Whistleblower who scares city

He was one of the lowlier stars in the City firmament. Until last week, the name of James Middleweek was barely known outside his own home and the stockbrokers that employed him.

Unlike many others in his job as an investment analyst, his research was not seen as influential. His rare mentions in the City pages were likely to be in the Birmingham Post. Even his pay was modest by the standards of the modern City, averaging £160,000 in salary and bonuses since 1996 - a sum that a true Master of the Universe would count as pocket money.

Yet this reluctant troublemaker - described charitably as "a bit of a steady Eddie" - has electrified the Square Mile with allegations that could lead to a change in the way in which London's investment banks are regulated.

Mr Middleweek's claims about the murky business practices he says he has encountered have already knocked more than £100 million off the value of his former employer, Collins Stewart.

The firm - headed by a tough, crophaired East Ender called Terry Smith, a genuine Master of the Universe - has hit back with a formal complaint to the City of London police that Middleweek is "a blackmailer". It has launched a libel action against the Financial Times for reporting the allegations.

Mr Smith's solicitors have told of his concern that allegations of this nature appearing in the FT, the paper all money men read, gives them legitimacy.

It is the sort of bare-knuckle confrontation the City normally loves but this time the stakes are uncomfortably high. If found to be true, Mr Middleweek's claims about questionable practices could have repercussions right across the Square Mile.

At the heart of the dispute is Collins Stewart's dismissal of Mr Middleweek, a 38-year-old father of two, for "gross misconduct" in July. Mr Middleweek was demanding £3.1 million in compensation, arguing he had been sacked only because he refused to turn a blind eye to the "irregular" practices at the firm.

In a High Court writ issued last week, he painted a picture of a bullying culture where supposedly independent analysts were under intense pressure from management to support the "low-quality"-companies that Collins Stewart was launching on the stock market. The writ set out how he felt his career was damaged because he was "too even-handed" for a firm where displays of naked aggression were the only way to get on.

During one flotation, that of a media company called Milestone, Mr Middleweek allegedly dug in his heels, refusing to recommend the shares to clients because he felt they were dangerously overvalued. He claims he was then threatened with the sack.

In a 32-page dossier sent to the City's chief watchdog, the Financial Services Authority, Mr Middleweek details a litany of far more serious concerns about the way he says business is done at Collins Stewart. The company strenuously denied the charges and hired City law firm Clifford Chance to conduct an independent inquiry, which found no evidence of wrongdoing.

Mr Smith, a sharp-witted boxing enthusiast who counts the promoter Frank Warren among his friends, now says Mr Middleweek is a blackmailer whose bluff has to be called. He has even gone to the extraordinary lengths of making a formal witness statement to the City of London police, claiming Mr Middleweek's lawyer offered to bury his report about Collins Stewart in return for a £2.4 million pay-off.

The stage is set for a bruising contest, with City heavyweight Smith in one corner and unknown lightweight Middleweek in the other.

Ironically, Mr Smith sprang to prominence as a whistleblower in 1992 when he published Accounting For Growth, which attacked the book-keeping practices of some of Britain's biggest companies. He is a hard-talking, self-made millionaire, who demands total dedication from his staff.

Last year, he was in talks to buy The Business, the Sunday financial newspaper, but abruptly withdrew when the paper reported that authorities in Guernsey were investigating Collins Stewart's conduct of split-capital trust transactions. Those who know him well say Mr Smith's hostile defiance is typical of a man who lives his entire life by the maxim "don't get mad, get even".

Conversely, another client says: "If someone wants to have a pop at him, he will come out of his corner with a couple of haymakers. He has this permanent glower on his face like Alastair Campbell - there is definitely something of the night about him."

Mr Smith, who has one meeting room decorated with photographs of his boxing heroes, is the subject of many City yarns about trading floor punch-ups. The firm he runs has a reputation in the City as a hard-driven organisation, where Mr Smith's presence is all-pervasive.

In contrast to his mighty adversary, Mr Middleweek is known as an unremarkable analyst of small companies. Born the son of a Manchester lawyer, and the nephew of former Labour agriculture minister Baroness Hayman, he won a scholarship to Manchester

Grammar School before earning a second-class law degree at Bristol

After qualifying as a lawyer with Nabarro Nathanson, he shifted his career into stockbroking in 1992 with Smith

New Court and Merrill Lynch before being headhunted in 1996 by Collins Stewart.

Terry Smith was one of his interviewers.

He lives in a large but not palatial house in Hampstead Garden Suburb, with his wife Emma and sons Sebastian, two, and Cameron, three months. He drives a Mercedes C Class and enjoys a modest lifestyle.

"James is being portrayed as a blackmailer trying to bring the City down,"

University. says one of his friends. "But he isn't. He just feels he has been unfairly dismissed and doesn't want to be walked all over. The idea that he is a blackmailer is ridiculous - there were negotiations between lawyers, and offers and counteroffers made. If that's blackmail, then all such negotiations must be regarded as one party blackmailing the other.

"He's not a flash gold-digger. For seven years running, he was regarded as having performed well and received bonuses each year. After he raised concerns with Collins's compliance officer about some of the practices he was unhappy with, he was told his performance wasn't up to scratch and he was given a verbal warning. It seemed the firm wanted him out."

Collins Stewart has portrayed Mr Middleweekas an embittered loser whose managers "had lost confidence in (his) competence as an analyst". Its defence against the writ says he had " demonstrated a conspicuous lack of enthusiasm for, and commitment to, his work". And - far worse in the eyes of his bosses - had failed to bring in any new corporate clients.

Whatever the truth about the claims, there is little doubt that the tough management style at Collins Stewart was paying dividends. Mr Smith, already one of the best known names in the City, led a £122million management buyout of Collins Stewart in 2000 from the banking group Singer & Friedlander.

Collins Stewart was floated on the stock market just six months later for £326million, almost three times the amount the team had paid for it. Until news of Mr Middleweek's allegations became public, the broking house had been enjoying another bumper year, with the share price touching record levels and its market worth soaring to more than £900million. Now all Mr Smith's considerable achievements are at risk.

This week, he was as combative as ever. "Of course, I could walk away and my colleagues or investors could decide I should not be chief executive," he said. "I would be fine. I have plenty of money. I do not have an extravagant lifestyle. It is all very well for me to think 'sod this' and go and lie on a beach in Barbados. But that is not right. What is at stake now is much bigger."

It is a sentiment shared by his colleagues. Many of the practices alleged in Mr Middleweek's incendiary dossier are still rife in London.

If the dispute is dragged out through a messy court case, far more of the City's dirty laundry will be washed in the most public way possible.