Still puzzling over what the problem could be, I decided to experiment.
It turns out that reproducing the problem is very easy, and it strongly suggests there is something wrong with the SMF wysiwyg editor.
Here is a sequence of actions which reproduces the bug. I'm using Firefox, just to establish that the bug does not only occur with Chrome. I'm doing this in the sand pit play area version of the forum where the wysiwyg editor is still enabled.
1. Bring up an MS Word document which has some mark-up. This was the hardest part for me, since I don't have MS Word, but I found a document which appears to have been produced by MS Word:
2. Select some of the text which includes the mark-up and copy it to the clipboard (Ctrl-C). I selected the first line: "From Baker Street tube: turn left out of the main entrance"
3. Open a 'reply' window in the forum, press the button tagged 'toggle view' in order to turn on the wysiwyg editor, and paste (Ctrl-V) the text into the reply window:
Looks OK so far. But,
4. Press 'preview', and we find that the text has gone bananas in the 'preview' window, in just the same sort of way that many of Comrade Z's posts have gone bananas. There is a rogue bbcode, and the size of the text has become unreadably small:
5. Press 'post' and look at the new post. We find that the bananas text has been posted:
So. Bug. No entities.