Sure, if this was the first submission of the app, or the second. It isn't. It's had this feature and the intro explaining that it broke the rules from the get-go. But now, Apple suddenly backtracks it's decision to allow it AFTER the dev has already made sales based on the feature.

Apple should (in theory) give refunds for this, or make the developer whole somehow, because the dev's reputation is screwed.

No, they are incompetently enforcing the rules because the "not allowed" functionality was added a while ago and explicitly mentioned to the reviewers. The update review that triggered the removal was just bug fixes.