Local Users created under DEFAULT domain can only be authenticated by using the Forms authentication and is because the user created in Quest Archive Manager is not a windows credentials at all (even it's in an domain DEFAULT)
Since the domain is not AD domain, it's just an string in SQL and for that reason it cant integrate with windows authentication, and windows cannot identify this user.
When using Forms authentication, Quest Archive Manager has it's own logic to verify this user but windows authentication does not.