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.
1. What the student code at umn says and what i think the student deserves are vastly different things.
2. Something being grounds for expulsion and what a reasonable response would be are vastly different things.
3. The rules saying "up to and including" (aka grounds for) and the full range of punishment are not the same - the max of a range is not the entirety of the range.
You are mixing up two students. The one who complained about "bordering on slander" had nothing to do with the research paper at issue, other than having the same advisor as the author.
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.