If you paid attention to the Murdoch issue you'd actually realize each of your facts parallel a facet of the phone hacking scandal:
A) Your purported argument about scale really suggests that YC may have more investments than they can reasonably manage, but that doesn't absolve them from blame. This is EXACTLY the same argument Rupert Murdoch made (We have so many newspapers that we couldn't possibly be aware of hacking at one paper)
B) Your sixth fact is
6. ...even though they aren't in YC for IM, YC has no real influence or control over IM or even the team.
There are actually two parts here, and I'd like to hone into the first for a moment: "even though they aren't in YC for IM". It seems VERY odd that PG would allow companies to pivot without first having an office hour or discussion with partners on the matter, and if what you are saying is true then there are deep procedural issues. Murdoch tried to make the same argument regarding autonomy of the individual units under News Corp.
C) Your second and third fact focus on partners and alumni. They have additional senior staff, so how was this allowed to happen? If the partners and alumni did share the same mores as PG purports to hold now, and if at least one partner or alumnus dealt with IM, then there's an internal inconsistency (akin to blaming rebekah brooks for what is really a cultural issue)
D) Your fourth fact tries to argue that this is a single bad apple. It's the first instance being reported. Of course it's an isolated incident insofar as no other company attempted the same effort, which is exactly what James Murdoch claimed regarding News of the World.
E) " Immediately after it being brought to his attention, PG followed up with the owners and they made some changes as a result..."
The problem is that the underlying problem wasn't resolved. PG decided to point to the TOS, which doesn't address the nature of the business model. This is akin to James pointing to ATT's terms of service and security model.
I'm pretty sure that for whatever "fact" you wish to throw there's an analogue, and until there's some sort of real "accountability" I don't see how you could have such unwavering support.
My expectation is simple: if YC wants to invest in those types of firms, that's their prerogative and they should own their decision. Don't try to pull some cognitive dissonance. Just say that you are comfortable with investing in the malware model, and this entire discussion would be moot. The only reason my reply makes sense is because PG and YC claim to aspire to something higher. If we all drop that assumption, then the original issue is really irrelevant.
And with regards to your last comment: " YC explicitly looks for people doing things that might seem questionable at first.", I think you misunderstand what 'questionable' means there. Questionable there means "i doubt it could succeed", not "shady business practices".
Perhaps against my better judgement I am going to give you the benefit of the doubt here. You seem to be misunderstanding the situation with IM and YC; according to what PG has said so far, the IM team did not "pivot" while in YC. Again, just to be completely, perfectly, totally crystal clear: nobody at YC was aware of IM. That's not what the team applied for, and it's not what they were accepted for. YC applications do not ask for work history. You are not required to share your resume. They do not ask for references. If I had in the past built a business on exploiting Wordpress installations, it would be largely irrelevant to YC (until such time as someone found out about it, posted it to HN, and triggered the predictable witch hunt).
And, again, even if someone knew about IM -- even if it was mentioned on their application as a past project -- there is absolutely no reasonable expectation that YC's principals should have looked far enough into it to come to the same conclusions that other people here did.
Furthermore, I'm not sure where people are getting the notion that YC funds things on some moral basis. As far as I know, there has never been any statement to that effect, nor is it supported by data. At most I would say only that YC looks for startups that "make something that people want". You seem to be on some kind of mission to "expose" YC, except that all you're really doing is exposing what you have imagined YC to be. This makes you look silly, not them. Every single batch, there is at least one thread on HN wondering why YC funded some company or another, usually because people disagree with the business model. Yet, people are still surprised when YC funds something they disagree with.
I did not at all misunderstand what questionable means. I used it exactly as I meant to.
Finally, your continued comparison to Murdoch is beyond absurd. You are performing a slightly more contemporary version of Godwinning this thread. I shouldn't dignify it with a response, but, Murdoch was found to have been willfully ignorant of what was going on, all while there were widespread (and well-founded) allegations that in fact the top-level executives of his various companies were (and still are) carrying out his wishes in spirit, if not in letter. The News of the World incident was only the one that they happened to get caught at. Only the most imaginative mind could find some kind of allegory between that situation and this one.
It's clear you don't seem to understand investments, given your assertion:
the IM team did not "pivot" while in YC
Like with any other venture capital or private equity placement, YC starts from the moment the team accepted the investment and ends when the legal entity behind Y Combinator fully divests its financial interests. YC can choose to sell its equity, and their refusal to do so is a tacit approval of the company and its actions.
You are trying to claim that YC has divested its interest. Clearly that didn't happen -- if it already did, then PG wouldn't have had to respond. Stop trying to change the subject by focusing on the application -- the problem you are trying to avoid explaining is on the fact that somehow they went from state A to state B, a massive shift, without anyone at YC noticing (ironically, this is exactly the storyline in the News of the World scandal that you find criminal in one case and plausable in another). YC is a significant investor in most of these companies and (based on their claims) has a sufficiently frequent engagement with the companies that it would be hard to pivot without them noticing.
"I'm not sure where people are getting the notion that YC funds things on some moral basis."
I don't think they are, but PG is in a state of cognitive dissonance: he is trying to claim that he is being "moral" by not sponsoring spam yet is profiting from the practice. That's the part that rubs me wrong (and, incidentally, another aspect of the phone hacking scandal that rubbed me wrong) Defending cognitive dissonance is not just silly -- it's deceptive and does a disservice to silicon valley.