The students do need a bit of punishment - they are adults who chose to act this way. In this context though, switching their advisor and requiring a different research track would be sufficient - that's a lot of work down the drain and a hard lesson. I agree that expulsion would be unfair - (assuming good faith scholarship) the advisor/student relationship is set up so that the students can learn to research effectively (which includes ethically) with guidance from a trusted researcher at a trusted institution. If the professor suggests or OKs a plan, it is reasonable for the students to believe it is a acceptable course of action.

The student doubled down on his unethical behavior by writing that his victim was “making wild accusations that are bordering on slander.”

You can’t make a silk purse out of a sow’s ear.

I agree in this case the driver of the behavior seems to be the professor, but graduate researchers are informed about ethical research and there many ways students alone can cause harm through research potentially beyond the supervision of the university and even professor. It's usually much more neglible than this, but everyone has a responsibility in abiding by ethical norms.

Dunking on individual maintainers for academic bragging rights seems pretty unfair, too.