The algebraic loop is in SD2 subsystem. This will help you identify it: http://www.mathworks.com/help/simulink/ug/algebraic-loops.html#bsjdi74-1
Simulink by default will optimize out the unused blocks from Simulation. In this model, the subsystem SD2 has no sink block connected to its output, so it will be removed from simulation. When you connect a scope to its output, this subsystem cannot be removed and so the algebraic loop is reported. The sink block does not cause the algebraic loop - it only helped you see it.
If you turn off Block reduction from configuration parameters pane (see: http://www.mathworks.com/help/simulink/gui/optimization-pane-general.html#bq7cqwp-1), you will get the same error even with scopes commented out.
