I'm no scholar of WWII or of the Selective Service, but the idea that the Selective Service was tasked with rounding up Germans doesn't pass the common sense test. Especially considering Germans were never "rounded up" at all by any governmental agency before, during or after WWII. Now, those filthy Japs, that's another matter...
It also seems likely that if his German ancestry had anything to do with his arrest, that detail would be in the FBI files, and it is not. Think about what Selective Service did - they rounded up Americans to ship them off to wars. That's the only reason they would have any interest in Bukowski. He was 24 years old, left his home state and didn't keep up contact with the draft board during a major world war.
Bukowski talked and wrote about the episode quite a bit, yet only in Sherman's book does this "picked up for being German" detail come up. Rekrab has pointed out another Sherman "memory" that could not have possibly been accurate. Shit, man, I've had people repeat things back to me that they think I said in a conversation 10 minutes earlier and I wonder where the hell they got the idea I said anything like what they heard.
But it must be very liberating, I suppose, to write about these conversations 50 years later, when one of the conversants is long dead and you can put whatever words you'd like into their mouth. Spineless, shitlicking weasel cowards like Ben Pleasants have made tiny little careers out of that. Scribbling sensationalist little turds that can't be verified by anyone.
But I digress.
Reading more into the event is certainly an entertaining mental exercise, but I think that's all it is. Is it possible? Sure. Anything is possible. The question should be; is it probable?