Of course having her notarize the document is not illegal. The thing is that the fact her former boss asked her to notarized it without the signer's presence is illegal. The notary still did that. And the notary's family had business with her former boss before. She was doing him a favor.
Yes. That is true. It is illegal for her to notarize a document without the signatory being present. We all agree on that.
What we seem to be having trouble beating into your head, though, is that just because something is illegal doesn't mean that the correct recourse is a lawsuit. The correct procedure is for you to report her to the Notary Commission. If you deposed her because you thought somehow her seal meant anything but she had identified the signatory, that's your tough luck. You still don't get to sue her. Her notarization did not cause you any damages except ones that you incurred because you didn't follow the correct procedure.