I've done some light research on this because megaupload was my main download/upload website. I had a subscription with them that still had quite a few months to go. Here is what I understand:
(1) When a movie is ripped, thousands of people upload that exact same file to megaupload.
(2) Hollywood contacts megaupload, asks them to remove it.
(3) There seems to be some mechanism within megaupload that identifies identical files within their servers. This means, if they find a movie file, they can delete ALL copies of it on their servers.
(4) Megaupload removes the single Hollywood reported, NOT all of the files.
(5) This effectively does nothing to stop piracy.
(6) There are various chatlogs, emails and recorded conversations of various megaupload employees downloading and even uploading pirated files ith no repercussions from the higher-ups (in fact, it seems it was encouraged).
Again, I don't know all the details but this is what I have been able to gather. A lot of this information is hearsay because there is still no confirmation of WHAT the government has against megaupload or how this information was obtained. Download websites like fileserve who have a similar model to that of megaupload are scared and have severely restricted what users can do till this issue is resolved, or till they move their servers/domain away from the US.