I'm not sure why this is happening, but I suspect that BuddyPress is sending header information before the redirection to the login page is firing, so it's getting ignored. Here's a workaround that seems to be working for me:
In the plugin file,
ds_wp3_private_blog.php go to line 461 and you'll see:
add_action('template_redirect', array(&$ds_more_privacy_options, 'ds_users_authenticator'));
You may want to do the same on 467 and 474 if you use any of the other privacy options.