Dear John,
The facts you stated may be true; but it appears to me that the answers to your questions cannot be simply given merely on the strength of the facts you presented only.
First and foremost, the erstwhile HR manager started the man power supply agency on his own only after resigning his previous job. It is his fundamental right and as such it is beyond the criticism of a third party like us.
Secondly, for whatever reasons best known to the new employer and to himself, he has resumed his job as a full time HR manager. It is not sure whether the employer has given him his consent to run the man power agency simultaneously without any condition or the person has formally transferred the ownership of the agency to some one like his wife, son or some other close relative subject to his informal control and supervision. If it is so, it cannot be termed as illegal. Even his present employer cannot raise the issue of dual employment against him under the above context.
Thirdly, if his attempt to push his de facto agency to supply labor to the company where he is working as a HR manager now has the tacit approval of the CEO of the same company for obvious reasons of economy, effective control and supervision etc., who are we to question it? Only a trade union of the affected workmen, if any can raise the issue in a conflict situation that too not very successfully for clandestine deals would always have the cloak of legality that cannot be pierced so easily.
Of course his adversaries may call him so as " HR manager cum Labor Supply Contractor ", so what?
After all, when the lust for money sets in, ethics takes to wings.