You and your co-workers could ask [the supervisor] for a team meeting and lay out the issue as you see it: “We feel like you don’t trust us and we aren’t comfortable making small talk anymore for fear of having our desks moved if we’re seen as being too chummy.” (Leave out the part about the snitches.) Tell him how this is hampering collaboration and affecting the work, ask him if he has a problem with the team’s behavior, and see what he says. Encourage him to come directly to the employee in question if he has a concern (rather than ask a third party to gather intel for him).
Trust is hard to rebuild once it has been broken. Your work center may take time to heal after this deplorable practice has been discontinued, but give it time and hopefully the open cooperation you once enjoyed will return.
Ironic, Big Brother.