Definitely legal! To be fair to the referee though it did happen pretty quickly, and in all honesty the ref was in the best position possible. If you pause the video at 39 seconds that's the angle the ref would have seen from where he was standing, and it does look like his knee is on the ground from that angle. Since it looked like he was setting up the omoplata it was a pretty smart place for the ref to be, seeing as he could watch the free arm to stop it quick if the top guy tapped.
Sick guard work though! Someone needs to do this in One FC where they have the Pride rule set, so there is no confusion!
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