The problem is, that all Quartus JTAG stack operations are starting with identifying the connected JTAG chain by an IDCODE read, which is apparently disabled with configured C III LS.
In this situation, you can only access the device, if you know which devices are connected to the chain. That seems to be the reason why Altera suggests to use third party tools for the FACTORY command related operations.
In my opinion, they designed this feature without much thinking. You can easily access the device, but not using Altera standard tools. The C III LS development board has a switch to disable the default configuration and unlock JTAG access, if I understand right.
You still can use the USB Blaster with third party tools that support it or access JTAG through your own software.