Three employees at Robert Fleming, the investment bank, have been absent from the office while the firm's compliance department investigates allegations of possible improper use of inside information.
The inquiry focuses on the relationship between the three employees, the financial public relations firm, Financial Dynamics, and the alleged leaking of information about the financial results of Caradon, the building products group.
The Robert Fleming inquiry will be a serious blow to Financial Dynamics, whose chairman Tony Knox was last month rebuked by the Takeover Panel for releasing price-sensitive information to a building analyst about possible 1996 profits for Amec, the UK constuction group. Last night Mr Knox declined to make any on-the-record comment about the Caradon affair.
Financial Dynamics, which is one of the City's largest public relations companies, was sacked by Amec - then at the centre of a pounds 360m hostile takeover bid - after being found to have "failed to take sufficient care" in divulging information to analysts.
Robert Fleming would make no comment yesterday about its investigation but it is believed that the three employees have not returned to work since the Christmas break while the firm conducts its highly sensitive inquiries. A source at the firm said yesterday: "It would be wrong to say they have been suspended but we are looking into the matter. If anything untoward has happened, then it must be sorted out."
One of the three is expected back at work today; another is expected to return on Monday.
The Exchange launched an inquiry into share dealings in Caradon, a Financial Dynamics client, in October after the building products group was forced to bring forward its results and issued a profits warning. On the Friday before its interim results were due to be published Caradon was the stock market's most heavily traded stock after late afternoon dealings saw 26 million shares change hands at around 210p each. The profits warning on the Monday led to a number of brokers' downgrades.
One building analyst said yesterday: "It looked very bad. There was a leak in the Sunday newspapers about problems at Caradon. Then the company issued an abridged version of its results on the Monday, three days ahead of schedule."
At the time dealers expressed concern over the trades that took place in Caradon on the Friday. They said the trading implied that some people were aware of Caradon's poor performance. Reports in two Sunday newspapers that the company's results would be disappointing added to their suspicions that there had been a leak. One source said that the Stock Exchange may have abandoned its inquiry towards the end of last year but resumed it again after tape recordings concerning the Amec affair were listened to by the Takeover Panel. The tape recordings appear to have highlighted a relationship between Financial Dynamics and a research analyst at Robert Fleming.
Robert Fleming is believed to have listened to further tape recordings and discovered a conversation between the same research analyst and Financial Dynamics about the Caradon results. It is now trying to assess whether any inside information was indeed passed on by the public relations firm to that analyst and if so whether it was improperly used.
At the time of the Amec affair the director-general of the Takeover Panel , Bill Staple, was reported to have said that he hoped the ruling against Financial Dynamics would serve as a warning to the entire market that the regulator was determined to clean up the City.
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