Brave whistleblower or blackmailer?

EVEN for a bruiser like Terry Smith, the notoriously hard-nosed chief executive of stockbroker Collins Stewart, the showdown promised to be tough.

It was early July and he was facing solicitors employed by one of his staff. At stake was Smith's reputation, that of his company and several million pounds.

Two days earlier, he had received a devastating document from the employee alleging unethical practices at the company and naming Smith as being guilty of encouraging insider dealing by the firm's clients.

The bombshell had been delivered by 38-year-old James Middleweek, a lawyer turned stocks analyst who had worked for Smith's company for seven years. He was now threatening to take his claims to the Financial Services Authority.

The opening words of the report were stunning. 'I write to set out a number of issues which I believe are of concern to the FSA relating to recent events at Collins Stewart. They relate to insider dealing in Collins Stewart shares by clients of Collins Stewart at the instigation of management and staff of Collins Stewart . . .'

Middleweek claimed:

He had been removed from working on two finance companies, Numerica and Millfield. Both were listed on the Alternative Investment Market and both were clients of Collins Stewart.

Middleweek says he was removed because his analysis was too honest. His writ says that he was told he was being too 'even-handed'.

Collins Stewart's defence says he was removed because his analysis was ' substantially below the standard expected'.

He then complained about Milestone, a small media company. Collins Stewart was sponsoring its admission to AIM.

Middleweek says he told Collins Stewart that it was overvalued at its initial target of £20 million, but was threatened with the sack if he did not work on the flotation.

The float went ahead at the start of July, valuing Milestone at £21.5 million. But its shares quickly slumped and the company is now worth £16.8 million - still £4.8 million above Middleweek's highest valuation.

The key allegation of insider dealing relates to the time Collins Stewart was buying Northumbrian Water from French group Suez.

According to Middleweek, Terry Smith was told by Suez adviser Morgan Stanley on the evening of May 14 that his bid had won. The following morning Smith told his salesmen and analysts.

'Terry Smith made no attempt to ask salesmen to keep this price-sensitive information confidential until the deal was publicly announced,' the writ claims.

Shares in Collins Stewart rose ten% on that day, adding £70 million to the value of the company. Middleweek says this was because clients of the broker had been tipped off about the Northumbrian deal, which was not confirmed publicly until May 17.

Middleweek also claims the company tried to pump up its own share price in the run-up to its takeover of stockbroker Tullett & Tokyo Liberty and that it pushed unsuitable flotations on its clients to win big fees.

Middleweek's solicitors present their client as a whistleblower. But Smith's lawyers claim he was an inadequate employee trying to blackmail his bosses.

The battle has now reached the High Court, but the outcome could hinge on exactly what happened in that July 9 meeting.

Middleweek, already in disciplinary proceedings at the firm, was seeking ten years' salary and bonuses. Smith then asked what would happen to his report if his company agreed to pay up. According to Middleweek's legal claim filed in the High Court, his solicitors said 'there was no legal obligation to produce the report'.

But Collins Stewart's defence alleges that on Middleweek's instruction, his solicitors were much more blunt. The report would be 'stuck in a file and go nowhere' as long as the £2.4 million demand was met.

Within hours Middleweek had been dismissed for 'gross misconduct'. And within days Collins Stewart had told the City of London police that Middleweek had tried to blackmail the firm. As tensions heightened, Middleweek sent his report to the FSA, which is understood to be carrying out its own investigation. He then launched his case for wrongful dismissal, demanding a total of £3 million for lost income. Collins Stewart's defence argues against Middleweek's wrongful dismissal claim point by point and says it 'does not accept that it has acted in any way which constitutes any regulatory offence and denies any allegations of the same in the FSA report'.

What began as a row over analyst coverage of three AIMlisted companies has become a legal battle that has called into question the reputation of one of the biggest names in private client broking and which may have far wider repercussions.

No one expects any prisoners to be taken.