I played around a little bit with this today. On my second run-through and I had created a veritable Pirate Nation - nine cities and a couple dozen ships. Although I imagine it's unintentional, I wouldn't mind having it as a feature. And, yes, you can buy Settlers and found new cities. You can also build Harbors, Encampments, & Aqueducts along with their associated buildings although it is really turn prohibited because there isn't a way to increase yields to reduce build times. You can buy Traders, though, but I haven't tried that yet to see what it'd do.
How it works concerns the value of the OuterDefenseHitPoints, which has to be higher than the remaining City Center HitPoints when both are nearing 0. Generally, this won't be possible because each city will build Ancient & Medieval Walls, which together are 200 points. This total equals the City Center HitPoints of 200. Based on the city combat mechanic, reducing a city's Hit Points to 0 before the walls' OuterDefenseHitPoints, is doable, but can be difficult to gauge correctly.
However, even though Renaissance Walls are not in the scenario, Urban Defense still is. Each of the Civs are also still doing research in the background so once they research Steel they automatically get Urban Defenses and their OuterDefenseHitPoints jump up to 400. This is really only possible in the late game, but it unintuitively makes it easier to take the City HitPoints to 0 before the Walls. Admittedly, I did mod the MaxTurns to 100 among other things to play around with a Pirates vs Colonial Powers type scenario, which is about the only challenge since the AI is severely lacking for the other Pirate Factions.