[Detective]

I have the same problem, I solved it by filtering the display names:

add_filter( 'get_user_display_name', 'rk_display_name' );

function rk_display_name($name, $ID = 0) {

if ( !seems_utf8( $name ) )

return utf8_encode( $name );

return $name;

}

Put this inside a plugin.