FSA knew of Collins Stewart allegations

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The main City regulator, the Financial Services Authority, was already aware of some of the most damaging allegations about the broker Collins Stewart that appear in the report by its former employee James Middleweek before he alerted the authorities in July.

It is understood that the FSA knewCollins Stewart was accused of trying to buoy its share price during its acquisition of rival Tullett & Tokyo, a deal which was funded mostly with shares.

In a wide-ranging dossier about Collins Stewart, James Middleweek made claims of insider trading, share ramping and biased research. The FSA is looking at Mr Middleweek's report in the round, but it is believed that the watchdog showed particular interest in his allegations about the Tullett deal.

It is understood that Mr Middleweek has been interviewedin the past few weeks, by the watchdog's enforcement department. It investigates problems such as rule breaches over market abuse and can bring cases against individuals or companies.

The FSA will not comment on the details of its investigation, however, Sir Howard Davies, the out-going chairman, said earlier this week that the FSA was "trying to sort out the different allegations".

The watchdog is expected to give guidance in the next couple of weeks about whether it wants to look at specific elements in the report more closely. Mr Middleweek may be interviewed again as part of the investigation.

A spokesman for Collins Stewart said the company, one of the City's best known independent brokerages, had not had any contact with the FSA about allegations made by Mr Middleweek in the months before he issued his report. The spokesman added that Terry Smith, chief executive of Collins Stewart, would be happy to be interviewed by the FSA to discuss the charges.

"We will do whatever is needed to prove these allegations are what we have always said they are, which is completely unfounded," the spokesman said.

Collins Stewart has stressed that the law firm Clifford Chance, which was called in to investigate the situation, gave no credence to Mr Middleweek's allegations.

A spokesman for Clifford Chance said: "The findings did not support allegations of serious regulatory misconduct."

Clifford Chance, which investigated the case from 10 July to 28 July, was given access to people within Collins Stewart and to tapes of meetings, Collins Stewart said. The law firm is not thought to have spoken to some of the other people highlighted in the report that Mr Middleweek cites as third parties who could corroborate his accusations.

Collins Stewart sacked Mr Middleweek on 9 July for allegedly trying to blackmail the company, after he said through his lawyer that he would drop his FSA report in return for receiving £2.4m in compensation.

The company refused the deal but it did say Mr Middleweek could have "the value" of his shares and severance pay, worth £460,000, if he retracted his allegations.