Aren't Xeloxi "crime lords"?
GalCiv4 Forums
This does not seem like something they'd do. If you keep it, maybe have it RAISE relations if you do nothing?
As far as I understand, they are not allied with the space monsters or precursor sentinels. Therefore I believe the event is reasonable but the flavor text should be changed. If it really was the pirates, they could have their own event and A: bribe them to leave you alone B: lie (small - to relations) C: scoff (larger - to relations).
They pretty much need to sweep through all of the possible events to alter or eliminate those that don't make sense for the faction. Over the weekend the Onyx were trading away their promethion. 
If it were me, I'd have a large spreadsheet. It would probably take a solid day to work through all of the combinations and decide on desired effects and who knows how long to implement it all.
In my current game I noticed that the Xeloxi were happy that I joined them against the pirates.
I remembered getting that quest and that I chose the first option and thought it was the cause.
I reported it in the the feedback thread in the forums.
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