What's wrong with the nominating a fan film series?
The problem is that is exactly that - a fan film series. In other words, not a professional production.
This has more to do with the fact that there are other, professional productions out there competing for the award that otherwise lost their chance at winning because of all the press "World Enough and Time" got because of Takei's involvement and, rightly, because of how well-made it was. I can't recall at the time whether there was anything in the rules about the Hugo awards prohibiting the fan film from competing, but I remember an awful lot of professional writers, directors and voters were not pleased about it's being submitted and nominated.