I don't think it was some ethical issue, but KTM just didn't want to sponsor them.. The way I read it was that KTM thought they had 0 experience in this type of riding and were not good riders in general. That was 100% true.. I think they didn't want the bad press when Charlie and Ewan failed.. Bad call on their part. BMW got great press for LWR even though they cracked frames and broke tons of crap.
KTM seems to be a little cagey about their product exposure.. Must be an Austrian thing..
I read the book a couple years ago, so I don't remember the details. In the show at least, they gave the impression that KTM was going to be a sponsor, then they changed their minds. Sound anything like Kenny Roberts GP team, WSBK, and Red Bull Rookies Cup?