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Underbidding again!

In an ACBL sectional matchpoints game, you pick up some spades in third seat at favorable and the auction proceeds:

 

W
N
E
S
P
1
2
X
P
2
?

 

 

East looks annoyed before settling on 2, so you surmise you can push your opponents higher.  You decline to accept the insufficient bid of 2.  East demonstrates even more annoyance, and seems about to say something, but eventually shrugs, and passes.  Alas, you go for 300 into their partscore for a bad result.

 

After the defense has concluded, West unhappily informs you there was a failure to alert: the double of 2 was penalty, not negative.  Despite the rarity of this treatment, you aren't actually sure if this requires an alert (the ACBL Alert Pamphlet is not clear at all, noting only that penalty doubles are alertable over suited openings and preempts without interference).  But that thought quickly vanishes as East confesses he knew it was penalty the whole time; however, West never has her penalty doubles, so he made the insufficient bid on purpose.  Thus, he says, the poor result was your fault for not accepting his magnanimity.

 

There, uh, seems to have been an irregularity, so you call the director.  The director isn't sure how to handle this board.  How would you handle it?

 

Hand omitted since I'm not interested in hearing whether you think South had a 2 bid at favorable, or whether South should have accepted the insufficient bid - this actually happened as described, but the exact hand isn't the point of the question.  I am genuinely not sure how the Laws apply here - both to East/West and to North/South (for the latter: normally if there were misinformation, we might ask players if they would have acted differently, but I suspect that only applies to *legal* auctions, right)?

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