Does it have a design flaw?
It isn't as much flaw as deception. Litecoin used the same scrypt parameters as Tenebrix. Artforz had gamed almost everyone involved in the scrypt()-based coins. He had choosen the set of parameters that made GPU mining possible, but made claims that the design is GPU-resistant. Then he proceeded to mine all the scrypt()-based coins (Tenebrix/Fairbrix/etc) on his GPU farm that was significantly more efficient than the CPU miners.
Is the information in this post correct? Could the parameters of a scrypt coin be adjusted to make GPU mining less competitive with CPU mining? How much work would this be? In the litecoin announcement post, Coblee indicated that litecoin was not supposed to compete with bitcoin for miners, yet now it clearly is competing because the chosen scrypt algorithm is not inefficient enough on GPU. Why did the litecoin devs choose to use Artforz's exact proof of work implementation?
https://bitcointalk.org/index.php?topic=47417.0