You know Kauto Star is the horse with the big white face, don't you?
While I admit that Kauto Star didn't jump as well as he could, he absolutely tanked along for over a circuit; it's only when Denman pressed on that he made his first mistake and Ruby didn't move a muscle at any point until jumping the open ditch directly opposite the stands on that final circuit. I've watched the race forty or fifty times as I still can't believe how Denman destroyed the field with that display of perfect jumping and strong galloping for that middle third of the race. Incidentally, Kauto Star did not drift to odds against in the in running market until mid way down the far side.
Bringing this back to the notion that the Nicholls camp knew Kauto Star wasn't right but ran him to be sporting, I would point to the market moves on the day. Denman had looked likely to challenge for favouritism in the morning of the race and one firm made them joint jollies, but the SP's (on one of the strongest possible racing markets) were 10/11 Kauto Star and 9/4 Denman. There is no way that Kauto Star's price would have hardened on the back of negative vibes, especially as such an influential punter as Harry Findlay would have been aware.
I can only imagine that this story has been misunderstood and is actually about the Nicholls duo who ran in the Champion Chase. In that instance, PN said it was impossible to split Twist Magic and Master Minded at home but rumours abounded that Twist Magic wasn't right and he ran a stinker after drifting significantly.
It should be pointed out that when Denman made "his move", Kauto Star (winner of a Tingle Creek over 2 miles) could not just go with him but he could not go with Neptune Collonges either. At one stage it looked like NP would beat KS comfortably.
If Denman beat KS from the bottom of the hill I would accept it, but there is no way the move Denman made so far out should have had KS struggling so far out given the pace he has shown in the past.