The share price of Macquarie Group Ltd (ASX: MQG) was dragged into the red during lunchtime trade as its ex and current chief executives have become "suspects" in a German criminal investigation.
The stock fell 0.4% at the time of writing to $127.25 after the investment bank said in an ASX statement that its former boss Nicholas Moore and his successor Shemara Wikramanayake are likely to be classified under German law as "persons of interest or suspects".
The Cologne Prosecutor's Office (CPO) is investigating improper trades around the ex-dividend dates of shares to obtain the benefit of dividend withholding tax credits.
This matter is also subject to civil litigation where two investors have already sued a Swiss bank that introduced them to the investment. Both investors, together with other investors, have sold their claims to a Special Purpose Vehicle, which is suing Macquarie for €30 million.
Macquarie is strongly disputing this claim although that has not dissuaded the CPO from launching its own criminal investigation.
The Aussie investment bank has also taken pains to point out that the CPO and other German agencies are also investigating many other transactions that occurred around the same time or earlier but doesn't involve Macquarie.
The financial risk from the investigation (and even the civil suit for that matter) is inconsequential to Macquarie but the same can't be said about reputational risk.
Our largest financial institutions are already under a dark cloud from the Banking Royal Commission with shares like Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB), AMP Limited (ASX: AMP) and IOOF Holdings Limited (ASX: IFL) suffering a big de-rating for unethical, if not criminal, conduct.
Macquarie has not been tarred by the Royal Commission, which is expected to hand down its interim report later today, but the German probe does introduce this element of risk.
I believe the risk to Macquarie is small but not all the facts are yet known. Investors can't be complacent as the Hayne Royal Commission experience has shown.
Macquarie is the best performing large-cap financial stock on our market by a country mile with its shares rallying 44% over the past 12 months with the second and third spots going to property group Goodman Group (ASX: GMG) and stock market operator ASX Ltd (ASX: ASX) with gains of 28% and 22%, respectively.
I believe Macquarie will continue to outperform the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index over the next year. It's a case of innocent until proven guilty.
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