I have mixed feelings on this. Xandry likely has innocent intentions, but doesn't realize that this could very easily be abused, and could result in more spam/infringing posts. I would like to think they would stop rewarding merits if they suspected this to be the case. I don't think Xandry should face punishment for this, nor be removed as a merit source. I think they should definitely stop awarding merits for reports, because of the likelihood of abuse especially now that it's more public than it was before.  

If they aren't a merit source, and was awarding members with sMerit they'vereceived himself through their posts I don't think there would be too much of a problem, because at the end of the day it's up to the person what they perceive worthy of merit. However, if they are a merit source which looks likely then it could quickly become a problem as merit sources have more merits to send out, and are 'responsible' for rewarding high quality posts. Looking at the merit sent in seems that a few people have caught on to it, and it's the same users that keep popping up. I'm not sure if they've always reported, but at a external point of view looks like they've found an easy way to earn merit.

It's a strange one, because he's sending the merit to posts that have since been deleted which means that those users would of had to post in that thread before it was deleted. Makes me wonder on how they are reporting whether they are using the report to moderator button or simply just posting in the thread with instructions to the OP on what they have done wrong etc.

All of the above is on assumption, and viewing it from an external point of view. It would be interesting to see what Xandry has to say about it. I don't think we should be too quick to judge. I think the only problem I see is:
1. Xandry is a merit source
2. How easy it is to abuse.

@OP
You know how to plug your threads don't you?