It's always hard on people who really care about their martial art and what they're teaching to others when someone else comes along with the idea to make as much cash as they can.
If i were in your shoes, i'd roll with him as much as possible and beat his ass into the ground until he at least gets some of his lost skills back, then at least you can say you tried to help him. If however he doesn't improve or make and serious effort, then to hell with him.
If he teaches under the name of his old system, how does his affiliation with you translate into what he teaches? Does he teach the same style? Does he claim to be part of your organization? If he does, then go in there and whip his ass.