I've been reading some articles on the Madoff scandal and I haven't heard this opinion stated, so here it goes.
I think that some (many?) of the people who invested with Madoff thought they were benefitting from a network of connected people. With his secretive investment strategies, his reputation and his consistent returns the investors could assume that Madoff was getting inside information from other investors that they couldn't act on themselves, but could reap reciprocal rewards from other insiders who similarly helped guide Madoff's investments.
It was just insider trading, once removed. It was a scam on Madoff's part, he wasn't brave enough to actually DO that, but that's what I think he was selling. Whenever you look into what he said he was doing to make such consistent returns, it didn't make sense, so "smart" money would assume he was doing something he couldn't talk about.
Insider trading is such a complex subject. I think, more and more, I'm coming around to the view that we should abolish insider trader restrictions. I read an opinion piece on insider trading in the WSJ a few years back that took this stand. I was suprised to learn a few years back that they are a fairly recent invention, going back only to the 60s. Used to be, CEOs were rewarded by insider trading, but their trades were all public (still are), so you could follow them. Sure, they were front runners, but shouldn't someone who worked hard and came up with a winning strategy be rewarded? Note that in this world, the CEOs (and other well-connected people) typically made money only when they did well for their companies. Now, we have these arrangements where CEOs make many millions whether their companies prosper or not.
Getting back to Madoff, here's my takeaway. The "smart" money, the big players who were investing with Madoff knew (or should have known) that they were involved in risky business and they got what they deserved. The little guys who were hurt in this were either conned by their advisers or shouldn't have been involved with Madoff at all. I do think that there should be criminal penalties for not just Madoff but advisers who were directing money into what should have been viewed as a risky investments.