A limitaion of the Solid Swept Cut tool is that the cutting tool body cannot have a concave face.
http://help.solidworks.com/2012/English/solidworks/sldworks/HIDD_DVE_FEAT_SWEEP.htm
Tool body
(solid cut sweeps only). The tool body must be convex, not merged with the main body
Well, member mncad of Eng-Tips has a simple workaround
http://eng-tips.com/viewthread.cfm?qid=312336
Below is the file in 2010, SP4. I did forget the one quirk of Solid sweep cut, it will not do the ID fillet without a workaround. It does an OD fillet (nose radius of the cutter) without a problem. If you look at my sketch of the cutter you will see the corner rounding radius as a construction line, if you change that back to a line and change the chamfer line to construction, the solid sweep cut will work with corner rounding just fine. If you try creating a solid sweep cut with the fillet for corner rounding right from the start, it will show the error you got.