In what way? This was true when YouTube first launched (I've heard stories that the founders uploaded copyrighted movies and tv shows themselves) but YouTube has a system in place now that removes copyrighted content automatically and it works pretty well (some say too well).

No, that's not the same thing. The law doesn't say that you can't have any pirated content on your service. It says you can't knowingly have pirated content. Once you learn about a stolen movie on your site, you have to take it down.

When, like Dotcom, you instead actively solicit pirated material, optimize the pirated material on your site for quality, and pay users to put more pirated material on your site using a sliding scale based essentially on how pirated the material is, the DOJ reasonably concludes that you are not a public video site like Youtube, but rather a criminal conspiracy.

Dotcom appeared to have been operating under the misconception that a "notice and takedown" system insulated him from that charge. Dotcom didn't actually read the DMCA, because notice and takedown is only ~half of the responsibility of an online service. The other half, written right into the DMCA, is operating without red flag knowledge of pirated content.

They are protected under the safe harbor porvision of the DMCA which basically says that if someone says "That's my stuff, take it down" they have to take it down. However if no one complains, YouTube can argue that millions of videos are added everyday, they can't possibly screen them against every piece of copyrighted music/film ever made.