Megaupload's contention that the authorities entrapped the now-shuttered file-sharing service is "baseless," the government said in a new court filing.

The brouhaha concerns part of the government's rationale to seize Megaupload domains and arrest its chief executive Kim Dotcom and his top lieutenants for running what the authorities claimed was a massive and illicit file-sharing service that cost Hollywood studios and other content makers some $500 million.

The nuanced flap comes nearly a year after Dotcom and crew were arrested in New Zealand, where they remain free on bail awaiting an extradition hearing on whether they can be tried on criminal copyright and money laundering charges in a Virginia federal court. What's more, Dotcom says that on January 19 he will unveil a new file-sharing service on the one-year anniversary of his arrest.

But stateside, the government and lawyers for Dotcom and Megaupload are in a bitter entrapment dispute.

The controversy centers on Megaupload complying with a then-secret U.S. search warrant targeting five of its users, who were running their own file-sharing service using Megaupload’s infrastructure. Eighteen months before Megaupload was indicted, Megaupload complied with the warrant and turned over a database on the 39 pirated movies detailed in the warrant that linked the files to the file-sharing service NinjaVideo, which was later indicted.

Though the feds had already begun quietly investigating Megaupload months before, in this case the government treated Megaupload as NinjaVideo's internet service provider, and asked it to keep the NinjaVideo warrant quiet.

Despite Megaupload’s cooperation, the 39 infringing NinjaVideo files were later used against the popular file-sharing service as evidence to seize Megaupload.com domains and prosecute Dotcom and others connected to the site. That's because Megaupload did not delete the 39 movies from its servers. The government used that fact to demonstrate that the company knew full well that its service was being used for piracy.

Ira Rothken, Dotcom's attorney, said in a January 2 court filing (.pdf) that "Megaupload had every reason to retain those files in good faith because the government had sought and obtained Megaupload's cooperation in retrieving those files and warned that alerting users to the existence of the warrant and the government's interest in the files could compromise the investigation."

But the government, in a Friday filing, (.pdf) said it never instructed Megaupload to retain the files, which were subsequently uploaded by more than 2,000 different Megaupload users.

"Megaupload's allegations are baseless, as even a cursory review of Megaupload’s pleading and the search warrant materials at issue disproves the allegation that the government misled the court as part of a conspiracy to entrap Megaupload," the government wrote, adding: "Yet Megaupload does not cite a single communication between the government and Megaupload or a single instruction from any member of the government to Megaupload; there are none."

In an e-mail interview, Rothken lashed back:

"The law requires the ISP in this context engage in evidence preservation, and avoid obstruction of justice by maintaining the status quo until advised otherwise by the government conducting the investigation," Rothken wrote. "If the government didn't like the status quo of preservation they could have written Megaupload a followup letter but they didn't."