No it's not illegal. Reasonable people can disagree about whether it should be illegal, but it would be nontrivial to enforce and it's meaningfully distinct from what's termed "naked short selling."

There's really not any other way to get to shorted at 150% of the float, which was the GME reality. So... yes, likely illegal things happened by the hedge funds. Will the SEC investigate or fine them for it? Probably not, they'll probably get a(nother) bailout instead.