It sounds like you need to be upfront with his mother and the grandmother. Let her know what happened, but also let her know that you are worried not only on your daughter's behalf but his, because he must have learned it from someone...meaning, maybe HE'S being messed with by someone else when his mother isn't looking. That's how these things usually begin. Children at the age of 9 know better, and for him to tell your daughter it was a "secret" only means that he knew he was doing something wrong.
Drill it into your daughter's head that what he did was wrong, so she knows the next time (whether it's with him or anyone else) that she needs to run and tell. Do what you have to do to protect her, because you don't want her all screwed up in the head years later because nothing was done to prevent it.

Even though what he did was (literally) "child's play," if there is a bigger predator in the family and he's not saying who it is and you inadvertently left your daughter with the person responsible for his deviant behavior, it could end on a much more tragic note.

I only say this because I've been there and it sucks. Best of luck and be strong for you and your daughter...they're only this little once.