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So my coworker just pulled some deviousness in his list. He has a Sorceror Prophet riding a Lammasu, which can cast Shadow spells. With Smoke and Mirrors he wants to swap the Lammasu with his K'daai Destroyer. How does this work when the caster is actually a mount for another character? Does the prophet suddenly ride the Destroyer? Does the prophet go with the Lammasu?

(edit)

Reread Smoke and Mirrors, it says to swap with a Character. The Destroyer is not a character, so this would not work, correct? Out of curiosity, what WOULD happen if the Destroyer was a character and this was valid?

Ok, I don't have my rulebook on me, so take this with a pinch of salt, though I'm fairly sure I'm right.

Firstly, you're right, the swapped models need to be characters but, if I remember correctly, Smoke and Mirrors says you can swap with a character of the same unit type, i.e infantry/cavalry. Therefore, your answer should be found in the "character mounts" section of the rulebook where I'm fairly sure that, under every entry, it says "a character riding an X treats his unit type as Y".

Your prophet on a monster is considered a monster and would swap its place together with its mount with your other monster character.
I don't think your case works though

He is partially right in that the caster's unit is a monster. But a K'daii isn't a character. There is no monster character in CD for him to swap with unless it was another dude on a taurus. It has to meet both criteria of [troop type] and character.

So no, it doesn't work.