The article very clearly says that the defendant was *not* sued for libel. "The truth is an absolute defense" in cases of libel, so the ex-teacher had no ground to stand on for a libel case. He chose a civil tort instead, which allows you to sue for pretty much anything you like, so long as you can get a judge and/or jury to agree.
Also, i'm not sure what the police would have done. It seems from the article that the ex-teacher had been involved in some capacity in a bad mortgage scandal, the results of which did not cause him to face any legal sanctions. However, any university wishing to appear credible is *not* going to have someone studying mortgage failures that was implicated in even a tangential way with an actual mortgage fraud. "Avoid even the illusion of impropriety."
What I'd want to know as a jurist was whether the ex-teacher disclosed that past incident to the university before he was hired. If he had, I'd be far more likely to find in his favor, because an individual caused him to be terminated for reasons that the university initially did not find objectionable, but he was "Tried in the public courts" as they say. If he had *not* disclosed, I'd likely find against him, as it seems that he was merely caught being dishonest.