I don't believe Holly's claim that Gunn's match against Butterbean was punishment for beating Williams. I think they just underestimated the fact that Butterbean was a legitimate trained boxer and Gunn wasn't. Apparently, Butterbean wanted to be on the WWE roster, and thought the WM match might get him a contract offer. Obviously, that didn't happen.
In the first round Steve Blackman easily defeated Marc Mero (who actually had boxing experience) just by repeatedly taking him down instead of punching with him. Blackman dropped out before the next round because of an injury, but had he stayed in he likely would've won the tournament, and bored everyone to death while doing it.
Ken Shamrock refused to enter it because he worked hard at getting the roster to trust that he would never shoot on them in the ring, and didn't want to jeopardize that.