Because GME already has more cash than it’s debt. It’s always had a great balance sheet. Shorts were not very justifiable: it was hardly going to go bankrupt.

It doesn’t have to go to bankrupt, it just has to go down.

Matt Levine is speculating that they're doing exactly that.

Some say that would be illegal, since GME knows these prices are wrong, and thus they would be guilty of fleecing whomever buys them.

But supposedly they could make the investors sign a waiver that they acknowledge this?

This is not accurate. There is no such thing as “prices are wrong”. The price is being set by arm’s length third parties transacting. Their motivations may be questionable but that doesn’t make the price “wrong”.