That is ridiculous. The student earned the diploma, and the school has NO right to not present it to them.
I smell a lawsuit coming.
The diploma is a keepsake. If the student has met all the requirements for graduation, they receive documentation for such-like a transcript.
Participation in the graduation ceremony is a privilege, not a right.
A student in my school district was denied the right to participate because she broke the dress code. Instead of clearing her choice of apparel under the gown, she wanted to wear pants, prior to the ceremony, she just showed up. Wasn't allowed in the line up. She had to watch from the audience. BTW- she wasn't denied her diploma either, she got it after the ceremony like eveyone else. Lesson learned- there is an appropriate way to get what you want.