Quartus, I think you nailed that one dead on.
I consider it a moral obligation to reveal the defects, regardless of the buyer. That said, even with this discolsure, I think you should have passed on selling the gun to the dealer.
My primary concern, like yours, isn't so much for the dealer, but the person he's probably already sold the gun to. And that's a serious problem because you have no control over who buys it or for what purpose.
I can hear the dealer now, "These guns are reliable and the person I bought if from didn't tell me about any problems. I'm sure its a fine defensive weapon."
This is why I stated that I would never sell a gun that I don't trust with my life, or more importantly, the lives of my family.
Regards,
Larry