It's modifying copyrighted files, which is technically illegal, but isn't wrong. Also, I extremely doubt that anybody would bother prosecuting a Brawl hacker over the millions of other hackers , especially pirates (piracy actually IS stealing, we're just messing with stuff we bought). In the end, we're not harming Nintendo in any way, in fact, we're probably encouraging people to buy Brawl so they can hack it.
But if they minded, they would have taken action by now.
Didn't they threaten Syntax Error back in the early days. Hence the reason they died off.
Nobody's gotten in trouble for Brawl hacking (Syntax Error got shut down by Wordpress, NOT Nintendo). Wordpress was afraid that Nintendo would do something, but we don't even know if Nintendo knew about them then or now. We do know however that they haven't tried to stop us specifically (they've tried to stop Homebrew in general, but that's because of piracy).