This sort of stock market manipulation is illegal in US. Nothing to be proud of. Germany already started criminal investigation. Hope that people directly responsible for it will go to jail.
I think they did not even exert the possible squeeze, the price only rose because of fear that they might exert it.
Maybe such a squeeze should be illegal (asking for an infinitely high price for stock), but it is difficult to imagine a viable law for it? I suppose going short always carries an infinitely high risk.
Anyone who speculates by unhedged shorting has to expect to go bust occasionally. That's just part of the game.
Frankly, I have no sympathy for market speculators who got reamed here by shorting VW. I do have some sympathy for people who were short the DAX index as a broad-based hedging strategy and got trapped by the leap in the DAX. Then again, "the market can remain irrational longer than you can remain solvent" is a true today as it was 75 years ago.