There was no invasion of privacy. He was outside in plain view, so no expectation of privacy applies. Plus, the neighbor simply called police and asked if it was legal. If my neighbor did the same thing, I wouldn't hold it against him.
The police, however, handled it horribly from the start. Guns drawn onto the property without even taking the time to figure out if the man was a threat. Considering that OC is legal where Mr. Krause was (there is no CC allowed in WI -- OC is the only legal way), there shouldn't have even been an investigation.
Regardless, they put him in jeopardy, arrested him, stole his gun, and put him through all of this turmoil because they didn't know the law. The man has a legitimate complaint, and I wouldn't be surprised if he files a lawsuit against the officers, city, and state. He probably should, just to provide a precedent.