Feds Indict Musician on Landmark Massive Streaming Fraud Charges

Federal investigators have indicted a North Carolina man over a scheme in which he allegedly used bot accounts and hundreds of thousands of AI-generated songs to earn more than $10 million in royalty payments from the major streaming services.

The case is a landmark development in the still-developing music streaming market, with the U.S. Attorney’s Office for the Southern District of New York calling it the first criminal case involving artificially inflated music streaming.

In the indictment, the prosecutors say that for the past seven years, North Carolina musician Michael Smith had been running a complex music streaming manipulation scheme to fraudulently profit off of billions of streams from bot accounts. “At a certain point in the charged time period, Smith estimated that he could use the Bot Accounts to generate approximately 661,440 streams per day, yielding annual royalties of $1,207,128,” the prosecutors said in the indictment announcement.

Smith, 52, was charged with wire fraud conspiracy, wire fraud and money laundering conspiracy, totaling to a combined maximum of 60 years in prison if convicted.

“Through his brazen fraud scheme, Smith stole millions in royalties that should have been paid to musicians, songwriters, and other rights holders whose songs were legitimately streamed,” said Damian Williams, U.S. Attorney for the Southern District of New York. “Today, thanks to the work of the FBI and the career prosecutors of this Office, it’s time for Smith to face the music.”

An attorney for Smith declined to comment.

Both streaming fraud and AI music have been hot topics in the music industry in recent years (though the industry has also shown some cautious optimism over AI’s potential as well). The major labels have voiced concerns on both topics for the same reason — that streaming fraud dilutes the royalty pool and takes away revenue from the actual artists driving real music listening, while AI songs made at the click of a button can exacerbate those problems. Spotify instituted a new policy at the beginning of the year in requiring at least 1,000 streams before creators will earn any revenue on songs.

Streaming payments are doled out through a “pro rata” model in which artists get paid proportionally to how much of the overall streaming pie they’re responsible for. Therefore, as the indictment notes, the fraud “diverts sound royalties away from artists whose sound recordings were legitimately streamed by real consumers.”

Smith allegedly obtained thousands of email accounts through bulk account vendors to sign up for streaming services, at one point having about 10,000 bot accounts at his disposal on streaming services like Spotify, Apple Music and Amazon Music. Given how labor-intensive setting up thousands of accounts would be, Smith paid people in the U.S. and abroad to help, per the indictment. He allegedly bought family plan accounts as a cheaper way to get his bots signed up. To make the payments look more legitimate, he used a service out of New York that provides debit cards to employees at companies, providing that company with fake names he said were his employees’.

According to the DOJ, Smith spread the streams from his bot accounts across thousands of tracks rather than a few to make it harder for streaming services to detect the behavior. As he said in an email referenced in the indictment document: “In order not to raise any issues with the powers that be we need a TON of content with a small number of streams.” (Smith was not immediately reachable for comment.)

At first, Smith allegedly tried using a publicist’s music catalog and offered to sell streams to artists to get the scale he needed for the scheme. Neither of those strategies worked, and by 2018, the indictment said, he turned to artificial intelligence, which became the engine to make the streaming farm possible as he then had access to hundreds of thousands of songs. Smith allegedly worked with an unnamed CEO of an AI music company (referred in the lawsuit only as co-conspirator three) as well as an unnamed music promoter to make hundreds of thousands of AI songs.

In a 2019 email describing their plan, the CEO said “what we’re doing musically here… this is not ‘music,’ it’s ‘instant music’ ;).”  Smith and the AI music CEO had established an agreement in which the CEO would supply thousands of songs per month, and Smith would give him a 15 percent cut of the revenue.

Over the years, the AI songs were getting higher quality and harder to detect, the indictment said. In an email in February, Smith allegedly wrote that the music had “generated at this point over 4 billion streams and $12 million in royalties since 2019.”

As the indictment notes, Smith repeatedly denied taking part in streaming fraud when the music distribution company he used had told him that they’d received streaming abuse claims from multiple outlets, and that the music would be taken down. “This is absolutely wrong and crazy, how can I appeal this,” he wrote.

In March 2019, the indictment detailed, Smith had been in direct communication with an unspecified streaming service, asking for his music to be put back online. “You have slandered me to my distributors claiming I’ve had fraudulent streams, however you have provided no proof of this claim, you have provided me no chance to defend myself, and you have withheld money that is owed to me,” Smith wrote. “I’m asking you to provide me with the documentation of what you feel was done artificially.”

The indictment detailed another case from last year in which the Mechanical Licensing Collective had stopped paying Smith over fraud concerns. Again, Smith, as well as his representative, had allegedly lied to the MLC purporting that the music was his, and that “none of Mike’s works are computer-generated creations.”

When asked for comment, the MLC’s CEO Kris Ahrend said the indictment “shines a light on the serious problem of streaming fraud for the music industry.” “As the DOJ recognized, The MLC identified and challenged the alleged misconduct, and withheld payment of the associated mechanical royalties, which further validates the importance of The MLC’s ongoing efforts to combat fraud and protect songwriters.”

From Rolling Stone US.