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It's not such a fine point as you might think.
I know of one site that launched several years ago, and that did some things unknowingly that caused a set of results similar to what you mention. They did not do it on purpose. But somebody outed them on a board that allows that sort of thing. The site got trashed and never recovered. The site owners did not even know what spam was. One of the negative byproducts of the spam wars these days is that way too many innocents are being taken out and shot in the woods. (Moral of that story: People need to be very careful about outing anybody.)
Most likely the site that you reference is using subdomains to get better rankings. But subdomains per se aren't spammy. And guess what? Once the SE sees the problem, that site is likely to be toast, innocent or not.
That said, if you feel the situation is truly spammy, then report it to the SE in question via their spam reporting mechanism. I personally don't file spam reports ever...but some do. And of course the SE's encourage it. They like the help. ;-)
I have resisted reporting them so far as it is so blatant that MSN should spot it, in a way I'm tempted to leave it to see how long it takes MSN to fix.
Of course, I'd have no complaints if someone else felt strongly enough to report them ;)