I'm not 100% certain of the legalese involved, but if something is open source, doesn't it simply mean that you can check out the code, make mods, etc, as long as you're not selling it and making a profit?
Like tametick said, open source stuff can
be freely distributed and sold. The problem is that everything but the code (i.e. the assets) is not
open source, so the actual game cannot be sold. This is very similar to what was done with the first three games of the Quake series. Replacing all the art, music, characters, story, etc. in Lugaru and selling that is totally legit (as long as the source code is sold with it), but this guy is not doing that.
In any case, from what I've read, the guy ripping off Wolfire seems pretty confident that his interpretation of what open source means allows him to do whatever he wants with it - but it sounds like your bog-standard 'there is a loophole or technicality in the laws that govern this shit that I'm taking advantage of to make a quick buck off someone else's work'.
There is no loophole. The guy talks as though he assumes that everything in the game including the assets is open source, but that is clearly untrue. I'm not sure whether iCoder is doing this out of incompetence or malice, but it is kind of strange that a team that supposedly squashed bugs and plugged memory leaks in Lugaru is supposedly unfamiliar with how open source works.