City row escalates as Smith sues FT

Collins Stewart, the embattled securities house, goes on the offensive over Middleweek allegations

Collins Stewart was forced to retract a central plank in its defence against damaging charges by former employee James Middleweek yesterday as it issued a statement of its intention to sue the Financial Times newspaper.

The company, which saw its shares fall by more than a fifth last week, admitted yesterday that it did not send a full copy of the highly critical report on the company which Mr Middleweek had compiled to the Financial Services Authority, contradicting statements it made last week.

The revelation could dent Collins Stewart's attempts to fight Mr Middleweek's allegations of insider dealings and share ramping if it prompts observers to think its comments last week were in any way misleading.

Last week Collins Stewart, one of the City's best known independent broking houses, repeatedly said the company had dispatched a copy of the report to the financial watchdog in an attempt to show it was being completely open with the regulatory authorities about the affair.

It said last week that the report was sent to the FSA directly after Collins Stewart sacked Mr Middleweek for "gross misconduct" on 9 July, after he allegedly tried through his lawyers to blackmail the company into paying him £2.4m in exchange for him agreeing not to put the dossier in the post to the FSA.

However, yesterday Collins Stewart made a statement to the Stock Exchange which said the company "reported the matter to the FSA on 10 July".

A spokesperson said that meant a "summary" of Mr Middleweek's allegations were sent to the FSA on 10 July in an email. The company declined to say who had sent the email and how extensive the summary was.

He added that the details of the meeting on 9 July, when the alleged offer of blackmail was made, were also passed to the watchdog. The company also alerted the City of London Police.

Collins Stewart vigorously denies Mr Middleweek's charges. After seeing his report, Collins Stewart asked the law firm Clifford Chance to carry out an independent investigation into the allegations. The law firm's report has not been made public, but a Clifford Chance spokesperson said last week: "There was no evidence in the findings to support the allegations."

The revelation about the FSA report came as Collins Stewart went on the offensive to clear its name, sending a letter to the Financial Times saying it would sue the newspaper for its coverage of the bitter and highly damaging row with its former analyst.

In a virtually unprecedented attack on a newspaper often referred to as "the City's bible", Collins Stewart accused the FT of "thoroughly irresponsible journalism". This resulted, the letter says, in a "hatchet job" on the dramatically different accounts of what went on at Collins Stewart by the company and by Mr Middleweek.

The letter, sent by Collins Stewart's lawyers Schillings, does not mention a specific sum it wants in damages. But it does say that Collins Stewart saw its market capitalisation drop by £128m after the publication of a long report on the subject by the FT on 27 August. The sum, which would be very high in the sphere of libel damages of this kind, is "relevant" to how much the company receives in compensation, the letter says.

Keith Hamill, chairman of Collins Stewart, lent his support to his embattled chief executive, Terry Smith, saying: "My colleagues and I have great admiration for what he has achieved and he has the board's unanimous support."

He added the board had "full confidence" in the management team of Collins Stewart, some of whom have been accused along with Mr Smith by Mr Middleweek of wrong-doing. The move stopped the downwards slide of Collins Stewart's shares, which closed up 31p at 410p.

Andrew Gowers, editor of the FT, who was away last week when the stories appeared, said: "We stand by our story and believe it was in the public interest in reporting the allegations."

The FSA and the City of London Police are investigating the allegations of both parties. If the case does reach the High Court, it would not be heard until next March, but there is still a possibility that Collins Stewart will decide to try to settle with Mr Middleweek out of court.