No idea if you should sue or not, but surely in this case it would be the credit card company who didn't investigate the chargeback who is the culprit, Paypal is somewhat beholden to their investigation. By just approving any chargeback and not doing any investigations to appeals they are abusing the system
You're assuming that Paypal didn't purposely withhold any provided proof of scam, to avoid further action on this issue. That appears to be exactly what Paypal did.
Sue them for your money, for the time you spent dealing with them. Check out small claims court limits in your state, and sue them for the maximum.
I bet you will win with all the documentation you have.