Hi all,
So this turned out to be a really strange issue limited to VMWare. Here's what our developers had to say:
The issue only appears to happen when connecting to the OpenSSH server via a VMWare port forward (forwarding from the host machine to the Linux VM). The issue occurs when connecting with SecureCRT, Putty and the Windows SSH client, as well as SFTP connections from SecureFX and WinSCP.
We advised the customer to report this behavior to OpenSSH and/or VMWare.