I think he stopped trying to pretend that it was a live demo precisely because he noticed that the fraud had been revealed due to the presence of the VLC menu, and a general lack of sync due to the delay the VLC mistake caused. It is not honest to try to fake a demo and then say "haha, it's fake really" after the audience has already seen through it.
To know how honest he intended to be, we need to know whether he would have convincingly faked it had the mistake not happened.
My gut feeling is that what might have happened is that he and his staff wrote the talk in advance and prepared for it in the hope that they could do a live DX11 demo. When it turned out to be not quite ready to demo in time, they prepared a video for the backup plan (not a bad idea anyway) and made light of it.
I would really be surprised if he went on stage thinking that he was going to pretend to play the game and actually fool the gamers who would undoubtedly be analyzing his video frame-by-frame. He could not have faked driving the race car convincingly without a lot of practice (or a self-turning wheel) and surely there would be at least one smart game/video developer involved in the preparation who would have told him that.
But I could be wrong. Dumber things have been done in the heat of the moment.
(FWIW I have given talks with very touchy complex actual live demos. But more often than not though it's been the little video clip that screws up in the presentation :-)
I don't find it surprising; I guess because he didn't actually admit to it being a video at any point during the talk. His excuse was that "they're running (playing) it backstage", which sounds hastily constructed, and would be a believable lie only if we hadn't seen the VLC dialog.
To know how honest he intended to be, we need to know whether he would have convincingly faked it had the mistake not happened.