Soiled is a Flash-based telnet client and terminal emulator, supporting both char-by-char and line-by-line mode. In line-by-line mode, it has some features that make it suitable for MUDs, such as aliases, macros, and hotkeys. Since it is implemented in Flash, it can be used from a Web browser.
The wolfchat.net's policy-file has the wrong syntax. If your "to-ports" list is to have multiple ports, you can not have any space characters in them, at least not with the linux version of Adobe's flash player. I have tested the server at dum.acc.umu.se with firefox on Ubuntu, Safari and firefox on OS X Leopard and with IE7, Chrome and Firefox on Windows Vista, all without problems (except an ugly font on linux, but that has been fixed in trunk). If you don't have some firewall that prevents the flash player from connecting to the needed ports, I don't know what it could be.
I believe the error means that the policy file could not be read. Perhaps you have a (personal?) firewall that blocks the access? I just tested the example server with flash player 10,0,32,18 and it worked fine. The client need to have access to TCP port 843 for the policy file and port 2001 for the server in the example.
If you can't find the problem, please file a bug report naming your OS, browser and player versions and I'll dig further.