My understanding is that most labs cite themselves over and over in general, but perhaps this is more advanced.
Of course other groups have also done related things, and you should cite them as well to create an honest image of the research landscape.
In the case the OP mentioned, this is how a lot of research is carried out. The main part that sticks out to me as as scuzzy is that he took first author without being closely involved in the work.
But as a PhD grad looking for a faculty position, you will be evaluated by the number of first-author papers you have published.