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.