Papers filed in the United States court state that the FBI have never formally served papers on the file-sharing company accusing it of a crime.
They say there is no ability for US courts to remotely charge the Hong Kong-registered company with a crime. It stated the FBI had acted outside the law when it inspired raids across the globe which led to the company being shut down and its assets seized.
The defence comes four months after New Zealand police arrested Dotcom and his three co-accused in a dawn raid. They are facing an extradition hearing in August over claims of criminal copyright violation, money-laundering and racketeering through Megaupload, which attracted 4 per cent of the world's internet traffic.
It is the first time lawyers acting for Dotcom and his co-accused have filed a formal defence against the US charges. If accepted by the court, it could lead to charges against Megaupload being thrown out and the collapse of freezing orders over company assets.
If the court rejects the argument of tossing out charges against Megaupload, other papers ask the court to release money from the company so it can fund a defence. The papers stated that even if the FBI were right - and it asserts it is not - then the amount of money lost is out of proportion to the NZ$88 million in ready cash which had been seized.
"The (US) Government ... has destroyed Megaupload without bothering even to serve the company and is now bent on preserving its advantage by disabling any effort to challenge the lawfulness of its actions.''
Dotcom's legal team have also stated the US failed to show any crime had been committed by Dotcom and fellow co-accused Finn Batato, Mathias Ortmann and Bram van der Kolk.
They have stated there is no evidence any member of the group was involved in any copyright infringement. Instead, they say the FBI claims they should be "held criminally responsible for the alleged misconduct of third-party cloud storage users''. Papers state the FBI allegations "turn a blind eye to laws ... that provide a safe harbour'' for businesses which work to remove any material which infringes copyright. It stated there was no law which allowed cloud storage companies to face criminal charges over the actions of users.
It conceded Megaupload - like any online service - was "susceptible to misuse by some customers'' but the company had agreements allowing major copyright owners direct access to its system to take down any suspect files. Companies which had free access to remove files included the Recording Industry Association of America, Disney, Warner Brothers and Microsoft.
It stated the FBI had pulled the website down while overlooking innocent use of the service _ people who used the company to store family photographs, video and other personal or business material. It had made "casualties of the blameless'' as well as those who were allegedly culpable.
Even though, Dotcom's lawyers asserted, there had been no evidence which showed violation of the copyrighted material on the servers which was linked to the individuals who had been charged.
A fresh legal judgement issued in New Zealand courts this week has been filed as a major peg of evidence supporting the case. The judgement, by Judge David Harvey at the Auckland District Court on Tuesday, included the statement "the US is attempting to utilise concepts from civil copyright context as a basis for the application of criminal copyright liability''.
Judge Harvey's ruling allowed Dotcom and his co-accused limited access to the evidence against them. It was a move opposed by NZ government lawyers acting under a mutual assistance request from the US.
The loss was the latest setback for the government's Crown Law Office, which had previously used the wrong type of freezing order to seize the Megaupload group's NZ assets. It is currently facing questions posed by High Court chief judge Helen Winkelmann after it emerged they had sent cloned copies of seized computers to the US after telling the defence team it would not do so without notice.
- David Fisher of the New Zealand Herald
