Tonight one of the characters in my game died. Actually, if not for some incredibly lucky rolls, half the party could well have died.
In another setback, paranoia lead them to accidentally ambush a party of good dwarves, killing them. One of the players suggested that the character death that came after was karma...
I set up a Lurker Above in the dungeon. (A modified version, anyway) The denizens of the dungeon had concocted a special fungal paste which, when smeared on someone, repulses the Lurker from dropping on them. The player characters missed the clues, and as a result, one of them was killed. They managed to slay the thing, with 63 hp and a to-hit AC 0 of 10... quite an impressive feat.
Since they did kill a big monster with much higher hit die and some nasty special abilities, I let the dice fall where they may for treasure, and if they can find a way to transport it, they stand to receive quite a bit of money and experience.
I did not fudge, not one way or the other.