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If you did download it, and you didn't do anything to hide yourself (proxies, encryption, etc...) then you might consider settling to avoid higher costs. Also, does the letter indicate what kind of information they have on you? If it is an IP, then my advice is get a used wifi router fast, set it up as an open unsecured access point, and claim it has been up the whole time. Just don't do something stupid like by a model that wasn't available in your area at the time of the download. Also, make sure the game is not on your computer anymore. This might mean manually deleting some reg keys and directories as most games are a little sloppy when uninstalling themselves.
Basically the question is whether you want to spend the time and resources either disputing this because you didn't do it (which if is the case, then do resist because you didn't do anything wrong), or you did do it and you need to make it look like it wasn't you. The latter option is risky and time consuming. So it is your choice.
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