It is not possible to earn $1000 or more using free money. That guy is lying or he might have invested his own money and created the impression with his friends that he is playing with free money.
It is possible if we are talking about possibility, it is proven by some people who could make some money from free money.
I did it once in poker freeroll few years back when there was a promo of a new poker site.
I won the 1st place and I earned 0.25btc (not really remember how much was it worth in fiat)
Of course the chance to win big from free money is so small, but it is still possible if you have the luck.
Ofcourse! They will likely allow such bettors win only small or moderate amount, Or make winning harder for them.
I guess the non peer-to-peer games will be harder to win with the free tournament.
It's nice they offer the free bets though. But it'll be a good idea if the betting sites that run something like that are very transparent about it. I think it should be possible to prove the bettors chances to win any prize with some sort of fool-proof tools.