I just set up a quick solo compstomp with a password (to keep solo, solo) and a newbie wandered into the game.
Now, this was quite innocent (appropriate to a newbie) and he left after I explained this to him, (and just before I could say I'd be ok with a quick dual compstomp, just didn't want to play a human enemy right now) but this is obviously not what should happen begind a password.
While I admit my password wasn't overly brilliant, (three random letters) I doubt he just guessed it, so it would seem that the game passwords are non-functional right now.