Why are continuation patents allowed their parent's priority date?

I'm following an IPR that includes one patent that is a continuation of a continuation-in-part. It was filed in 2006 but claims a priority of 1999, the date of the oldest patent.

I know for a fact that the subject matter was made available to the public around 2005 by a competitor of the "inventor". It seems that they figured that they could patent a competitor's product under a continuation, and keep the 1999 priority date making it much harder to find prior art.

Firstly, is my understanding of how a continuation patent works correct? Secondly, assuming it is, why should this be allowed, isn't it a loophole that prevents otherwise strong prior art being used to prevent a patent from being granted?