I build Version 3.4p1 using --with-tcp-wrappers on both IRIX 6.5.15 and OSF1 
v5.1. Priv Separation works fine on IRIX and connecting as root on OSF1. Normal 
user fails on OSF as follows running sshd -d -d -d

Messages from connecting machine

aku445 IRIX64 ssh -X aku214     
debug3: Trying to reverse map address 161.99.65.161.
cannot set login uid 202: error Not owner.
Couldn't establish session for wadelljs from aku445
debug1: Calling cleanup 0x12005153c(0x140030728)
debug3: mm_request_send entering: type 27
debug1: Calling cleanup 0x120068074(0x0)
debug1: channel_free: channel 0: server-session, nchannels 2
debug3: channel_free: status: The following connections are open:
  #0 server-session (t10 r0 i0/0 o0/0 fd -1/-1)

<snip>

From host:
<Snip>
debug1: server_input_channel_req: channel 0 request x11-req reply 0^M
debug1: session_by_channel: session 0 channel 0^M
debug1: session_input_channel_req: session 0 req x11-req^M
debug1: bind port 6010: Can't assign requested address^M
debug1: fd 11 setting O_NONBLOCK^M
debug2: fd 11 is O_NONBLOCK^M
debug1: channel 1: new [X11 inet listener]^M
debug1: server_input_channel_req: channel 0 request shell reply 0^M
debug1: session_by_channel: session 0 channel 0^M
debug1: session_input_channel_req: session 0 req shell^M
debug1: fd 4 setting TCP_NODELAY^M
debug1: channel 0: rfd 10 isatty^M
debug1: fd 10 setting O_NONBLOCK^M
debug2: fd 9 is O_NONBLOCK^M
debug1: Setting controlling tty using TIOCSCTTY.^M
Connection closed by remote host.^M
debug1: channel_free: channel 0: server-session, nchannels 2^M
debug3: channel_free: status: The following connections are open:^M
  #0 server-session (t4 r0 i0/43 o0/0 fd 10/9)^M
^M
debug3: channel_close_fds: channel 0: r 10 w 9 e -1^M
debug1: channel_free: channel 1: X11 inet listener, nchannels 1^M
debug3: channel_free: status: The following connections are open:^M


I tried setting user sshd as a member of group terminals, reseting protection 
of /dev/pts, etc.

Also, when loging in as user root, the log progresses to the line

debug1: Setting controlling tty using TIOCSCTTY.^M 

when the session is established.