Thank you for reporting this edge case.
The codes work on my Windows computer both in R2016a and R2016b. The results are the same as what you reported. Your hardware and software platforms might be different than mine. Occasionally, the results could be different in edge cases. It appears that the error message comes from the Cholesky decomposition of a matrix (named PhiHat in line 557). When I run the codes, I saw that matrix is ill-conditioned, and thus it is possible that Cholesky decomposition fails on your computer.
The predictor matrix X has some problems in this case. The values of the third variable are all zeros except for a single observation being one. Meanwhile, a constant term is included as the first predictor. The data have strong collinearity. A regression might not work well for that dataset.
Also, try to adjust the scale of the regressors, either by the data scale or the OLS estimator scale. It may help improve conditioning and overcome the edge case.