The issue seemed to stem from the fact that they called grounding late…the chains had already flipped it to second down, and the referee(s) probably already move his whistle on his hand to second down. When the called the loss of down penalty, they thought they should be skipping 2nd down, and jumped to third down.
You are correct - the penalty was called very late by the ref and really caught everyone off guard because everybody in the stadium except the ref recognized it was simply a broken route pass incompletion - not intentional grounding.
Here's where the screw up really started - when the ref called the penalty and gave his description over the on-field mic, he said "loss of down - it's 3rd down". So, the ref screwed it up right there as he should have said it was 2nd down. This caused the PA announcer to also announce it was 3rd down to everybody in the stadium. So, between the ref's announcement and the PA announcer, the chain gang moved the down indicator to 3rd down, when it should have been 2nd down. PSU ran the next play which didn't pick up the first, so everybody came off the field and we punted.
As soon as the ref called the penalty and improperly announced it was 3rd down, I was 95% sure that it was wrong, so I began watching the PSU sidelines very carefully. It was clear from his body language that CJF knew EXACTLY what was happening from the very first moment. He called the ref over and was emphatically discussing the situation, but wasn't having any luck changing the ref's mind. This discussion continued during the commercial TV TO after the punt. Based upon the body language of everybody involved, I would bet a large sum of money that the ref then figured out that he screwed it up, but it was too late to do anything because PSU already punted.
I am convinced that it was during the TV TO when the ref recognized his mistake. He went on to the field and called a meeting with the rest of the officials. You could almost tell exactly what the discussion was and they all realized their f.u. This seemed to be confirmed during the very next PSU possession where they gave what I thought was a clear make up call when they spotted the ball at least a yard more than it should have been in order to give PSU a first down. Unfortunately, the replay booth caught on to that, buzzed down to replay the spot and properly moved it back a yard or so, taking away the PSU first down.