I know this is an old thread, so I post here only for the record.
The file /var/palm/event.d/mobi.optware.openssh contains the line:
exec /opt/sbin/sshd -D -p 22 -o "PasswordAuthentication no" -o "PermitRootLogin without-password"
If you want root login and password authentication, you have to change two things:
exec /opt/sbin/sshd -D -p 22 -o "PasswordAuthentication yes" -o "PermitRootLogin yes"
So PasswordAuthentication yes and PermitRootLogin yes
And btw. if running trough wterm, then my Pre3 doesn't set up PATH properly. Namely /sbin is missing from the PATH, so I couldn't start services without specifying full path like /sbin/start