Since they are modifying the medal to be their own I do not think that it is exactly illegal. If they did not modify it, it would be illegal.
The following is a copy/paste from another question that someone asked on Yahoo answers.
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TITLE 10--ARMED FORCES
Subtitle A--General Military Law
PART II--PERSONNEL
CHAPTER 45--THE UNIFORM
Sec. 771. Unauthorized wearing prohibited
Except as otherwise provided by law, no person except a member of
the Army, Navy, Air Force, or Marine Corps, as the case may be, may
wear--
(1) the uniform, or a distinctive part of the uniform, of the
Army, Navy, Air Force, or Marine Corps; or
(2) a uniform any part of which is similar to a distinctive part
of the uniform of the Army, Navy, Air Force, or Marine Corps.
(Aug. 10, 1956, ch. 1041, 70A Stat. 34.)