The incident took place at the Chapel School, a private Christian school in Bronxville, New York. According to investigators, black students of two fifth-grade social studies classes were asked by their teacher to leave the classroom and stand in the hallway where they were placed in imaginary "chains or shackles".
In the mock auction, in front of the class, white students acted as purchasing of black children, according to the office of Attorney General (AG) Letitia James on Wednesday.
"It had profoundly negative effect on students present especially the African-American students and the school community at large," the AG's said in a statement.
Following the mock auction, the school terminated the teacher and agreed to improve diversity measures after the state investigation, USA Today reported.
A deal struck with the school involves a number of measures, including hiring a chief diversity officer approved by the New York AG as well as ensuring a more diverse student body and staff.
"Every young person regardless of race deserves the chance to attend school free of harassment, bias and discrimination," James said.
"Lessons designed to separate children on the basis of race have no place in New York classrooms, or in classrooms throughout this country. I thank The Chapel School for agreeing to take measures that address the issues of race, diversity and inclusion at the school," she said.
( With inputs from IANS )