That's exactly what I think about the situation. I've never wanted anything personally bad to happen to Mike Kennedy, but the entire approach to this project was either deceitful or ignorant and negligent. Either way, it was unfit to continue, and if it was Mike being naïve, it sucks for him, but he should take away the lesson of humility to acknowledge that he got in wayover his head, and that he might not be the right guy to trust with investment dollars.
Also, remember that it wasn't just the prototypes. The Jag Bar script issue was rather poignant, there was the shuffling of money between Game Gavel, Retro Magazine, and RetroVGS, the Facebook editing and blocking, the fake forum accounts by people associated with the projects... there was a lot more wrong here than just the hardware stuff.