I used to help run a rather large fan convention. For our first 5 years (starting in about late 2003 or so), PayPal was the only option we offered for registering online. At the time, they were really the only option for implementing online payments easily without the complexity of a full merchant stack (and it was just me doing the programming, volunteering to help them while I was still in college). By the time we finally switched away from them, we were probably clearing $80k or so a year through them, with a very large percentage of that coming over the course of a week or so just before the event. People like to wait until the last minute. :)

We never had any issues, but we were very vigilant about transferring funds out of PayPal every few days just in case. We did finally stop using them, probably about 2009 or 2010, when stories like OP's started to become widespread.

For us, having them "hold" our funds for 6 months or cancelling our account would have bankrupted us. The hotel wants to be paid on Monday after the event. Vendors need to be paid within 30 days. Things like that would have been impossible for us to do if they decided to sit on the money or can us. We were a volunteer fan convention; we didn't have the financial cushion to withstand something like that.

Not to mention the fees were higher than a standard merchant account. We finally did switch to a merchant account through Elavon and, after I left, I think they switched to Stripe. Either way, they don't accept PayPal now because the financial risk to them that could result from PayPal freezing or canceling the funds is significant.