Collins Stewart and ex-employee tell bizarre tails of bugging

The row between Collins Stewart Tullett and a former employee, James Middleweek, is likely to deepen this week after details were leaked of a meeting on 9 July when the brokerage accused its ex-analyst of attempted blackmail.

The situation, which is becoming one of the most colourful slanging matches the City has seen for years, also took a bizarre twist when both sides claimed unknown parties had bugged them to track their whereabouts or listen to private conversations.

A transcript of the meeting in July, which was taped, reveals how relations between Mr Middleweek and his old employer deteriorated. The recording confirms that Mr Middleweek's lawyer, Dale Langley, asked the company to hand over£2.5m in return for his client not taking a potentially damaging report about alleged share ramping, insider dealing and biased research to the Financial Services Authority.

After repeated calls for clarification as to exactly what the deal would involve, Mr Langley tells Terry Smith, chief executive of Collins Stewart, and his lawyers: "The report itself can simply be stuck in the file and go no further than that."

Seamus Smyth, a lawyer for Collins Stewart, says: "In return for suppressing the FSA document, which raises some very serious allegations, some of them criminal, Mr Middleweek was asking to extract a very, very large sum of money .... That strikes us as blackmail in which your client, and, I'm sorry to say, you too are parties."

The allegation, which led to a 20-second stunned silence in the meeting, was followed by Collins Stewart claiming to the City of London police that Mr Middleweek and his lawyer had tried to blackmail the company.

The police last week threw out the blackmail charge. It has also emerged that despite having a tape of the meeting, Collins Stewart did not include it with witness statements about the alleged blackmail.

Mr Middleweek reported to the police on Friday that a firm of security specialists had found a sophisticated tracking device attached to his car. A Collins Stewart spokesperson denied that it was responsible for planting the device, saying: "This shows how increasingly close to the edge of credibility these people are prepared to go."

The company itself believes the mobile phones of Keith Hamill, the chairman, Mr Smith and others have been cloned so that unauthorised people have had access to voicemails and text messages.

Another detail to emerge was that a fund manager and friend of Mr Middleweek sold short 25,000 shares in Collins Stewart on the Friday before his allegations came to light. In the following five days the company's share price plunged 23 per cent. Jeremy Benjamin, who runs a hedge fund called Merlin and has been alleged to have been linked to the share deals, was unavailable for comment.

While Collins Stewart has become swamped in fighting the allegations, there were rumours that it is still trying to boost its position in the market by holding talks to buy a US-based rival, Prebon Yamane, for about £150m. Prebon has been for sale for some time.