I doubt that this will be a career-ender for them. Just because you are given an LOR doesn't mean it goes in your records. Many's the time I had a young firebreather standing tall in front of my desk getting an LOR for extreme lack of judgement. After I got their attention, I told them that it would go in my desk drawer and, after a set time of good behavior, I'd tear it up. Never did have to place one of those in anyone's records.
What I suspect happened was that news of their participation, which was a clear violation of regs, got out and became common knowlege. At this point their boss is caught between a rock and a hard place. Either administer punishment or be accused of going easy on them because of their elite status. By taking this action he fulfills his duty and keeps them from getting into serious trouble.