Here's the CNN story, complete with video shot at school, during school hours.
I absolutely agree that the video is in poor taste. I would hope that no parent would want to see their children behaving that way. Absent a published policy beforehand, though--and there's no indication in this story that one exists--I can't see forbidding students from participating in their graduation exercises over this.
My school does have published policy--seniors who do any number of things, to include vandalism, will not participate in graduation. One year that policy made things very uncomfortable but it was enforced, to the credit of the principal whom I thought would fold like a lawn chair.