Maybe she did, maybe she didn't. Unless you are going to find your son a new school, you need to be careful about how you handle things. The incident involved the *para*, not your child's teacher, so you should have been talking to the *para* from the get-go. The para is not assigned to your son, so whether or not she is doing her job or not is not your problem. As extreme as it sounds, a previous poster is correct. What you *can* control in this situation is *your* reaction - and to a lesser extent, your son's.
If he is always getting in trouble because he's buddies with another kid who cannot really be punished because of his IEP (which sounds really dumb to me, personally), you need to keep them separated during school hours. Invite the other kid over to your house, but tell your son if he's always getting into trouble when he is around this kid, maybe he should not be around the kid so much. I would not want my kid to be around someone who twists his arm so much he ends up yelling out "Stop it, you're killing me!" for all to hear. That is not a friend, in my opinion. There are good friends and bad friends and it sounds like this kid is a bad friend.
My guess, after years of experience with kids, is that no-punishment-IEP-boy knows he can't be punished and likes to egg other kids on to get *them* in trouble, knowing that he has no consequences for his actions.