I think tagging them with Negative Trust isn't enough to teach them a lesson. They should be permanently ban or else they will keep abusing Merits.
Users can use their smerit any way they like, they won't be banned for it.
This is what theymos says about merit trading:
Merit sales, transfers to aliases, back-and-forth trading, etc. are not much of an issue. All illegitimate merit will decay, and will account for a tiny and very expensive fraction of the total merit economy. It's basically a rounding error; fight it where convenient, but waste no sleep over it.