(FORTUNE Magazine) – Rupert Murdoch has often been described as a buccaneer. A recent lawsuit against NDS, a News Corp. subsidiary that makes smart cards for decoding digital television signals, alleges that the label is not just metaphorical.

NDS is a publicly traded company based in Middlesex, England, whose board members include Murdoch's sons James and Lachlan. NDS's cards help protect News Corp.'s BSkyB satellite television empire against piracy. Last March, Vivendi Universal's Canal Plus, Europe's largest pay-TV provider, filed a $4 billion lawsuit that accuses NDS of running a "cloak and dagger" operation devoted to hacking its security systems and exposing them to thievery.

Rupert Murdoch strongly denies the charges. "That is absolute bullshit," he tells FORTUNE. "We'd love to go to court on it." That's not likely to happen anytime soon. Canal Plus's legal challenge is on hold because of Vivendi's financial woes. But federal prosecutors in the U.S. are looking into the matter. In October, NDS said the U.S. Attorney's office in San Diego subpoenaed records from its offices in California.

Before Vivendi imploded, Canal Plus and News Corp. were direct competitors in the Italian satellite-TV market. The French TV giant controlled Telepiu, a service with 1.8 million subscribers. Telepiu's rival, Stream, which has 700,000 subscribers in Italy, is 50% owned by News Corp.

In late 1999, Italy was flooded with cheap counterfeit cards that enabled viewers to beam in Telepiu for free. Telepiu's pretax losses ballooned from $187 million in 1999 to $255 million in 2000. In the suit Canal Plus says it discovered that NDS cracked the software code in Canal Plus's smart cards in a lab in Haifa, Israel, and arranged for the code to be published on a satellite-TV hacker website.

Canal Plus claims that a central figure in the conspiracy is Christopher Tarnovsky, a well-known hacker in satellite-TV circles. NDS hired Tarnovsky in the mid-1990s. People familiar with the situation say NDS hired him under an assumed name because it wanted his expertise but didn't want to alert the hacker community. News Corp. declines to comment.

Pam Naughton, Tarnovsky's attorney, insists that he had nothing to do with Canal Plus's piracy problems. Canal Plus says it has evidence to the contrary. Its key witness is Oliver Kommerling, a hacker who set up NDS's research laboratory in Israel in 1996 before falling out with the company. In a sworn statement filed by Canal Plus, Kommerling claims he taught NDS how to extract Canal Plus's smart-card code at the lab. He also says he was told by NDS employees that the code was transported to Southern California, where Tarnovsky arranged to have it posted on the Internet.

When the suit was filed, EchoStar filed a motion to intervene in the case, accusing NDS of decrypting its cards in Israel. DirecTV sued, claiming that its smart cards had been hacked and blaming NDS. NDS charged that EchoStar and DirecTV were retaliating against Murdoch for opposing their proposed merger.

Then the legal challenges began to evaporate. Strapped with $19 billion in debt, Vivendi could no longer stomach Telepiu's losses. Murdoch was only too happy to take Telepiu off Vivendi's hands for $893 million in cash and debt and merge it with Stream, creating a monopoly satellite-TV company in Italy. Vivendi agreed to withdraw the Canal Plus lawsuit as part of the deal. The case is on hold while the European Commission evaluates the merger.

Meanwhile, DirecTV and EchoStar are reportedly talking to Murdoch because their merger plans were scuttled by U.S. regulators. So their attacks on NDS may also be short-lived.

Poor Rupert. He may never get his day in court. --Devin Leonard