Verification builds:
1.2.3.6, 1.2.5.12 Retail

Summary:
Mobs are spawning at a much greater distance around the player (vertically) than they should. Mob spawning should follow a set of limits so they only populate an expected area around the player.

Steps to Reproduce:

1. Start a new flat world, set to peaceful
2. Create a 50x50 flat platform >128 blocks above the ground
3. Set the time to midnight
4. Set the difficulty to Easy or higher

Observed Results:
Many mobs will spawn on the ground that is >128 blocks away from the player, and a few mobs might spawn on the platform surrounding the player.

Expected Results:
Mobs should only spawn between 24 and 128 blocks away from the player (in this example, they should only be spawning on the platform), and none should spawn on the ground as it is >128 blocks away.

Screenshots/Videos attached: Yes

Notes:
Even testing this at y256 still allows mobs to spawn on the ground.