How do you know that the military people who were upgraded were not on the upgrade list? Did you check his name with the list? People in defense travel alot. Also, I've seen actual upgraded customers goto the desk and give up their upgrade to a military customer. Customer Care has always told me that they can't see past upgrade lists anyways.
The ex-military GA chatting with current military people isn't out of the ordinary.
As for the yellow tag, I'd treat it the same as the orange tag. Priority handling isn't a guarantee. I also imagine that it has to do with the order that the bags are placed into the plane at the origin. If there were lots of last minute bags, the priority bags might not be first off.
As for the agents laughing at you, that wasn't appropriate. Not sure if it warrants a complaint though.