I work in a high school. Kids skip classes for various reasons every day. They are not banned from graduation. Hell, often it gets overlooked or it's just a detention.
Yes these kids broke the rules and stupidly put it up for the world to see. Suspend them. I'm even fine with the missing of prom, since usually dances are seen as a privilege and students usually have to be in good standing to attend.
What bothers me is the banning from graduation. I don't believe students should be banned from participating unless they've done something particularly grievous. Making a stupid video? Not so much. Make them film an apology and air it at graduation.
Did that other kid file a complaint? Can they claim harassment if he didn't?
As for dancing rules. While yes there is a line, often you don't know until you see it but it's like administrators who make these rules have no idea whats going on and expect kids to still know how to lindy and waltz (which as also considered obscene and lewd when it began) or line dance. Maybe they need a little instruction on what is or not ok dancing for school dances. Yes, it probably should be discussed at home. But when teens are surrounded by conflicting messages, a little instruction can't hurt.
I also grew up dancing. Often young students are taught how to isolate hips and ribcage to "pop" them when needed. What about young kids who do ballroom competitions in tango and rhumba? They are asked to move in ways most adults would consider provocative.