I believe this is actually not that unusual. I've heard of other companies who have made unauthorized demos of licensed games for pitching purposes, such as Sanzaru Games. If I remember correctly, Sanzaru made a conceptual demo for a potential Sly Cooper game on PS3, and they pitched it to Sony to convince them to make an actual Sly Cooper game on PS3. Sony liked what they saw, so they allowed them to put together the PS3 Sly Cooper Collection. They liked what they saw there, so they allowed Sanzaru to make Sly 4: Thieves in Time.
I suspect Silicon Knights intended to make Eternal Darkness 2 for Nintendo, so they were working on a conceptual demo to pitch the idea to them. It didn't work out, mostly because of "talent" being siphoned off for X-Men Destiny.
I seem to also remember a Western company a few years ago who tried (and failed) to pitch a Western-style Final Fantasy game to Square-Enix. I can't remember the company, though.