Watchdog fears hedge funds behind 'phantom' takeover talk

Watchdog fears hedge funds behind 'phantom' takeover talk

The Financial Services Authority has launched a probe into suspicious share price movements involving leading British companies rumoured to be takeover targets. Officials fear that hedge funds or other investors may be spreading rumours purely to extract financial advantage.

Whitbread, Scottish and Newcastle, Carphone Warehouse, condoms company SSL, energy group Scottish and Southern, Next and ICI are some of the high-profile firms that have seen their shares jump by as much as 10 per cent in a single day, amid speculation about imminent takeovers.

A dealer at a leading bank said: 'I think there are issues that need investigating. Share price rises present an opportunity for people to make big money, which is fine as long as no one is spreading stories designed to create a false market. That would be something for the authorities to stamp on.'

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The FSA is responsible for ensuring that markets are orderly and well managed. But its investigation will be complex, as it must take into account two possible scenarios. First, it might be that bids really do materialise at a later date - raising the spectre of insider dealing. According to an FSA study published last year, nearly a quarter of all takeover announcements in 2005 were preceded by share price movements that indicated possible insider trading.

Second, share price rises could come about as a result of the deliberate dissemination of false information - a problem that is complicated by the fact that many rumours start on the internet and are difficult to trace. But investors, especially hedge funds, thrive on stock market volatility and some chief executives have expressed irritation that their company's shares are affected by the short-term interests of speculators.

The FSA says it is developing technology that can identify suspicious trading patterns by private individuals or by insider dealing rings. The watchdog has warned in the past that hedge funds were 'testing the boundaries of acceptable practice concerning insider trading and market manipulation'.

John Tiner, the FSA's outgoing chief executive, has given top priority to cracking down on abuses by hedge funds and investment banks. But few cases of market manipulation have been brought.

The persistence of suspicious share price movements has rattled the authorities, who are also aware that the number of private equity consortia bidding for public companies means that a wider circle of people is now aware of transactions before they are announced.

Guardian Unlimited © Guardian News and Media Limited 2006