I would expect the developer to patch the server/software instead of killing the character for all to see. If the player is a 14 year old Italian, living in Napoli for instance (where the mob is stronger then the state) he just learned about a code of conduct that might stuck there throughout his lifespan leading to some seriously fucked up situations (because real world crime repercussions are different). Some people are seriously hooked up in online gaming. Some of them are kids for Christ's sake.
What this company did here is plainly ridiculous. You don't respond to bullies with bullying if you don't want to promote violence. If you respond violently (by humiliating your opponent) you are effectively promoting violence and unethical behaviour, although indirectly.
Closing the account and making a statement would be more than enough. What I see here, is just an 'ego' hurt... But the developer's and/or security-whatever-officer's ego should be feeling more for the 'problem' than the 'messenger'...