The custodian seems to be indicating that you requested a Roth conversion, not a recharacterization, so there really isn't anything can be done to change this. Code 2 is correct for what happened. You'll report the traditional IRA contribution and Roth conversion separately.
If you feel that you requested a recharacterization yet the custodian mistakenly performed a Roth conversion (which under the law is irrevocable), you might have a legal case against the custodian, but you might have a hard time showing any actual damages resulting from this mistake. There are circumstances where this mistake could actually be advantageous.
