They put spyware on mike's computer to get his passwords, and possibly record his computer webcam for four months.
Now I'm having real trouble believing this... Everything else I totally believe, but I find it insane that Mike didn't notice that spyware (then again he runs an iMac I believe, and Mac users don't think Macs can get viruses.) Also: the spyware ('supposedly' says Mike so I won't attack this yet) logged his microphone and webcam? And then I assume it must have uploaded the data to another computer? Even if this is true I don't think Kyle is smart enough to think about doing this.
But yeah, fuck Kyle, what a snake.