I do not understand why you believe this argument to be bogus.
Here's an "investment" plan that (nudge, nudge, wink, wink) will earn you money in good times and bad and with the excellent insider connections of the partners, will likely never be prosecuted. It's technically illegal, but since it's the investment manager doing it, you should be safe.
If you invested money in such a scheme to get higher returns, why should people who avoided such chicanery bail you out? We do not normally use tax money to reimburse victims of fraud. We do not normally use tax money to reimburse greedy victims of con artists. We do not normally use tax money to reimburse people who invest in fradulent tax xhelters. We do not normally use tax money to reimburse people who fail at criminal enterprises. There are many more examples.
There is an issue with Moral Hazard here. If anyone attempting to skirt the laws is guaranteed to be made whole, then there is strong incentive to seek out and invest in such questionable schemes - indeed there is a strong reason NOT to invest in lesser performing, but known to be legal, investments.
The investors thought they were cheating, but getting away with it. In fact it turned out that the investment manager was cheating the investors. Why should they get any more sympathy than others with legitimate losing investments? In fact, they thought they were cheating. Why should they get any sympathy at all?