Not being familiar with religious customs is not a crime, but then you shouldn't use your ignorance to adjudicate a case.
[1] "Loh"/"Lohe" is an old German word for wood/forest. See also the many German place names containing "loh(e)", such as Gütersloh or Dortmund-Loh.
In reality, he doesn't think of himself as a Jew nor does anybody else, except the jokers that the US federal government apparently hires for these kinds of jobs (and that only after him volunteering that information), so there's no reason for him to have any fears that he might be exposed to antisemitic reactions. How would a hypothetical al Qaeda agent even learn that he has a Jewish grandfather?
Somebody's trying really hard to find a justification for stupid behavior by US agents that doesn't meet any evidentiary standards other than cover-your-ass paranoia.
So, yes, he was completely right to deny being Jewish.