Perhaps I spoke too soon, the problem still shows up in the copy Amazon sent me. Based on my own tests, it's possible the "new" version wasn't sent to me. I use a Kindle Paperwhite 2.5 (4GB of storage) and have firmware version 5.6.5.
I did some tests:
Code:
<html><body>
"Calvin said so."
<p>
Enter the "Kraken".
</body></html>
Converted with Calibre to a .mobi (old format) looks alright, but with the quotes being really just hash marks (as shown in the code).
However, select the "smarten punctuation" and old .mobi and the output is:
" Calvin said so."
Enter the " Kraken".
Try to convert to a .mobi (new format) and it says the file is corrupt (so it's possible that when I mailed the "both" file to myself, it mailed the older version because it wasn't "corrupt").
Converting to a AZW3 and the smarten quotation and the output looks exactly as expected, the only problem being you can't email it to yourself.
Interestingly, I sent the old .mobi format with the smarten punctuation to my wife's older Kindle Touch and everything looked fine. It's just strange that this problem only appears between quotation marks and a capital C or K, and only when smart punctuation is on. Perhaps this is a bug with how the Paperwhite views older .mobi files?