When I am trying to set moderators (in the set moderators for this forum) I get a message saying "The specified username/group was not found. " . By the way when I type in admin it replaces it with "Administrators ( 4)" and it still says it is an invalid user group!
There is somthing wrong with your board, please provide me a test account or a screen shot of what you are doing.
Try typing in the username itself. You were not very clear.
You've got outdated files, run the File Verification tool in the Tools & Maintenance section of the ACP, see what files it says are changed, and reupload those files.
I did that and it said "Congratulations! No corrupt files have been found on your installation."
I have forgotten about this issue for a long time and I now think my board was out of date or that the next MyBB update fixed the problem.