I know exactly what the problem is. The solderless socket is not making a good connection from LED3/LED4. (Or, the solder pads around the stock LED3 and LED4 were shorted out when the stock LED's were removed...). We remove all stock LED's and insert an aftermarket circuit board with our three-color LED's on it.
The modchip monitors the original Player LED's and 'mimicks' their output on our aftermarket LED board. If it doesn't 'see' what the stock LED3/LED4's were doing, it can't mimic them. This doesn't affect the function of the LED's that you may assign using the macro software. Just the mimicking of the stock LED blinking - such as when the controller is searching for the console or such as when you receive a message or game invite and your LED's blink.
Ben do you know if this was one of yours or one of ours? Because I see a warranty repair in this customer's future lol
Pyroman, open a support ticket to arrange for a return and repairs.