I feel your pain. I bought some broken iPods and am trying to figure this one out as well. What I have discovered is that when I move the flex ribbon of the click wheel a certain way while it is connected to the mother board, the click wheel works. It has something to do with the connection, although I can't say this is the same problem everyone is having. What I do know is that it's not a software issue. I have restored after restored after restored and even zero'd out the data with disk utility and then restored again with itunes. Unless I need to downgrade the firmware, which I really don't think will help.
I can't tell if there was liquid damage, but nothing indicates this on my iPod. All I know is that I was able to use the iPod properly when the ribbon was forced a certain angle....and then it glitched out and kept restarting and now I can't get it to do anything. Figures.