Just wanted to report back that I was able to solve my issue by:

apt-get remove vsftpd
rm /etc/pam.d/vsftpd (figuring it will recreate it)
apt-get install vsftpd

Now it works fine.

The /etc/pam.d/vsftpd was NOT recreated.

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https://bugs.launchpad.net/bugs/869684

Title:
  530 login incorrect error after upgrade to Oneiric

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