I came across this by accident this morning. It is an audio recording made a week or so ago, during which Matt Cutts of Google talks about sites that go too far with SEO, and how Google is launching an update in the coming weeks or months to combat this.
The following is not a word-for-word account of what was said, but if you listen to the recording it is pretty much accurate:
"What about the people optimizing really hard and doing a lot of SEO. We don't normally pre-announce changes but there is something we are working in the last few months and hope to release it in the next months or few weeks.
We are trying to level the playing field a bit. All those people doing, for lack of a better word, over optimization or overly SEO - versus those making great content and great site. We are trying to make GoogleBot smarter, make our relevance better, and we are also looking for those who abuse it, like too many keywords on a page, or exchange way too many links or go well beyond what you normally expect. We have several engineers on my team working on this right now."
A lot more than the above is said, so if you have the time listen to whole thing so that you can put it into context. He does not say that we should not do SEO, this is specifically about over optimization.