I would be leery of calling this a "bug" as well. Here is my take on it.
Nero Recode can erase all the files on your hard disk. But it only does it when you tell it to do it. It pops up a dialog if the destination folder for your Nero Recode output is not empty, and asks if you want to delete all files in that folder.
If you pick the root folder, the dialog asks if you want to delete all files in that folder, and you say yes, what do you expect to happen? Of course it will delete all the files in that folder, which means it will delete all the files on the disk.
This "bug" is mitigated by the fact that you have to make three mouse clicks after erroneously choosing your root folder as the destination folder in order to actually wipe it out. So this isn't an issue of a one stray click and your system is gone. It is an issue of the user not paying attention to what he or she is doing. You can wipe out your hard drive using Windows explorer, too, but no one calls that a "bug".
Yes, it would be nice if Ahead built in some extra protection that recognized when a user was about to do something stupid and asked "Are you really, really sure? This is going to wipe out a lot of stuff you may not have intended to wipe out." I admit that a danger is there, and anything that can reasonably be done to help alleviate it would be worthwhile. But people can't be completely protected from their own stupidity.
As long as Recode behaves the same way as Windows Explorer when it comes to deleting folders, then I think Ahead had satisfied their responsibilities. Of course, they may want to go farther to keep their customers happy, but people would not be justified in calling this a horrible bug.