I have to say -- curiosity and seeking out a game like this? probably within the normal range. The fact that it's gotten as intense and regular as it has? Definitely going wrong.
I remember being caught playing doctor with a group of friends in 1st or 2nd grade and all hell breaking loose. I also played secret games with one friend, although we were not touching each other, just playing games with sexual overtones. Neither of us had been touched inappropriately before.
Kids are curious, especially about things they get a sense of that are off limits -- people usually call them "privates", of course they will want to check it out. What's worrisome to me is NOT the desire the kids have to explore and discover, coming up with that game is not at all unusual. The extent that it's gotten to is more due to the fact that no one has noticed before now to say it's inappropriate and needs to stop. A teacher who lets kids disappear in a group for 30 minutes is totally checked out in my book. In my daughter's 1st grade class, only one kid went at a time, and they checked the clip board to see if someone was already out. 3 at a time raises a flag for me in so many ways -- that's also ripe territory for bullying. Don't like it at all.
I would probably want to talk to the teacher, and hear her plans on how to deal with it. Since it happened on her watch, she should probably talk to the principal as well and they may want to have each kid check in with a school counselor to make sure they are OK with what happened. These kids may not feel violated at all, and I don't think there's a reason to start making them think they were (unless they were).