Technically if the "official" (for this league) rules allow the referee discresion to adjust a rule for learning purposes, then I think he has (in a weird end around) followed the rules as written.
When you talk about teaching them the wrong thing -- I think teaching them to use deception to get an advantage would be worse than teaching them that as much as possible the "right" call will be made.
These are 5th graders for heaven's sakes -- they are LEARNING the game, there is nothing on the line except their pride, happiness, etc. They are playing organized basketball to have FUN (hopefully). No scholarships are going to won or lost based on the results of the game... which is where it'd differentiate from a high school or college game, imo.
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