While I’ve not experienced this exact issue – it would appear that settings are no longer being respected in all instances. For my installation (wp 3.3,bp 1.5) users who have selected All Email and then reverted to a different setting are still receiving All Email. One user even has shown that they are receiving duplicate emails, though I’m not able to replicate that particular problem myself.
For the time being, I’m disabling the plugin until I, or Boone for that matter!, have more time to look into it.
Thinking of doing the same; my site is barfing out a lot of emails, particularly since any new activity stream replies bump topics up
That’s another plugin I don’t want to deactivate, though!
I am going to have to turn this plugin off, unfortunately. Even users who have their settings set to NO EMAIL are getting upwards of 50 emails an hour 
Daisy