You are correct-the chapter was closed because of the drug use among it's members and those members are no longer recognized by the national organization. And, no, alums aren't always necessarily embarrased. Many times, they are quite angry when their their chapter is closed. From what I understand, it was the university that kicked them off of campus. Here is a portion of another WS post about it:
He's in an off-campus Jewish fraternity with no house referred to as APES. Long story short: they were kicked off campus for one reason another when they were known as AEPi. This past year AEPi was started again and will have a house on campus, but none of the existing members of the off-campus fraternity were allowed into the new AEPi and they can no longer refer to themselves as AEPi brothers, so they go by APES.
From what I have learned from co-workers, many of the APES, which include JR and JW, have what is described as a "underground" fraternity. Many of them live in Smallwood and JR's complex because the owner is a member of AEPi. This might explain how JW's friends got into Smallwood when the confrontation with CR occured. It seems that he has a positive relationship with these ex-AEPi members. He was upset that nationals closed the chapter and revoked memberships.