I have seen fuzzy s/h pellets only once before, I had deflasked some violacea seedlings in a s/h compot and kept them in a plastic container with the lid on and off temporarily. The temp was moderate (maybe 22C?) and the natural light was medium in intensity. I had left the pellets in a very mild chlorine solution then rinsed it off 2 times before i potted the seedlings. From the start they were not doing good...I had noticed that some, while in flask, had some black root and tossed them before compoting them in s/h.
At first I thought it was due to the transplant stress and that they needed more moisture so I closed the lid. Just one day after the transplant, there was this fuzz growing from each seedling around it...the media was damp, but not in a way an orchid wouldn't mind, actually it would thrive.
Within 2 days all the seedlings were dead with fuzz in the bottom part of the crown and on the surface of the medium. Most of the damage was near the point where the crown ends and roots form, which had deteriorated like chantilly left out of the fridge in the summer.