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There are two ways I could go with this ruling.
The first is that this is a game and the whole idea is beyond ludicrous. The idea that prisoners can't have a way to relax and escape for a few hours into a magical world and make them forget that they are in such a drab and confining place irks me. There are many people I know who play and that is the main reason they do so. They need an escape into something that isn't real, going into a head space that frees them up from thinking about their fucked up lives for a few hours helps so they don't end up as another inmate. Heck, if done right, the role-playing game could help with the rehabilitation process. (It would have to be very low violence and might be tough, yet a very strong emphasis on role-playing and light to little on combat might be good.)
The second way I can go with this ruling is to go with the courts. First and foremost, these guys are criminals. They have done something bad to end up here in the first place. The person involved in the lawsuit beat and stabbed a guy. He needs to be locked up for a bit, because that is what the law of the land says. And, most of the games do "elevate" someone to be "in control" of the action.
However, the way I do finally judge this is...it's a game. If you are worried that this will lead to gang behavior, have one of the guards run the game. He is already in a position of authority. If the guard were the game master, then there probably would be less of an issue.
But, that is just my opinion.