Could it also be "He did not understand what happened"? f not, why?
In English "what had happened" is better, because something must happen BEFORE you can understand it, and the pluperfect (had happened) establishes the time sequence.
On the other hand, nowadays many educated as well as uneducated people avoid or do not know how to use the pluperfect, so I am not sure that I would mark your suggestion as wrong -- many would say it.
I think when the original clearly puts the subordinate action in the past with respect to the main clause, then the corresponding sequence of tenses should be used in English. The simple past wouldn't be wrong in conversation, but it's incorrect as a translation.