Read again: The sum total of the file sizes of the "decompressor" and "compressed file" had to be less than the original file. So moving data into the decompressor would do nothing.
He did "win" on a technicality: The challenge did not count the size of the filesystem metadata towards the sum, so he hid information there.
Also tuning the decompressor to the specific data-set was entirely allowed, even intended. Otherwise it would be obvious that the challenge is impossible, in this way it depends on a sufficiently random data set.
Regardless, it boils down to this: Do you feel the rules of the challenge forbid shifting an arbitrary amount of information from the compressed file into the decompressor?
Shifting from the compressed file to the decompressor is totally allowed. What is not is shifting it to the filesystem. For example, he could have named the decompressor file with the first 512 bytes of data and then the decompressor concatenates the filename with the rest of the data. However the filesystem is still storing more data than it was before.
The part you quoted says that decompressor + compressed data must be smaller than the original data. You can make the compressor arbitrarily large, but it will not allow you to "cheat" in the way you stated (by moving data into the decompressor), because you'd also have to increase the decompressor size for that.
He did "win" on a technicality: The challenge did not count the size of the filesystem metadata towards the sum, so he hid information there.
Also tuning the decompressor to the specific data-set was entirely allowed, even intended. Otherwise it would be obvious that the challenge is impossible, in this way it depends on a sufficiently random data set.