That Zalman controller can only handle 6W of power through it. Push it above 6W of power for an extended period of time, and behold the wrath of molten plastic.
It has a small heastink for a reason, it's not meant to handle much power dissipation.
I still have mine from my first build from 4 years ago and it still works. I have never cracked open mine before, however I am willing to bet it has a pot connected to a linear voltage regulator in inside. The higher the current that has to pass through the regulator, the higher the regulation losses have to be to maintain the voltage level required at the output so the higher the temp will be. Obviously, lower fan speeds require lower voltage, and the lower the voltage difference required from input the more power the Zalman would have to dissipate (because it's a linear voltage regulator at the end)
Now it might also be the case that no more than 6W where being driven out of it but the regulator just failed.
OP, what was the rating of the fan that you had connected to the Zalman?