Shares in Republic, which is quoted on the New York stock exchange, yesterday fell 5 per cent to $57 - 21 per cent below the $72-a-share price at which the deal was struck by HSBC in May.
HSBC has so far refused to comment on the specifics of the investigation. The bank insists that with the deal announced but not yet closed, the matter is entirely the responsibility of Republic's existing management.
However, John Bond, HSBC's chairman, is believed to be far from happy at Republic's handling of the affair, in particular its failure to provide sufficient reassurance for investors.
The latest share fall followed news in the early hours of yesterday morning that Martin Armstrong, a commodities trader and prominent client of Republic, had been arrested and charged with securities fraud.
Mr Armstrong's firm, Princeton Economics, is at the centre of an investigation by Japanese and American regulators into allegations staff at Republic's securities arm helped Japanese clients to hide securities losses. Mr Armstrong's lawyer said that his client was being made a "scapegoat for honest non- criminal losses" stemming from drastic fluctuations in the yen-dollar rate.
After being contacted by the Japanese authorities, Republic suspended the head of its securities arm, James Sweeney, and replaced the head of futures trading, William Rogers.
HSBC has refused to rule out either renegotiating or walking away from the deal, although its management is still privately confident that the rationale behind the deal is intact and the fall-out from the scandal is containable. A spokesman said yesterday: "Our official position is that the transaction continues to be delayed while we wait for the outcome of the investigation."
One analyst said yesterday: "Everyone knew that HSBC was interested in Republic because of its huge private banking operation, these areas are not affected. But at the same time HSBC has a reputation of not paying more than it has to."Reuse content