Ethical boundaries in the work environment

Scenario:

You are a new corrections officer in a very effective cell block unit. Your coworkers are professional in almost every aspect of their work. You have been in the same cell block with them through your probationary period and now you are out on your own, managing your section of the cell block. Early one evening, you get dispatched to an adjacent cell block to assist other corrections officers with an unknown incident. Upon arrival, you find a total of five other corrections officer teams. Your concern is that something serious is happening. As you approach the cell block hallway intersection, you can see movement in the hall mirror that is used for monitoring what is around the corner. You can also hear laughter just around the corner. As you approach your fellow corrections officers, you see one senior officer hand a roll of aluminum foil to a male inmate who appears to be about 45 years of age and very animated. The inmate asks the corrections officer if he is sure that the foil will work and the corrections officer says yes. The man unrolls the foil and begins to wrap it around his head and face, poking out eyeholes and a mouth hole to breathe. The other officers are laughing.

You find out that the inmate is known as Karl, and that he is delusional in that he believes that large "Grays" (aliens from another planet) can read and steal his thoughts. Karl tells the officers that he has been looking for a method to keep the Grays from getting his thoughts. The corrections officers told him that the foil is special antialien foil. They tell him that it is in the corrections officers' hats as well, and it protects them from aliens reading their minds. You find out that the corrections officers have been entertaining themselves with Karl for the past year and a half. Nobody has made any attempt at getting Karl a mental health referral, and they have been encouraging his delusions for their amusement. Although it is not clear to you what the exact nature of Karl's problem is, it is evident that he is the victim of declining mental health. In addition to the incident, it is clear that the other inmates locked in nearby cells are not happy with what the corrections officers are doing to Karl.

I need help answering the following question in reference to the above scenario
What professional ethical issues exist for corrections officers to engage in this behavior?
How could this behavior adversely impact your cell block corrections officer's unit?
What action do you feel compelled to take concerning this situation both with Karl and your colleagues? Why?