I think you are right, something like ~people needed more high level monsters/content and this was quick fix. Even with the high level monsters at night, you could still zone in, stay high on the walls, and JUST KEEP RUNNING! SoW or Bard's Selo was plenty to keep you ahead of the undead and there was seldom anything up on the walls. All the pathing and spawn points are changed now. Looks like someone at SONY intentionally planted a bunch of undead high on the walls to prevent people under level 50ish from getting through the zone.
A little googling suggests that the "Bloody Kithicor" event did take place on Halloween, 1999. And then, to everyone's surprise, the zone didn't revert to its original state after the event was over...