New Zealand's High Court ruled on Thursday that warrants used to search the home of Megaupload.com founder Kim Dotcom were invalid and the seizure of evidence, including computer hard drives, was illegal.

It also ruled that the copying of the evidence by the U.S. Federal Bureau of Investigation (FBI) and sending it to the United States was also unlawful. The case is the FBI's highest profile action against global copyright theft.

While the ruling did not kill the extradition case against German national Dotcom, also known as Kim Schmitz, one legal commentator said it had likely made it more difficult.

"If the major plank of the extradition argument relies on the evidence obtained from the searches, then I would have thought there's a problem," Jonathan Krebs of New Zealand's Law Society told Reuters.

"That's not to say the case will fall over, it may be there's a lot of other evidence that the authorities can put before the court arising from the United States or somewhere else in the world," he said.

Dotcom, 38, was one of four men arrested during a dramatic raid on his luxury country estate, outside New Zealand's largest city, in January as part of FBI-led investigations.

Prosecutors say Dotcom led a group that had netted $175 million since 2005 by copying and distributing music, movies and other copyrighted content without authorization.

His lawyers say the company simply offered online storage.

The High Court said the search warrants were too vague and did not properly spell out either the offences or the evidence being sought, but has left it to a hearing next week to decide on what further steps will be taken.

New Zealand police have said they are discussing their next step with prosecutors, while the FBI said it would respond in court at the appropriate time.

TREMENDOUS BLOW

A U.S.-based lawyer for Megaupload said the rulings were a "tremendous blow" struck in his client's defense against the piracy charges.

"The government was engaged not only in wrongful conduct but in double wrongful conduct: they weren't allowed to go ahead and do the initial seizure ... (and) they violated the law again by bringing them (hard drives) offshore when they weren't allowed to," lawyer Ira Rothken told Radio New Zealand.

A U.S. Federal Court will hear several motions later on Friday that the company cannot be charged with criminal behavior because it is Hong Kong based and that no papers have ever been served formally.

"The court may hear a motion to dismiss Megaupload, we also have in the queue a motion to release funds," Rothken said.

The extradition hearing for Dotcom and his three co-accused on copyright theft and money-laundering charges is set for August. Under New Zealand law, the alleged offences must be an offence in both countries punishable by a jail sentence.

"The judge didn't comment on the admissibility of the evidence for the extradition hearing," said Otago University law lecturer Kevin Dawkins.

The judge in the extradition hearing would have to "go through a balancing act" when considering what evidence to accept, he said.

A public interest group, the Electronic Frontier Foundation, will also ask the U.S. court to free the private and legal data of people who stored material with Megaupload.

Before it was shut down in January, Megaupload was one of the world's most popular websites, where millions of users stored data, either for free or by paying for premium service.

Authorities say megaupload.com and related sites cheated copyright holders out of more than $500 million.

Dotcom mocked U.S. and New Zealand authorities in a Twitter post after Thursday's court ruling, showing a computer monitor encased in police 'crime scene tape' and asking if any of his 40,000 followers had a pair of scissors.

Dotcom was originally denied bail after the raid and jailed for a month, but the courts have progressively eased the conditions on him, allowing him back into his mansion, giving him access to hundreds of thousands of dollars for living and legal expenses, and removing travel and meeting restrictions.

(Editing by Paul Tait)

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