Ok... Found it. The reference to combat in a crowd in SW is specifically related to ranged attacks in a crowd, so be warned.
Reread the bit in the rulebook about "Shooting or Throwing into a melee... This is basically the idea, but stretched a bit.
Basically, if your attack roll misses your target's Defense (AC) by a small amount, you instead may hit a bystander. If the attack roll is high enough to hit the accidental target's Defense (AC), they suffer all ill effects of the weapon's damage. The "hit a bystander" range depends on the crowd density...
1 person/32 square meters (100 sq ft.)... 1
1 person/16 square meters (50 sq ft.)... 1-2
1 person/8 square meters (25 sq ft.)... 1-3
1 person/4 square meters (12 sq ft.)... 1-4
More than that (your jail, for example)... 1-5
So, for example...
A fighter fires an arrow at a goblin standing in the midst of a crowd (1/25 sq ft... 1-3 range) of blind kobolds.
Let's say the goblin has an AC of 14 and the kobolds have an AC of 10 (They're blind, so they loose their Dex bonus). If the fighter rolls (with bonuses) a 14 or better, he hits the goblin. If he rolls an 11-12, he misses the goblin, but risks hitting a kobold instead. If he rolls a 10 or less, the arrow misses everybody.
Let's say he rolls an 11. Now the DM randomly determines which kobold gets hit, and applies arrow damage to that kobold. If the kobold was wearing leather armor, bringing his AC up to 12, then the attack roll of 11 would not hurt him... the arrow would glance off the armor.
Make sense?
In this very tight situation, perhaps you could apply those rules to melee combat too.
I agree with granting "entangled" status of everyone involved. However, the cover only does good if the opponents aren't standing next to each other. Meaning you could only use it if somebody was trying a ranged or reached attack.
I'd also rule, that in those conditions, anything larger than a tiny weapon recieves a penalty to hit, since isn't enough room to weild them... Perhaps -2 for small, -4 for large and -8 for large weapons.
