Did you submit a ticket for this issue? If so, what was the resolution?
I ask because I'm having a similar problem, but it's intermittent. In short, I'm importing blog entries from a WP blog into SF using the WP feed which contains all of the content as well as the images. I've tried every thing I can think of, from passing the stream directly into the LibrariesManager Upload method, to "using" the stream with my web client's OpenRead method and passing that in, ensuring the library allow for these particular image formats, running VS as an admin, changing the permissions on the containing folder, etc.
Any feedback would be much appreciated. Mahalo.