Flow is generally the first problem that is suggested. Does it look like the overflow is moving at a good rate? Note that just because the pump is rated at 40gph, it may not be moving that much into the chamber. Head pressure, though it should be slight here from the look of things, may be taking some off of that - and perhaps that drop is enough to cause issues?
Does the chaeto ball spin in the current? Does it have room to even do this (eg; has it grown at all and have you harvested any out of the chamber yet, if so)?
The lights being too close ("cooking" the chaeto) or too far (not enough light) is another possible cause - though I doubt that's the case here as it's a pre-assembled unit...
How are your water parameters? If your water is already "clean" before you added the fuge, then there may not be enough nutrients for the chaeto to survive, perhaps?