I purchased my C 7070 8 months ago and started playing with the depth of field feature just last night. I am experiencing the same problem that you are experiencing. I contacted Olympus last night and the support tech experimented with his C7070 while I was on the phone with him. He could not get the depth of field effect to work, He stated to me that the camera just was not capable of out of focus shooting. I was not satisfied with the answer. So I called Olympus back the next day to talk with another tech. He spent at least 45 minutes trying the feature to work and to no avail was unable to. He did state that it was very strange to have the aperture priority feature and not be able to control depth of field.
Please let me know if you are successful in unlocking the mystery. Perhaps it's some sspecial setting that we are overlooking.