I only first heard of this at all the other day, and with the only sources being a few personal blogs (at least one of which is gone now), I'm certainly looking at it with a grain of salt.
The implication seems to be that TOG was paid an amount for X number of months of work on another game, barely did any work on it, and someone (the owners of that game? random people on the internet?) is accusing them of using that money to fund work on KQ instead.
Unless some serious charges are made, I doubt we'll ever know. Tracking that kind of thing IS difficult without looking directly at the company's financial records, which I wouldn't expect anyone to have access to in this case. Activision definitely funded the KQ game as far as everything I've seen/heard implies, so it's unclear why TOG would have needed the other money to put into it. I mean...maybe they just made a crappy demo and that's that. It does happen.
At this point, personally, my biggest stopping point for playing the new KQ is the price tag and not what (currently) appears to be a loosely made accusation.