IMHO, this "exploit", and I find it way too hard to call it that, was a clever use of game mechanics and should not be even punished.
What should be done is to modify the mechanics to avoid somehitng this stupid to happen again. Having the flag bearer to need a bigger ship is a good start, but IMO there should be some more limitations:
Bearer should have a high enough rank to enter the battle
Bearer should be in a clan: not that I hate clanless people, but conquering stuff requires organisation and that's what clans are supposed to be there for
If you really want to punish the guy / guys, I'd go with a warning and a ban for the next port attack blocking offense by anyone.