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In some circumstances, the privacy of albums of group covers can be modified. In a group albums list, view the Covers album and then click the "Edit Album" link on the top right (do NOT click Edit on the album in the albums list, this will work). The privacy of the album can then be modified and if you do so, a lot of things go wrong afterwards!
The following snapshot was done on your demo site.
Can you please update the label for this topic which is NOT a "Customer Issue" but a "Confirmed bug". I'll then set it as fixed since this is corrected in the latest JomSocial version.