Sounds like the typical AC agent on a power trip, combined with the usual amount of incompetence about follow-up (i.e. 3 agents assured him he'd get a free replacement ticket, but magically the note was nowhere to be found on the file).

They should have allowed him to board. A slight water stain on the back cover does not constitute damage, especially if the passport scans fine and the photo page is in working order.

But if they were going to deny him, they should have rebooked him on another flight a couple of days later on the spot, for free, and given him all the necessary confirmation information right then and there, along with compensation. But then, they've eliminated ticketing at the airport to cut costs, so...