Here's how I see it:
You have to verify that pirate:
1) paid back 100% of the borrowed principle
Pretty easy. His passthrus and direct investors will state whether or not they received it all. If he scammed them, we'll hear about it pretty loudly and pretty violently all over the forums, and they'll be able to provide proof of their investment as well. Not difficult at all to prove this.
Say user A makes a 500 BTC bet with you. The time comes around, and it seems Pirate is paying back everyone. Then user A has a sockpuppet account or a friend, let's call this user B, that will help him claiming that Pirate did not pay back funds.
User B produces e-mail messages, transaction records etc. to prove that he in fact did invest with Pirate. Although all of this would be fake, he claims it's legit. Pirate responds and says user B never invested with him. How would we know who is talking the truth ?
The answer is that it's impossible to determine with 100% accuracy, and therefore everybody should stay away from these bets. As long as Matthew would be the one determining the outcome as well, that's just wrong, as he would have a stake here. The outcome should be determined by a 100% independent party. And all rules should be stated 100% in advance, otherwise this will just turn into a true mess.