Because there are many investors that have no input in day to day operations or simply had no influence or knowledge of the particular offenses. If the state takes over they will certainly have to take a huge loss.

Take your bank as an example. You gave them the money they used to commit whatever illegality and you profited from it. Now imagine the state takes over and only pays you a fraction of your deposits.

Worse yet, it incentivizes the shareholders to try to keep things hidden where today they would likely sue the company or CEO.

The investors have plenty of input. They don't have to own any of that stock, and can choose to own stuff where they do have control. Knowing is their responsibility. If they want to shirk it, sure, but that doesn't mean they aren't on the hook for what they should have done, which is to have control over what their money is doing.

Otherwise the argument "companies need free speech and rights because they're just extensions of the owners few speech and rights" makes no sense, because the owners have no actual say in what's going on

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Why would investors sue the ceo when nothing bad will happen to them? How do they even have standing when the ceo does wrong if shareholders are indemnified?

In this banking example, it would be my fault for picking a poor quality bank? I'd also expect that the fine isn't going to be that much more than double the profits I made, so maybe $100-$1000? It's not like im making much money on my savings in a bank.