Police drop blackmail investigation against Middleweek

Collins Stewart suffered a major setback yesterday in its row with former employee James Middleweek when the City of London Police threw out its potentially explosive claim that the ex-analyst had tried to blackmail the brokerage.

A police spokesperson confirmed it had closed its investigation into the situation after concluding that "no offences had been committed by either side". The development is a blow for Collins Stewart, whose shares collapsed by more than one-fifth last week after it emerged that Mr Middleweek had reported a series of damaging allegations about the company to the Financial Services Authority.

Collins Stewart, one of the City's best known independent brokerages, had tried to reassure the City and its shareholders about its integrity by saying it had reported Mr Middleweek to the police directly after he, through his lawyers, allegedly tried to blackmail the company.

Collins Stewart is understood to have forwarded to the police a note of a meeting held with Dale Langley, Mr Middleweek's lawyer, on 9 July. The police are also understood to have conducted a number of interviews, including with Terry Smith, Collins Stewart's chief executive.

The company claimed that Mr Langley said his client would bury his dossier of allegations about insider dealing, share ramping and biased research if Collins Stewart paid him £2.4m in compensation. However, after taking advice from the Crown Prosecution Service, the police decided that the blackmail charge was not worth pursuing.

Mr Middleweek's side does not deny that it offered to shelve the report if his claim was settled, but argues that the move was legitimate because he was not obliged to report his worries about Collins Stewart to the FSA. Collins Stewart would not elaborate on a prepared statement which was: "Due to the seriousness of the allegations and following legal advice the board of Collins Stewart believed it was obliged to notify the matter to the City of London police."

It added that it continued to "vigorously deny" Mr Middleweek's allegations.

However, Ian Burton, senior partner at Burton Copeland - hired by Mr Middleweek to fight the blackmail charges - said: "Mr Smith was in a position to put his best foot forward in his complaint to the police, and he was advised by his solicitors. But the police, having looked at it, are saying there is nothing to investigate."

Collins Stewart raised the stakes this week by saying it would sue the Financial Times for its "hatchet job" reporting of the situation. Keith Hamill, the chairman, also tried to counter speculation in the City that the broker would have to bring in fresh blood, by issuing a statement saying the management had the board's "full confidence".