Believe I ticked off "Can Email Members' for all groups too, but will double check in the morning.
Based on the mailer-daemon bounce backs I looked at none of the recipients or senders were members. I only looked at a statistically valid sample though, not all of them (there were over a thousand at least).
That's what made me think it was a hole in the Email to a Friend. I'll have to do more research either way, but please keep the suggestions coming.
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