharmaceuticals, SuccessFactors Inc., Cubist Pharmaceuticals, Northern Oil & Gas Inc. and WellCare Health Plans. This “no-load” (no sales charge) fund requires a $2,500 minimum initial investment.

While an economic upturn is still not a certainty, it would make a positive difference for small-cap stocks in 2012.

“The U.S. consumer is gradually improving, and the employment picture, while not great, is at least stabilizing,” says Hart of Invesco Van Kampen Small Cap Growth. “What we haven’t seen on the consumer side is wage growth and, once we start to see that, I think the picture will improve even more.”

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