That's not entirely accurate. Transponders are transmitters. They don't add anything to a target's radar cross section. They emit an electronic signal providing a "secondary" contact for radars tuned to look for that signal. A "secondary" contact is not a raw radar return. It is simply a radio signature transmitted from the target aircraft. And while you are absolutely correct to say radar can track passive objects, the system everyone is viewing in this thread cannot. It can only see "secondaries".
Is there an actual report of a reflectivity return from this "bottle rocket" or are the conspiracy buffs relying only on transponder signals? Anyway, what do you think the pilots saw? Temperature layers causing refraction?
As I understand it, the active radar return does not carry any altitude information... only direction and distance. Therefore, if the transponder signal coming from "bogey" ghost suddenly shows the aircraft at 1500 when it actually is at 6000, that information had to come from the transponder... which wouldn't send inaccurate info. Can the "ghost" transponder signal garble the information to indicate the wrong altitude?
Where I come from, transponders pick up incoming radar and answer it with a return transmission. They don't just transmit all the time. That's what I was suggesting. The return transmission is much brighter than a return echo because it doesn't have to make the round trip. Of course it can also be on a different frequency, and normally contains an ID code of one kind or another. Either IFF or in this case the flight number.