If anything it points out the hypocrisy of a handful of upper brass, and supports DS9's thesis that human progress and idealism has difficulty standing up to real danger.
It doesn't negate the entire accomplishment of the Federation establishing a peaceful society.
@Ghel
I think it's incorrect to suggest that secretive fascist organizations are the only way to protect the security of a state. In TNG it showed that the Federation was willing to defend itself and protect its interests through military action.