For the sake of keeping peace? You don't have peace with this guy's disruptions, so what's to keep? This is false logic; you can't preserve that which doesn't exist.
I have to agree with Mary. Peace is not being kept. If your students don't feel comfortable training with this person then this needs to be addressed. If the subtle things are not working then it's time to be a bit more obvious. A student needs to be able to trust and respect their teacher. If their teacher is permitting a situation in which the students are continually being harassed and mistreated then trust and respect will be lost.
Stop being polite to this moron and start being the guy in charge. Period end of discussion he does not get to have a say in the matter. If he does not like how you teach and how you run YOUR class, then he has a choice. It's his choice. You don't even really have to make it for him. But make it really clear to him what that choice is.