Investigators opened criminal proceedings against Denis Kvasov, former head of Media Service, which owned the Web site, after U.K.-based Emi Records, U.S. Warner Music Group and Universal Music Group filed a 5 million-ruble ($200,000) compensation claim for alleged financial losses.
"Investigators' conclusion that Kvasov's actions were criminal ... was premature," the verdict said.
Investigators said Kvasov had connected a server owned by Media Service to the Internet and illegally sold music recordings to the sum of at least 54,000 rubles (about $2,000) between September 2003 and December 2005.
The judge said Russia's copyright laws did not ban online use of pirated music at the time. "Such a regulation only entered force in September 2006," she said, adding that investigators had been careless in collecting the evidence.
Lawyer Eduard Margulyan said Kvasov had acted within the law and made regular payments to the copyright holders, as shown in receipts enclosed in the case. Margulyan also said no illegal copies of music had been found during an inspection of the company's server.
Prosecutors can appeal the verdict within 10 days. The Web site, allofmp3.com, has been shut down.