Well to get started, you may look into the US legal system's definitions of "Fair Use", which allows for the use of material if it's used for educational purposes, parody, or sufficiently transformative, AND if there is no profit involved in redistributing the material. It's not a bulletproof, anything-goes silver bullet for all things remixing, but it is often the justification used for the distribution of rearranged music on OCR.
If you have questions about the whole process, the basic wiki for fair use (and it's links) are a fair place to start, as well as looking at OCR's FAQ section and our content policy section (OCR has a lot of experience dealing with this very issue!).
Again, there is no silver bullet, and honestly things are resolved on a case-by-case basis, but in general that's the blanket justification for arranging VG music, which most companies understand and silently comply with.
As far as the asshat who is stealing YOUR music, there is no fair use justification for stealing your material and claiming it as their own. You made it, you have a defacto copyright on the material, so if you want to go through the effort you could get Soundcloud to remove it. Up to you, but yeah, that guy has no right to take your music as-is and simply claim it's his.