Edit 8 minutes later: seems to work fine for me on anarki.
arc> (fromfile "x" (drain:readline))
("This is the first line." "After this line there is an empty line." "" "After this line there are two empty lines." "" "" "This is the last line.")
arc> (fromstring "\n\na\nc\n\nd" (drain:readline))
("" "" "a" "c" "" "d")
Yeah, I run arc3.1 for several reasons -- including that anarki doesn't work in Emacs's shell, and I haven't taken the time to figure out^1 why: my hypothesis is that simply removing rlwrap would fix it, but I so rarely use Arc these days I haven't dealt with it.
 Nor have I taken the time to respond to your emails from months ago. I'm sorry about that; it's related (among other things) to some general malaise I'm trying to deal with.