I cannot posrep Firelance again. Sigh. I really need to start randomly handing out bennies.
Firelance, totally agree.
If you want to have a morally ambiguous plotline come up, in order for it to ACTUALLY be ambiguous, the DM has to accept that either outcome is possible. If the DM has decided that one outcome is right, then it's no longer ambiguous. Therefore, IMO, the DM has to accept whatever decision the players make, not punish them for making the "wrong" decision.
The DM in this case, chucked out a possible plot hook, none of the players bit onto it. They did what they were tasked to do - root out evil baddies and turn them over to their bosses. Punishing them for following orders, when it is ambiguous whether or not they should disobey, is not a good idea.
Ok, they turned over someone who was less than slobberingly evil. Fair enough. Now you know that the group favours the idea that they are members of this organization and that following orders ranks high on their priorities. Play on that. If you want to get into a morally ambiguous situation that is. Create a conflict between what you KNOW they will think is the right answer and their orders.
Take the Buffy example of Dawn, where the group of crusaders is sworn to destroy the Key. They very much intend to kill Dawn to prevent the opening of the gate. Put the PC's in that situation. The target is truly innocent but, they are under orders to either turn the target over to the council for almost certain death, or to kill the target themselves.
And don't punish them for following orders. It's not your place to decide what the right choice is. That's the whole point of playing morally ambiguous scenarios. Your job is to sit back and watch. Twist the knife a bit, maybe, to make them squirm, but, whichever decision they make, don't screw them for it. Don't kick them out of the organization with no hope of return if they decide to save the target (although kicking them out for a little while might not be a bad thing.

) OTOH, if they turn the target over, or do the deed themselves, then fair enough. It's morally ambiguous, the organization is not wrong. Just like the crusaders in Buffy were not wrong to want to kill Dawn. Kill Dawn and save all the universes. This is not a wrong decision.
Edit for clarity - by "you" I mean both GMforPowergamers and a more general you of you the reader. Not Firelance.

Well, not specifically Firelance because he's part of the general you, but, oh hell. He doesn't need my blathering anyway.