I'm not one of the ones that really has the authority or knowledge to speak up, but it pretty much goes like this... Square Enix sent a Cease and Desist letter. You can see a scanned image copy of the letter here:
http://crimsonechoes.com/. There are, of course, rumors that the entire debacle was either faked for publicity or faked because Zeality and the others were unable to complete the game and this was their way of pridefully giving up.
To say the least, I think it's safe to assume - logically - that both are false.
First, it couldn't have been faked for publicity - Zeality never finished the game. Flames of Eternity and a second unaffiliated group both got hold of the alpha/beta demo's from beta testers (who have since been banned from the Compendium) and neither group has really given Mauron, chrono99, Zeality, etc. credit for their work. Seeing that none of the original creators has anything to do with either group, Zeality and the others still haven't gotten the recognition deserved. Thus, the only publicity garnered would have been for the Chrono series. Although noble, this would be ludacris (even here on the internet) and out of character for the ever-prideful and vocal Zeality.
So the argument goes that they were unable the complete the game. Once again, false. Look at the beta - it was close to completion and entirely functional. It just needed polished up and the new tech's needed to be added. The Crimson Echoes Memorial on Youtube is proof that it had been at that point shortly after the C&D. This claim is laughable.
We already knew that Square Enix was protective of its intellectual property, especially concerning Chrono Trigger - after all, they had crushed
Chrono Resurrection several years prior. A Compendium member known as ********* may have played a role in the cease and desist; he supposedly sent an e-mail to Square Enix claiming the project was out to make a profit.
After the Cease and Desist I personally called the Square Enix / North America office and pretended to be a reporter asking for a statement. They transferred me to their legal department, who quickly declined a comment. There was no official confirmation, but obviously no denial. I know of at least one other person here at the Compendium who also called and encountered a similar scenario. If you'd like, you could probably do the same. It's a surprise no actual reporters have bothered to do so.
At the end of the day there's no logic for any of it to have been faked. Also, please see Faustwolf's notes below.