Despite this recent scare warning, it still boils down to the content owner(RIAA, MPAA, etc.) finding something copyrighted that's being shared, and recording all the IP addresses that are downloading from the source that they found.
So it doesn't matter if what you're downloading has been ripped into a different format. If the content owner finds it being shared online, and can prove that it's their material, and can see your IP address connected to it, then they can contact your ISP and say "The user with this IP at this date and time was downloading our copyrighted material, please do something about it."
The ISPs have, and have always had, the ability to see exactly what you're accessing online. Simply because they control your flow of information. Everything you do online, every bit of data, must pass through their hardware. So they do have a great deal of control. But the good thing is that ISPs still don't
want to be the internet police. It takes up way to much of their resources, slows down their overall bandwidth by a lot, and pisses off or at least scares their existing paying customers. So no matter how the RIAA or MPAA lawyers claim that the ISPs are gonna start "going after" you, the ISPs themselves will still be reluctant to do anything without the copyright owners pestering and threatening them about it.
Peerblock is next to worthless these days. But there are things that still work effectively. As has been said, the safest method is Usenet groups, with SSL enabled. If you insist on torrenting, consider
BTGuard. Click the link for more info.