Watchdog investigates tycoon who bet on his own shares price

Concern over the millionaire businessman who profited from a spread bet on his own investment

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Leading article: Odds on

One of his professional advisers is known as "the Spaniard" and he goes by the name of "the Plumber", but Paul Davidson and his associates are neither wrestlers nor gangsters; they are devotees of spread betting.

Yesterday, Mr Davidson, a millionaire former pipefitter, was at the centre of a City inquiry after it emerged that he placed a huge bet on the share price of a firm in which he holds a 35 per cent stake before it was floated on the stock market.

City regulators are looking into the deal in which Mr Davidson, 47, bet that the share price of a biotechnology firm, Cyprotex, would increase after its flotation on 14 February. City Index, the betting company that accepted the wager, bought a large amount of shares in Cyprotex to hedge against its losses, inevitably pushing up the price and increasing the value of Mr Davidson's 31,750,000 shares.

Last night, after making an initial win ­ rumoured to be in the region of £6m ­ on his continuing bet, Mr Davidson appeared to be heading for losses when the share price, which had peaked at 35p, fell from 29p to just 22p before closing at 25p.

The fact that one man and a spread-betting concern could have such an effect on the market performance of a company has caused regulators considerable angst but Mr Davidson insisted he had not done wrong.

"The share price has not been manipulated," he said. "It's not market abuse. I've made no secret of any of this." He described the deal as "pioneering stuff", irregular but not illegal. "It just goes to show that you can do any deal you want in the City," he said.

Regulators are understood to be increasingly concerned at punters using spread betting as a way of gambling on the stock market without having to buy shares or disclose activities to directors or shareholders.

Spread betting allows gamblers to bet on anything from movements on the FTSE 100 to the number of corners a football team will take in a match. In the case of share-price bets, a punter may gamble a certain amount per penny movement in share price. Each time the price moves up 1p, the punter wins that amount, but each time it drops 1p, an equivalent sum is lost. Winnings are tax free.

Mr Davidson is not a director of Manchester-based Cyprotex but, because of his investment, is regarded as a principal of the company. Cyprotex issued a statement saying it raised £6.5m from the flotation but had no idea that a part of that, from shares bought on behalf of City Index, had anything to do with spread betting. Cyprotex was valued at £27m when it was floated. Its chief operating officer, John Nicholson, said: "It is business as usual. We are endeavouring to get on with the business [of] delivering new customers and fulfilling our commitments."

The flotation was handled by the brokers Gilbert Eliott, one of whose senior employees, Nigel Howe, is an adviser to Mr Davidson. Mr Howe, known in the City as "the Spaniard", also runs a spread-betting advice website called spaniardsays.com. He is on holiday but there is no suggestion he was involved in the latest deal. The Financial Services Authority said it was "looking into" the deal and City Index is preparing to make a statement in the near future.

In a separate case, the FSA is investigating a group of City workers who allegedly used inside information to place bets on share prices.