Insider share allegations by broker rock Collins Stewart

Sacked analyst turns whistleblower, alleging price-sensitive information was leaked

Shares in Collins Stewart Tullett slid 7 per cent to 457.5p yesterday as the City took fright that the British stockbroker that specialises in medium-sized companies has become embroiled in a Wall Street-style scandal of insider dealing, share ramping and biased research.

The allegations against the company, which emerged over the weekend, are courtesy of a disgruntled former employee sacked last month for "gross misconduct" after he allegedly tried to blackmail Collins Stewart into handing him £2.4m - the equivalent of more than 16 years of his salary.

James Middleweek, who denies the charge of blackmail, has now styled himself a whistleblower. He alleges, in a writ issued to the High Court, a long list of wrongdoings by Collins Stewart including leaking price-sensitive information about a deal to buy Northumbrian Water in May from France's Suez.

While lawsuits between employers and their charges seem to be coming thick and fast at the moment - with everything from sex discrimination to stress up for dispute - the Collins Stewart case could not be more ironic.

At the company's helm is Terry Smith, the City iconoclast who has made a career of attacking financial dodgy dealing, even when the subject of his ire happens also to be clients ultimately paying his wages.

Mr Smith, 50, made his name 11 years ago when he wrote a book, Accounting for Growth, which attacked the way some companies manipulate their numbers.

What made the book particularly controversial was that Mr Smith, at the time an analyst at UBS, used some companies who were clients of the Swiss bank as examples of opaque accounting practices.

Mr Smith refused to back down and was unceremoniously sacked. "I was a real whistleblower," he says.

The bust-up followed an earlier incident at BZW, one of Mr Smith's first employers, where he wrote an unfavourable note on Barclays, its parent.

Mr Smith's gun-blazing approach has earned him plenty of enemies as well as friends in the City. Many of his foes think it is highly amusing that someone with Mr Smith's reputation faces damaging claims about internal practices at the company he has built up and earlier this year transformed through its largest acquisition to date - the £250m purchase of another brokerage, Tullett & Tokyo.

Yet all parties are taking the allegations seriously. The Financial Services Authority has confirmed it has received the report from Mr Middleweek. The City of London Police is also investigating allegations made by both sides.

If true, Mr Middleweek's dossier on Collins Stewart could be fatal for the company. The 38-year-old, who worked for the company for seven years and is also a qualified solicitor, asserts that Mr Smith told his sales people and analysts that Collins Stewart had been picked by Suez's adviser, Morgan Stanley, to go ahead with its bid for Northumbrian Water.

Mr Middleweek claims: "Terry Smith made no attempt to ask salesmen to keep this price-sensitive information confidential until the deal was publicly announced." In the event, Collins Stewart's shares did rise ahead of the announcement of the deal with the water company, though they fell back to just above their previous level when the deal was confirmed a few days later.

Also central to Mr Middleweek's claim is that he was removed from working as an analyst on two financial companies, Numerica and Millfield, because he was "too even-handed". A further allegation is that Collins Stewart overvalued a small media company it was sponsoring in its admission to the junior AIM market.

Mr Middleweek alleges he thought the company, Milestone, was only worth £10m, while others at the brokerage were going initially for a £20m valuation before agreeing on £12m.

Collins Stewart's lawyers have fought back with a document which paints a picture of an employee repeatedly failing to perform well enough, who has only raised his allegations after being disciplined for his professional failures.

Mr Middleweek, who earned £95,000 last year plus a £50,000 bonus, put in a "very poor performance" this year, Collins Stewart alleges, and was given a verbal warning in May. The official action followed months of frustrations at Mr Middleweek's failings, according to sources close to the company, including one incident where one of his seniors trapped him in the revolving doors of the company's offices. The informal warning was followed on 8 July by a letter from his lawyers accusing the UK company of malpractice in the style of the Wall Street investment banks that earlier this year had to agree a $1.4bn (£0.9bn) settlement with US authorities.

Collins Stewart alleges Mr Middleweek then tried to blackmail the company by, offering through his lawyers, to shelve the report rather than sending it off to the FSA in return for £2.4m settlement. While this could turn out to be Mr Smith's most serious débâcle yet, he is no stranger to criticism for the way he runs his company, in which he holds a 4.5 per cent stake. In the past year the straight-talking financier has enraged the corporate governance lobby over the way he handled the merger with Tullett.

He barred journalists from the extraordinary general meeting to approve the deal and tied a vote on the approval of the deal with a vote to award generous bonus packages to the company's directors. Mr Smith, who enjoys attending boxing matches in his native East End for relaxation, described the ensuing row as a "spat with the anoraks".

Collins Stewart is also implicated in the split-capital investment trust scandal, having advised some of its professional investor clients to put money into the sector that has seen a dramatic decline in the past two years.

There may be some solace for Mr Smith in the fact that Collins Stewart is just one in a long line of companies embroiled in legal disputes with employees coming out of the woodwork to lodge accusations against their bosses.

Two recent high-profile cases have included a £1m award Cantor Fitzgerald, the money broker, was forced to make to its former managing director, Steven Horkulak, after the High Court ruled he had been forced out of his job by the bullying and abusive behaviour of the company's European boss, Lee Amaitis.

That was followed by a pay-out thought to be of a similar level by the investment bank Investec to Louise Barton following allegations of sex discrimination. The two settled out of court after Ms Barton, a media analyst, said she had unfairly missed out on £1m in pay over four years compared to what colleagues received.

Collins Stewart did offer Mr Middleweek £50,000 in lieu of his notice period and to buy back his shares, but a more sizeable settlement does not seem to be on the cards. Indeed, Mr Smith, who has already lost almost £3m on the value of his stake in his company following revelations about the dispute, now seems to be in a pugnacious mood.

Given that Mr Smith's uncle was a prize boxer of the kind he now likes to go to see in Bethnal Green, Mr Middleweek may well be in for a fierce fight.