As noted by ^arky^ in #ubuntu-bugs there is a workaround:
http://playingwithsid.blogspot.com/2009/08/how-to-override-compiz-blacklist.html

I have tested and this allows me to enable Visual Effects without
complaint.

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[karmic][GMA950]Visual Effects cannot be enabled but compiz --replace works
https://bugs.launchpad.net/bugs/419096
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