OK, let's see:
The truth: Some Dragon Knight, acting on his own, assaulted the Divine, and made it possible to imprison him.
The Lie: Some Dragon Knight killed the Divine, and the other Dragon Knights supported him (I am not sure about this part).

Does the lie like this warrant the extermination of the entire race? And we are talking about penalizing the race for the bad deed of a single bad guy.

BTW, your example is not that good. Hitler or your Italian guys, they were your community leaders,elected heads of the states and such, so it is psychologically understandable that people trusted them. Though the excuse "I just followed orders" does not cut it. In our case, if to compare with WWII, the Dragon Slayers played a part of Rivellon Gestapo or elite SS troops, and as we all know nobody absolved them from responsibility. Just because they believed all the crap they have been told, does not make them innocent. They have been persecuted as war criminals.
And, in our case, Damien is not a Rivellon community leader, or an elected head of the state and such. He was an ARCH-ENEMY. What excuse can be made for believeing his lies???