I still don't get why they couldn't just come out and say that. Was incompetence and unprofessionalism really a better look then a understandable engineering challenge? Or was this another case of "being honest and doing the right thing would have created legal liability so we opted not to do it"?

Generally your lawyers will advise you that the less you say, the better.

Maybe, but then why would Twitter acquire Smyte in that case?

Presumably because Twitter was interested in the project, but didn't need the actual implementation immediately. Get the team on the cheap for now, and then just have them rebuild it in-house in a compliant way.