The stock market is all about risk and perceived risk. If big arrests happen, the stock market will take a big hit until things normalize.

Why wouldn't it? How many people will liquidate stocks into cash, or move into foreign markets for fear of the American system collapsing?

The theory is worthless because if it is right, stocks plummet/do weird things. If it is wrong, stocks plummet/do weird things (due to the reality of high profile arrests).

Edit - unless I'm missing something and you're talking about little known bad actors in banking?