It's not just overtly malicious sites (drive-by malware downloads, phishing, and so forth); Google also has to deal with "splogs" that scrape content from the original sites and point to one another in a complex spiderweb of cross-links. That is co.cc's business model: bulk subdomain sales. I mean, it's nice they let you have a couple of subdomains for free (even though they likely know that there's a high abuse potential), but they have to know that when they're selling as many as 15,000 subdomains to a single user as a package that there's likely some black-hat SEO involved.
Google's actions here probably have at least as much to do with the "block domain" option returns from their search results* as they do with reports of malicious behaviour. Co.cc might be able to claim vigilance over illegal activities, but Google is in the business of providing good search results and hanging ads off of them; when the search results aren't good, people go elsewhere, and the ads don't get seen or clicked.
And yeah, it's a pity that a handful of well-behaved people are negatively affected. But let's remember that it is only a relatively small group of folks, and that if search results really are important to them, it's a fixable problem.
* I don't know if that's available from all browsers, but it's definitely something I've used in Chrome to get rid of content-free teaser sites more than a few times. Killing about two dozen annoyance domains has dramatically increased the quality of my returns.