Well, looking at what happened it obviously wasn't (whatever his steps were to ensure his deposits were pirate-free, those steps were clearly woefully inadequate). But what we NOW know isn't particularly relevant to the discussion in this thread.
It is relevant because both participants believed at the time that it was. And there is no evidence that one party was more at fault in this belief than the other. Neither party would have entered into the agreement had they known this. So this is a common mistake.
The issues isn't whether his business model was sound anyway - it's whether it was KNOWN to be unsound. We already know that wasn't accepted by all - you've already accepted neither PH or MP knew it (or even believed it) and have yet to demonstrate that any significant number of people believed it.
Well then you've made the first part of my case for me. If they both believed it was sound, yet it wasn't, then that's a common mistake.
When you have a common mistake such that neither participant to a contract would have entered into the contract but for the mistake, unless there's substantially greater fault for the mistake on one side than the other, the parties should split the harm that flowed from the shared mistake. So long as one party isn't significantly at greater fault than the other, it's inequitable to enforce the contract as agreed.
Common mistake doesn't require the mistake to be negligent or culpable. It just requires both parties to be wrong about something critical to the agreement.
Once you agree that both parties had a false belief and that neither party would have entered into the contract without that false belief, the next issue is whether the belief is at the core to the contract. My position is that the discussions that formed the agreement make it clear that the belief is at the core of the agreement -- the contract was premised on the soundness of Patrick's business model and his lack of significant correlated Pirate exposure. Generally, showing that neither party would have entered into the agreement but for the mistaken belief is sufficient to show that it's at the core of the contract. And then the next step is to figure out how to equitably split the damages.
The common sense version of the doctrine is this: A contract states what happens under various conditions. But if neither party believed that a particular condition could happen, then their agreement couldn't have covered what should happen under that condition. (Unless it has specific "catch all" terms of some kind.) Thus, you can't follow the contract to decide what to do in that condition, you have to judge what's fair.