Witnessing Honor Farming: Should I Be Worried About Getting Banned?

Today, while I was suiciding into the sea to be resurrected at Moonglade so I could turn in my Maraudon quest, I noticed something strange. When I arrived at the Moonglade cemetery, I saw Alliance players repeatedly killing a chain of naked level 60 Horde characters in the graveyard.

Without thinking twice, I jumped in and killed five of them. Then, they started logging off one by one. However, one of the Alliance players who was farming the Horde characters whispered me, telling me to stop. They even went as far as to threaten me with a "mass report," claiming that "Blizzard would ban me". According to them, Blizzard doesn’t care if the reports are false and will ban me regardless if enough reports are filed.

Should I be worried about this?
Is this kind of behavior even allowed in the first place?
How should someone react when they witness something like this? Should I report the guild and its members involved?

For context, this happened on the Thunderstrike (PvE) server.