It is true that we are taught to judge everyone favorably, giving the person the benefit of the doubt (Pirkei Avot 1:6).
However, we are not being commanded to be blind to the truth or to be naive. The very next teaching in Pirkei Avot instructs us to stay away from bad influences, “Distance yourself from a bad neighbor” (Pirkei Avot 1:7).
In practical terms, judging favorably means that if you see someone do something that looks incorrect your immediate reaction is supposed to be that there must be a logical explanation as to why they did that, even if the explanation might be far-fetched.
But, when it is clear that the person is a sinner, or that the person has very bad character traits, or if there is no doubt that the person is wrong, there is no obligation to judge him in a favorable way. One should be careful, however, not to exaggerate his failings either.
Rabbi Yisrael Salanter used to say that the eleventh commandment is “Don't Be Stupid!”
I think that this guidance from our great Sages is applicable to the case you raise, in addition to other similar circumstances. I hope that my reply to you is clear and helpful.
