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Suddenly, Hollywood is having to confront the sort of nightmare scenario usually found only in movie scripts: its greatest enemy may lie within. For years Tinseltown has urged everyone from George Bush to Vladimir Putin to clamp down on movie pirates, but now it has emerged that Hollywood's Public Enemy No 1 was an insider who could have inflicted millions of dollars worth of damage on the only industry in America that - for now, at least - has a surplus balance of trade with every country in the world.
When FBI agents swooped on the Chicago home of Russell Sprague a few days ago they uncovered a cinematic treasure trove which has raised alarming questions over possible links between the movie industry and sophisticated pirating networks.
Detectives found scores of the latest movies - including Cold Mountain and The Last Samurai - which were supposed to have been sent to Academy Awards judge Carmine Caridi to review for this year's Oscars. The FBI agents also found duplication equipment and DVD copies of hundreds of films, including the British hit Calendar Girls. Sprague maintains he was copying the films for family and friends.
According to a signed affidavit, Caridi has confessed to sending Sprague hundreds of films over the past three years. Caridi, who had signed a contract confirming he would never release the films to a third party, said he believed Sprague was a film buff who wanted the movies for his personal use and insists he did not receive payment for sending them.
The deception came to light after suspicious bosses at Warner Bros put codes on the judges' review copies, allowing them to trace the pirated material back to Caridi. Numerous other studios are now checking their catalogues following the revelation, and detectives believe that more arrests are likely.
If found guilty, Sprague faces up to $500,000 in fines and up to eight years in prison. At the very least Caridi, an actor who appeared in the Godfather trilogy and as Detective Vince Cotelli in the television series NYPD Blue, faces the ignominy of having his 22-year membership of the Academy Awards judging panel rescinded.
The case raises profound concerns that a piracy ring is operating at the heart of Hollywood and exposes what many insiders have been whispering in private for years: that advanced copies of movies sent to the 5,000-plus Academy Awards judges have been falling into the hands of pirates who suck £2.5 billion a year out of the industry in lost profits.
Until recently it was assumed that most counterfeit copies were sub-standard footage shot surreptitiously on camcorders smuggled into cinemas. 'The quality varies - some are watchable, others are laughable,' said Jim Angell, director of operations at the Federation Against Copyright Theft which campaigns against piracy.
US movie studios even resorted to placing guards with night goggles into cinemas to spot rays of light coming from recording devices but it is now apparent that more and more pirated movies are perfect copies, raising fears that a network of industry insiders, from awards judges to distributors, are becoming bootleggers.
This would explain why many films are now available on the black market weeks, sometimes months, before their release dates. Perfect copies of the Christmas hit Love Actually were available on market stalls across the UK last November. The animated family favourite Finding Nemo - not distributed in the UK until the late autumn - was doing the rounds in July. Numerous other blockbusters from Kill Bill to Master and Commander were all available before their release dates.
And it is not just the number of pirated titles that is increasing: the volume of pirated goods is rising at alarming levels, too. Last year the number of pirated DVDs and videos seized worldwide touched 60 million, up 161 per cent since 1999.
Fear of industry collusion in piracy prompted the major studios to ban distribution of DVDs and videotapes for review and promotional purposes, only for the courts to rule against them on the grounds that it would hurt independent production companies trying to gain exposure for their work.
The studios compromised by proposing that copies only be sent to Academy Award judges. Sprague's arrest suggests this policy may now have to be re-examined, but one film-maker warns: 'The industry's too big, too porous, to ever stop this sort of thing happening completely.'
Far away from Hollywood, film piracy also has dramatic consequences in unexpected places. Former British trading standards officer John Hellier says he received six death threats in the course of his job. 'In my line of work you get them all the time, but those were the ones I took seriously,' he says.
Hellier spent most of his time struggling to contain the growing number of counterfeiters flooding Britain's car boot sales and market stalls with millions of pirated CDs and videos. Death threats from an industry with an image more akin to Del Boy than Don Corleone may appear fanciful - until you consider the increasingly powerful role played by criminal gangs who are turning away from the heavily policed world of drugs to the safer haven of counterfeiting, which offers fat profits and thin prison sentences.
The growing role of organised crime in media piracy has set alarm bells ringing among the intelligence agencies. The Alliance Against Counterfeiting and Piracy estimates that £10bn worth of fake products were sold in the UK last year. Of these almost £4bn came from pirated DVDs, videogames, software and CDs - the fastest growing area of the British counterfeit market.
The returns are huge for the criminal gangs. A typical pirated CD or DVD costs between 30p and 50p to produce and can be sold for 10 times this. At a time when the street price of ecstasy and other drugs is plunging dramatically, bootleg DVDs and CDs offer much more attractive returns.
Many people may find it difficult to feel sympathy for the Hollywood studios and music giants who have for years enjoyed bumper profits, but anti-piracy bodies argue that everyone suffers as a result of counterfeiting and point out that it cost British taxpayers more than £1bn in lost revenues last year.
The Federation Against Copyright Theft estimates that illegal DVDs sold in the UK last year alone deprived the film industry of more than £400m in lost revenues. This is money that could have made the difference between certain movies turning a profit from a loss. Eight out of 10 films don't make a profit at the box office, which means they have to rely on the home video, television and satellite markets to ensure they break even.
Much of the counterfeited material is produced in five countries - China, Malaysia, Pakistan, Taiwan and Thailand - and flown into Britain in batches of 2,000 to 5,000, concealed within containers marked with generic labels such as 'industrial parts'. And there is growing evidence that the pirates' methods are evolving. Last month customs stopped a lorry coming through Dover carrying industrial pipes. Sealed inside were thousands of CDs.
