I find Pellegrin's response more or less convincing in terms of actual *misconduct*; he messed up just what his subject's military background was and he cops to that, and I don't see that the image and its context would have been changed in a meaningful way without the word "sniper". I don't really have enough insight into normal photojournalistic practice to judge his claim that the background text wasn't intended for publication but got away into an unintended context; it does seem like the two BagNews articles take as a given that Pellegrin was responsible for its inclusion in the POY article and don't really consider the possibility that someone else screwed up in this respect (and whether Pellegrin passed up opportunities to correct the mistakes, and so on).
But I think there's room for a reasonable debate about the quality of the reportage: If a photojournalist poses a portrait, accurately represented as to its content (which we know the "sniper" picture isn't quite; but leaving that aside), without an explicit "this image was staged" disclaimer but with a clearly posed composition, and positions it in a way that exaggerates its connection to the theme of the greater story, is that legitimate artistic license or is it a kind of implicit falsehood? The history of arguments about photojournalism make it clear that that question is hard to answer in specific cases, and probably impossible to answer in general without recourse to extreme prohibitions like "no posed portraiture".
Finally, I don't actually think the picture is all that great, though obviously that's significantly a matter of taste. The one of the police officers searching the house (shown in the second BagNews article) strikes me as a much stronger image.