I got an answer!!! Took about 6 hours to get to it though...
If you are using Linux to run SWAT, you must also add the following
information to be able to use SWAT in authentication mode. Because SWAT
is using the PAM (Pluggable Authentication Module) system, you need to
configure the PAM sub-system to be used by SWAT. So you will create a file
called samba in the /etc/pam.d directory. This file will contain
the following two lines :
auth required /lib/security/pam_pwdb.so nullok shadow
account required /lib/security/pam_pwdb.so
For anyone else having this problem, it looks as though Linux using SWAT requires PAM installed.