Not that the customs officers seemed that pleased with their catch. 'Initially they were excited when they found the pipes contained something,' said Lavinia Carey, chair of the the Alliance Against Counterfeiting and Piracy. 'But when they saw it was "only" CDs they were less excited. That's why organised crime is getting into counterfeiting. The enforcement agencies are less interested.'
The chances are that they will become more interested soon. 'The breaking down of European borders has led to a huge rise in counterfeit products being smuggled into the UK via the ports and railways,' said one intelligence source. 'What it will be like when much of Eastern Europe joins the EU can only be guessed at. It is a grave concern.'
There is mounting evidence, too, of the links between piracy and the trafficking of both weapons and people. The National Criminal Intelligence Service has warned that a number of paramilitary groups in Northern Ireland are moving into the counterfeit video and music markets as a means of fundraising. The problem has become so acute that the Police Service of Northern Ireland has established an Organised Crime Task Force specifically to target counterfeiting.
The intelligence agencies have also uncovered evidence that the Russian mafia has been selling pirated music to fund a major expansion into credit card fraud. The same network was involved in selling both weapons and pornography. 'There are also strong links between the counterfeiting industry and human trafficking,' said Carey. 'Someone who has been smuggled into the country will be given a hold-all full of stuff and sent off to Liverpool or Manchester to stand on street corners, and they'll come back with thousands of pounds in their pockets.'
Backed by organised crime, media piracy has become industrialised - a multi-faceted, hierarchical business that can earn huge returns for its willing sales force. Hillier, who now leads the anti-piracy unit at Elspa - the videogames trade body that last year seized 250,000 fake computer game discs, an increase of 20 per cent on 2002 - recalls swooping on one stall trader who had made £9,000 from selling 3,000 DVDs and videogames in only a few hours.
Shortly before Christmas police raided Ingleston Market in Edinburgh where they made 18 arrests, seized £10 million worth of fake products and recovered more than £20,000 in cash. Trading standards teams say these sort of high volume hauls are becoming increasingly common, thanks in no small part to the advent of new technology which was supposed to make piracy more difficult.
While the average pirate with 100 VCRs can produce around 400 counterfeited cassettes in 10 hours, experts say someone with the right digital pressing equipment and code-cracking technology can produce thousands of perfect CDs, videogames and DVDs in a day. In the face of mass bootlegging there is only so much the authorities can do, or are prepared to do, when it comes to dismantling the pirates' distribution network.
For a start, there are only 1,500 trading standards officers across the UK and they are responsible for investigating 70 types of complaint - everything from loan sharks to cowboy builders. Many local authority trading standards teams are reluctant to prosecute pirates because it sucks too much cash out of their budgets.
Hillier said: 'I know of one case in which trading standards prosecuted a really big player, someone making millions of pounds out of piracy. Not only did the team end up wiping out their annual budget, they had to take £3,000 out of their budget for the following year.'
Jack Valenti, president of the American Motion Picture Association, appeared before a Senate committee last autumn and quoted the French general Ferdinand Foch who, during a furious battle with the Germans in the First World War, is said to have declared: 'My right is falling back, my left is collapsing, my centre cannot hold. I shall attack.'
Valenti likes to employ metaphors when referring to the threat Hollywood faces from the internet. He has seen what happened to the music industry and uses it to scare the film industry - with good reason. In Britain alone, 184 million CDs were distributed illegally in 2002 (the latest figures available) according to the BPI, the organisation that represents the music industry. This represents a trebling in pirated music in just three years. Almost all the pirated CDs are downloaded illegally from the internet, despite the best efforts of the industry to offer legal online alternatives.
'The internet changed everything for the music industry,' said Adam Sexton, vice president of Macrovision, a US company that has seen a huge rise in demand for its anti-piracy software. 'One person can now buy one CD and they can then become a worldwide distribution source.'
Given the anonymous nature of the crime, the music industry has faced huge obstacles in containing the problem. Indeed, some say it is already too late. Global music sales have plunged from around $40bn five years ago to $32bn now as pirating has taken its toll.
Hollywood believes it is made of tougher stuff. 'I am determined to make it plain that we will not allow the movie industry to suffer the pillaging that has been inflicted on the music industry,' Valenti told the Senate committee.
But already, according to one estimate, as many as 600,000 illegal copies of films are now being downloaded every day - a rise of 20 per cent on last year. And this is despite the fact that experts say the threat is still in its infancy. 'The bottom line is that it takes up to an hour-and-a-half to download a movie, and often you're not sure what you've ended up with. But when computers get faster it poses a real problem,' Sexton said.
Scientists have now developed an experimental program that can download a DVD quality movie in five seconds. Its impact on the film industry could be seismic. 'Our research is showing that criminal syndicates are moving faster to embrace new technologies than the multinationals they target,' said DK Matai, executive chairman of security company mi2g. 'The internet is perfect for them because it allows total anonymity and limited traceability.'
Indeed, even if the movie industry can locate a pirate site, the chances are that it won't be able to do anything about it. Many operate out of countries that do not recognise international copyright agreements, notably Iran and North Korea. Attempts to close them down merely see them jump to somewhere else on the net.
Despite claims from the anti-piracy groups that they are winning battles against the bootleggers, the pessimistic conclusion is that they are losing the war. And no one - not governments, not enforcement agencies and, especially not the public - seems to care. For Hollywood, the consequences of defeat are almost too dire to contemplate.
Caution ahead: essential road widening on the Boulevard of Broken Dreams.
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