It looks like that the iPod touch was taken apart and someone messed with the screen. The LCD was damaged by tampering with the back part of the display where all of the layers are. I have done this to my iPod touch 4 also so i'm quite sure that is the reason the iPod is messed up.
p.s. The layers are pieces of paper behind the display panel that absorb all of the light being emitted from the backlight also inside of the display panel, also the layers keep out any excess air and provide tinting so the LCD can be easily seen with the eye.