I would like to state that the report itself does not state that Muu Doesn't Know that the bullying is occurring:
The girl does not succumb, nor does she cry and apologize, and this causes the bullying to escalate.
Mu gives no orders. She does not bring up the girl in conversation.
Mu understood, however, that anyone who rebels against her
must fall, and that she was undoubtedly the center of the universe
Not only that, but the idea she does actively contradicts both Pain:
And yes I've read the VDs and just because Muu "known liar" Kusonoki who plays victim to avoid accountability says that Rei struck first doesn't mean that she doesn't understand what she did previously is bad. Purely that she sees herself as the clear victim in the scenario.
Her lyrics as well reflects her understanding of the scenario at hand.
You know, your “I’m sorry” won’t reach anyone
You’re super creepy, do you realize that?
You know, your “I’m sorry” won’t reach anyone
You can’t read the room, you’re such a waste of air
These lines are taken from the Blackboard at the End of After Pain (the Blackboard at the start of After Pain and at the end of After Pain are for different people, the first one is for Muu, the second is for Rei.)
2 – Read the atmosphere
10 – You’re so disgusting
(Tl and Edited Images by rochisama)
The lyrics of Pain reflect words that Muu either said directly to Rei, or words that she actively Heard and Permitted. She does, in fact, understand bullying as something "bad."
M: No matter the circumstances, it’s always the bullies who are in the wrong! Isn’t that obvious? Warden-san, you’re so smart, but you don’t even know things like that? Maybe you should take some lessons on morals or something.
E: …
M: Besides, even if I’ve done something wrong, there’s nothing that could justify bullying someone. Warden-san, I thought you were a nicer person.
Plus, just because people you know start shit behind your back doesn't mean you can't stop it, and we know that Muu is aware of the power she does hold over others in her social circle:
But Muu wasn't just idly complicit in Rei's actions, but actively viewed it as the "correct" action for Rei
Am I all-knowing and all-mighty? Only “yes” or “of course” is allowed
Mommy and daddy’s precious princess, friendship games, the ultimate playmaker
Weakness? I’m all strength, I’m never cannibalized, doing great today and everyday
The looooowest of the low, don’t speak to me, I didn’t allow it
She claims to be all knowing in one scenario because she believes she deserves everything, but then the moment anyone disagrees with her she plays victim and claims that she couldn't of held any sort of agency in her actions. This is a known pattern of hers that we saw it in Trial 1-Trial 2 and now she's back in Trial 1.
This doesn't mean she's 100% evil teenage girl or whatever, it doesn't, but she really did mean it when she harmed and Murdered Rei the way she did. Denying it is just allowing her to continue to escape accountability for her actions.