The web hosting provider Alpha Red Inc. filed for Chapter 11 bankruptcy on Wednesday in the Southern District of Texas, claiming more than $10 million in liabilities.
Alpha Red, a hosting provider with two datacenters in Houston that hosts numerous adult-content sites and other high-bandwidth customers, has been in legal trouble in recent months. On Sept. 23, Alpha Red chief executive officer James Reed McCreary IV and the company were sued by Washington state Attorney General Robert McKenna, who accused McCreary of selling "scareware," software that made Windows XP users falsely believe that their registry had become "damaged and corrupted."
The suit claims that through another company he controlled, Branch Software Inc., McCreary sold Registry Cleaner XP software for $39.95 that was marketed by exploiting the Windows Messenger Service with Internet-transmitted messages that made misleading "Critical Error Message!" dialog boxes appear on user computers.
"Contrary to the representation implied by Defendants' message, the user's computer has not already been tested or examined to determine the presence of errors, damage or corruption," the suit states. "Through alarmist language seemingly delivered by a trusted source, Defendants misrepresent the extent to which installing the software is necessary for repair of the computer for proper operation."
The "Critical Error" messages were sent repeatedly to users. McKenna cites one user who allegedly received 214 such dialogs in a 24-hour period. Five causes of action were filed alleging violations of the Computer Spyware Act and unfair and deceptive trade practices.
"We won't tolerate the use of alarmist warnings or deceptive 'free scans' to trick consumers into buying software to fix a problem that doesn't even exist," McKenna said in a press release.
The top 20 debtors in the bankruptcy are owed more than $4.57 million, including $826,000 to the IRS. McCreary owns 82 percent of Alpha Red's common stock, according to the bankruptcy filing.
A Texas state court removed McCreary from management on Oct. 23 and appointed a receiver to run the company, responding to a court action by MegaUpload Ltd., a file-upload site based in Hong Kong that was an Alpha Red customer.
Although a Chapter 11 bankruptcy is designed for companies to reorganize and settle debts to continue operations, the filing includes this statement by receiver Douglas Brickley: "[T]he Receiver deems it to be in the best interests of the Company to file a bankruptcy petition ... for the purposes of winding up the Company's business affairs, liquidating the Company's assets and distributing payment to creditors."
Some Alpha Red customers have been discussing their difficulties with the company for several months on chat forums. Customers who sent servers to Alpha Red facilities in Houston posted that they have been unable to get them back. "The place is locked down and no one answering the phone/mails etc.," one customer complained in October. "Got 10 servers stucked inside and cant do anything."