Yeah, that's pretty much how I interpreted it as well.
(The bipe pilot turned on his smoke to "increase his visibility to the R/C airplane operators". Uh-huh -- *he was showing off*, and got too close.)
That said, the FAA's decision was pretty clear -- the collision was the fault of the pilot of the model aircraft. I guess that's the only possible answer given their rules -- showing off is permitted, but hovering where a manned aircraft decides to be is not, permission or not.