Ok, here is the scoop. The production trans uses brass friction pates against steel drive plates. When overheated (which is usually caused by slipping under load) the plates will warp as mmwalter & Gerry says. Once this happens the clearance needed in the clutch pack for a clean neutral goes away, the plates are always rubbing. When they warp enough they will lock the trans in gear (per crazyhorse), and kill the engine if put in reverse.

It could work fine for quite a while, would help if you change to type F or FA fluid(ford spec). We use a graphite composite friction plate with a higher COF (coefficient of friction) and more of them. They are much less prone to slippage than the stock plates. Only problem is that they are softer than the brass, and if they do slip they go away altogether, no limping home while locked in forward.

The Ford fluid is a good bet in any case, it does not have the friction reducing modifiers contained in the Dexron fluids.

Marc, I've got a question for you. With the extremely limited hard usage my boat (38 Cigarette flat-deck) sees, and considering I have stock Velvet Drives in front of my SSM#A drives, is it worth upgrading them to something more in line with the supercharged 650 horsepower engines I'm running? Do you have a ballpark figure to upgrade them? I'm not looking to rain money on the boat but I understand these transmissions are nominally rated for 400 hp.
The engines idle at 800 in neutral and 650 in gear. Let me know if you need any other information.

Thanks for the info, looks like I'll be doing a rebuild in the very near future.

Since I'll have the transmission out are there any other components that should be replaced out of general preventive maintenance?

I just talked to a marina in my area and they mentioned the plates may have been shimmed tightly together causing the spin. Does this sound possible? The previous owner says there has never been a burnt smell of the fluid, however the spin was always there since he owned the boat.