Megaupload founder suffers procedural setback in U.S. extradition bid

Actors in police costume mock-arrest Megaupload founder Kim Dotcom (C), as he launches his new file sharing site ''Mega'' in Auckland January 20, 2013.

WELLINGTON (Reuters) - A New Zealand court ruled on Friday that the United States does not have to hand over all its evidence against Megaupload founder Kim Dotcom, a setback for the German national in a U.S. bid to extradite him for alleged online piracy, fraud and money laundering.

The Court of Appeal overturned a lower court ruling that the Federal Bureau of Investigation (FBI) should disclose all its evidence so Dotcom, released on bail last February, could fairly contest the case against him.

The FBI accuses Dotcom, who founded the Megaupload file-sharing site which housed everything from family photos to blockbuster films, of leading a group that netted $175 million since 2005 by copying and distributing copyrighted content without authorisation.

Lower courts had ruled twice that Dotcom should have access to all material the FBI was basing its extradition case on.

The Court of Appeal said the U.S. government had a duty of "candour and good faith" in making an extradition bid, but a summary of the evidence held would suffice.

"It is for the requesting state to decide what information it wishes to put before the requested state in support of its request," the court said.

It said there were safeguards for any accused, such as the New Zealand courts and government seeking more information if they are not satisfied there is a prima facie case to be answered.

Dotcom maintains that Megaupload, one of the world's most popular websites before it was shut down in January last year, simply provided online storage services and should not be held responsible for stored content.

William Akel, one of Dotcom's lawyers, said an appeal to New Zealand's Supreme Court was being considered.

"How can you determine whether or not there has been compliance with candour and good faith if you don't know what documents are being relied on to support the case?" he said on Radio New Zealand.

Since the initial raid, the courts have ruled that search warrants used in the raid were illegal, unfrozen some of Dotcom's assets for living and legal expenses, relaxed restrictions of travel, and ordered extensive evidence disclosure.

A New Zealand government spy agency was also found to have illegally spied on him, bringing an apology from the prime minister, and opening the way for a damages claim.

Dotcom, who also goes by the name of Kim Schmidt, is a German national but with residency in New Zealand, which made it illegal to spy on him.

The extradition hearing for Dotcom and the other three defendants is scheduled to be held in August.

(Editing by Nick Macfie)