I don't know, I didn't actually see it but from what I read it didn't really sound like an illegal maneuver. Seems retarded to not be able to knee to the head when you're in side mount. It's not realistic nor does it let fighters utilize all of their abilities. Many rules make sense (No gouging, hair pulling, small joint manipulation) for fighter safety, but things like that (And the UFC's "no kneeing downed opponents) are kind of retarded in my opinion.
It seems like the better fighter lost because of a technicality. Ah well, if Gracie can be proud of that win than that's sad for him.