I'm a lawyer. According to China's criminal law and related judicial interpretations, those who sell more than 500 pirated CDs have reached the prosecution standard for the crime of illegal business operation, so according to what you said, the police's approach is completely correct. As for the three-month silence, it is normal, because according to the relevant provisions of the Criminal Procedure Law, your father should still be in custody after being arrested and should be prosecuted soon. I think if you want to help your father, what you should do is to hire a lawyer to defend your father in order to reduce or mitigate the punishment. It is unreasonable to sue the police station only in this case, because the police's actions are legal.
So my conclusion is: If what you said is true, then your father's behavior did violate the Criminal Law of People's Republic of China (PRC) and should be investigated for criminal responsibility.