There are as many theories on "sandboxing" as any Google myth. Here's a great assortment of opinions..some very good reading:
http://www.webmasterworld.com/forum3/24183.htm
I apologize if this reference is not allowed moderator!
I think your keyword density represents the mean or avg. of the theories I've read on "highs & lows".
I have experienced the same on one of my sites, they were both optimized with the same techniques and two different niches, but Google loves one and hates the other. I've done the same thing as you are doing with great results in the one that was ranking badly.
I have been "de-optimizing" it in terms of using more simple title tags, (maybe only 2 -5 words in as understandable of a keyword usage as possible), very "easy to read" description tags & keeping the "on page" density down by only using the targeted keyword/keyword phrase to a minimum, and not sweating the singular/plural as much but try to get one usage of each if possible only if the copy reads well. If only one form fits, I'll slip the plural in the description tag.....and I am seeing large increases in SERP positions...starting to slowly see the first and second page on GG now and will continue.
Link anchor text is helping. I have few out bounds (maybe 25 or so) and have approached my partners (and getting very appreciative responses) with some anchor text exchanges in our former main page (domain name as anchor text) links. The deeper links spread out to some of the iindividual sections, this has shown positive results for SERPS for product SERPS in those sections with inbound links. Good luck!