MicrostockGroup

"When city officials announced the campaign on Jan. 9, they did not let on that the man shown — whose photo came from a company that supplies stock images to advertising firms and others — was not an amputee and may not have had diabetes. The city did not identify the man, and efforts to reach the agency that supplied the photo were unsuccessful. The photographer who took the picture, Morten Smidt, said he did not know the man’s name.

Mr. Smidt said on Tuesday that he had not seen the advertisement. In response to a description of it, he said, “Well, it is an illustration now, clearly not the picture I did.”

There's more!

http://cityroom.blogs.nytimes.com/2012/01/25/he-has-two-legs-but-what-about-his-name/?ref=nyregion

Is Image Source a Getty-owned company?  Because the original article has a Getty copyright for the same photo.

It's an illustration.  Big deal.  There's no "testimonial".

Why don't these people just put 'posed by model' and avoid this sort of publicity?

Unless any publicity is good publicity. 

How come the photographer says he never knew the man's name and yet, according to Getty, it has a signed model release?

I would agree 100%, if the illustration wasn't depicting a fake disabled person.  As the mother of a disabled young woman who models for me, it's frustrating to see disabled models bypassed in favor of a Photoshopped version or an able-bodied model who just uses props.  Unemployment runs extremely high (well over 50%...about 70% for the blind) among the disabled, and it would be so much better if more photographers and agencies would seek them out for modeling gigs so they can actually earn some money instead of relying on government assistance or family.  

But you are right about the fact that this should not be that big of a deal, because as you said there isn't a testimonial.  This isn't the same thing as the NY firefighter who modeled prior to his employment with the NY Fire Department, and whose photo was altered and featured in an ad for a law firm seeking to represent 9/11 victims.  That ad contained a testimonial and made it appear he was there, when he clearly was not.    
    

But apparently the photographer 'sold' his image to Image Source. Someone had to direct the model too during the shoot. If it had been an IS arranged shoot, with their own art director who spoke to the model, then the photographer could not have owned the image. The 'facts' as stated so far don't make sense.

I do realise that laws in the US are pretty lax about this.

Lax? The whole stock industry is about peddling lies, how is this any different? Lets start by being strict about "business team leaders" who have never been business team leaders in their lives. Or doctors with stethoscopes who've haven't even got an O-Level in biology. In fact, anything with a model posing as anything except a model. Or fabulous spas giving beauty treatments, when the premises are nothing like those the image gets sold to to advertise their business. Or food that wasn't cooked by the establishment that uses it in its adverts.

Even nature shots could be used to pretend zoo animals are free while outdoor scenes are often falsified by the deletion of logos, etc.

In stock and advertising, nothing is what it pretends to be. The only possible legal objection to a model's photo being doctored to make someone look like an amputee would be that it is distressing for the model, like putting them in a porn advert, but then you are suggesting that being disabled is socially unacceptable. 

I'm used to a system where adverts must be 'legal, decent, honest and truthful' (though I don't actually know the difference between 'honest' and 'truthful'!) even by implication.
I get furious when I see zoo animals in stock agencies labelled as wild, perhaps to avoid getting a zoo rejection; though bizarrely I've seen some taken in the wild which are tagged 'zoo', which beggars belief. I know it's caveat emptor if they don't want to look stupid, and I know it's why most users of wildlife images buy from the specialist macros.
I son't like it when I see one of my photos used in a lying way - even actually saying that my photo is an example of a company's work.
Yeah, I guess that's the nature of stock.
Google Image Search is just one more check a prospective buyer of a product/service has to do nowadays, limited as it is.