This scam was discussed on Watchdog the other day, and it seems that it's a big one. Apparently the whole basis of their case is that a particular user's IP address was used. As anyone with a bit of knowledge of the subject knows, IP addresses can be spoofed, and more directly, unsecured wireless networks can be tapped into. So they are making the assumption of guilt based on inadequate evidence.
The best thing for everyone to do first is make sure that if you have a wireless router then the wireless part is disabled if you don't use it, or properly secured with WPA encryption if you do. If you get one of these letters, do challenge it. Take advice from the Citizens Advice Bureau. Don't let them get away with what amounts to extortion.