I'll give this a shot, I remember going through all that, but it's been almost 4 yrs since I sold that wagon... regretting it.
Anyway, maybe it just needs time to bleed down? How long does it stay up? Do you have issues with harshness?
When you say you replaced the adjustment arm... why did it need replacing? IIRC, the valve opens up via the rod when the car sits low... redirecting hydraulic fluid to the rams thereby raising the car... when it reaches the set height the valve closes. And the fluid recirculates. I think it just needs time to bleed out. Cause if the bleed orifice is clogged the car would not stop rising...you'll know this when fluid bursts out the seals.

Manually actuate the valve... disconnect the rod. See if rises and falls. May just be an adjustment issue.

edit: make that 7 yrs...

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85 190E 2.3(SOLD)
86 230E (-->300D) sold
87 300D (-->300TD) sold
68 250S w/ a 615 and manual tranny (RIP)
87 300TD (SOLD)
95 S280 "The KRAKEN" (Turbo 2.9 602 transplant) traded
86 190E 2.3... current project