Sorry to resurrect a really old thread... but I saw that people were asking me to jump in and "pay my respects" so to speak... (And I'm having trouble getting to sleep tonight!!)
Regenerative braking does occur in all Castle ESCs. And yes, the actual braking action is achieved by just shorting the windings together through the FETs.
What happens is this -- the ESC shorts the windings of the motor, and forces the motor to start acting like a generator. Remember that a turning motor generates a specific voltage -- back EMF. This voltage is actually the voltage induced in the windings by the moving magnets.
Because the motor windings are shorted, the voltage drops to a very low level (usually less than .1V) and current rises very high, very quickly (often hundreds of amps.) As energy is generated (by the drag created by the voltage difference) current rises, and energy is circulated through the windings and the FETs - -- And a large magnetic field (with a LOT of energy) is stored in the winding.
After a short time, the FETs turn off -- and this is when the regeneration occurs. The current that was flowing through the windings suddenly has nowhere to go. Inductors (like a motor winding) abhor a change in current, so the stored energy (in the motor winding magnetic field) forces the voltage to rise until the winding current can continue to flow. The current flows from the battery negative, up through the body diodes of the low side FETs, through the motor winding, back through the body diodes of the high side FETs, and into the capacitors (and battery...)
This is similar to how a boost converter works:
http://en.wikipedia.org/wiki/Boost_converter
(stolen from the Wiki

The key principle that drives the boost converter is the tendency of an inductor to resist changes in current. When being charged it acts as a load and absorbs energy (somewhat like a resistor), when being discharged, it acts as an energy source (somewhat like a battery). The voltage it produces during the discharge phase is related to the rate of change of current, and not to the original charging voltage, thus allowing different input and output voltages.
But instead of a supply, there is a magnet passing the coil that creates the current source.
Hope that clears it up for you all!