I don't think this is an issue with Sony devices specifically, as I get the same garbled formatting opening up my text files (.txt) in other applications beside Windows Notepad.
In Notepad, the text looks great, and the paragraph structure is intact, and the document is readable. If I try to read this text on my Sony Reader (PRS-350) or in, say, Microsoft Word, the text is garbled with odd line spacing, and often one word per sentence.
Why is this?