I've seen this video before (forgot where I saw it).
You have to consider the time and context of the video in order to understand why they were so hostile toward Steve. Imagine today, an unknown DK player came out of nowhere and scored 1.3M. This is exactly how they were feeling. I'm sure everyone on this forum would be skeptical and scrutinizing the tape just as hard as or harder than they were.
As for the 8 way joystick, I don't know if anyone has definitively shown whether you can steer barrels while climbing ladders (on the rivet stage, I don’t believe it does anything). One of these days I'm going to take the restrictor plate out of my CP and test it out. Steve certainly seemed to be doing it when he was playing on an 8 way. In MAME, you definitely CANNOT do it. In an arcade cabinet it seems possible based on Steve's tapes. If you are accustomed to a 4 way, playing on an 8 way would actually be a disadvantage, but in theory if steering while climbing is possible and you practiced on an 8 way it could be an advantage. I'm sure Steve would now agree that scores on an 8 way should be excluded, but back then he was an outsider and didn't know any better.
I don't think anyone did anything "wrong"; everyone acted logically under the circumstances. Given what we know now, it is funny to hear their comments.