Maybe they didn't know about it. I doubt the company went out of its way to wait until it was 98% complete to bring down the hammer just to be extra nasty. They killed the Chrono Resurrection project, too, after a period of time but that one was nowhere near complete. But it did get a lot of exposure around the net.
What I think happens is that Square-Enix and most other companies are no different from any of us. I didn't know about Crimson Echoes until it started getting a lot of chatter around the net. By that time the game was nearly finished. It wasn't long before the C&D showed up. So it isn't inconceivable that the company just plain didn't get the memo.
That's the irony of it. If Crimson Echoes were a quiet project, what it was in its early stages, then there wouldn't be any trouble because nobody knows about it. It's when these things get big, usually after they've done significant amounts of work, that there's a risk of a C&D. I guess the lesson is "keep your mouth shut."