If fraud is involved, someone will go to jail and authorities will attempt to recover assets. This is perfectly normal in a functioning market.

You cannot claim that because crime occurs the market isn't functioning.

"what exactly is so worrying? A bad business failed; that's what's supposed to happen."

If all that had happened was a bad business failed, that would not be very worrying. I don't think anybody would be upset if MtGox had simply closed their doors and returned all their customers' funds. What is worrying is how many people outside of the business appear to have lost their property in the incident.

You can judge for yourself whether you feel the market is "functioning" — but if that many people lost that much money, it is absolutely not what is supposed to happen when a business fails.

You seem to be of the opinion that whether a market is riskier than most participants realize (and would be willing to tolerate if they did know) is tangential to how well it is functioning. That's a valid viewpoint. But it still makes sense for participants to worry when they realize how little safety they have in the market.

But in fact only the money invested was lost, which I imagine was an order of magnitude smaller than what was reported.