I'm not sure about your interpretation of the regs. @Flying Saluki was right on. Furthermore, in the definitions "Ground training means that training, other than flight training, received from an authorized instructor." So if he is not an authorized instructor, he can't be giving ground training by definition. If it's not being used to satisfy an FAA requirement, it is probably entirely legal. It sounds to me like your concern is more with the quality of the instruction given. If the candidate showed a poor attitude then maybe he will make a poor instructor. Don't jump to this being illegal, as you won't have a leg to stand on. Another major concern would be whether those paying for the "instruction" know that he isn't certificated and what this implies. A kind of false advertising might be illegal, even that is probably a stretch, but the ethical implications are obvious. I would be willing to bet there is nothing the feds could do about this even if they really wanted to, other than to start fishing for something else for which to violate the operation.