Barclays is understood to be in talks with the US financial watchdog, the Securities and Exchange Commission, to settle allegations that it traded on inside information it gained from serving on creditors' bankruptcy committees.

As Europe's biggest underwriter of corporate bonds, Barclays Capital is heavily involved in trading such bonds. It also frequently sits on creditor committees that negotiate the restructuring of a bankrupt company's finances and have access to company accounts.

It is understood the SEC's three-year investigation was triggered by Barclays itself, which reported its suspicions to the regulator. Most of the case dates back to 2002 and staff involved are no longer with the bank.

Barclays Capital refused to comment to Times Online on the inquiry, saying: "We are unable to comment on regulatory matters".

But Bloomberg reports that the SEC believes that bank staff used confidential information from serving on creditors' committees to trade securities of bankrupt companies.

The investigation highlights the potential conflict involved if any bank creditor with privileged inside information of a bankrupt company's accounts is also trading the company's bonds or distressed debt.

Analysts believe that a crackdown by the SEC is timely since the number of bankruptcies has been growing and the profits gleaned from trading distressed debt have also rocketed.

It is not the first time Barclays has come under the spotlight for alleged conflicts over its combined role of trading bonds and sitting on creditors' committees. It was sued in 2003 after it served on a creditors' committee that oversaw the debt restructuring of Galey & Lord, a bankrupt New York-based textile company.

Other members of the panel, including Merrill Lynch and SunTrust Banks, claimed that Barclays "callously placed its own pecuniary interests over the interests of the committee and its unsecured creditor constituency" by secretly buying up Galey & Lord's bank debt. Barclays agreed in February 2004 to settle the suit for $2 million. It did not admit or deny wrongdoing.

Last month a former Barclays analyst in New York Michael Econn filed a lawsuit against Barclays Capital claiming that his supervisor had "directed" employees to join bankruptcy committees, so gaining inside information. It is understood Barclays believes his claims have no grounds and will defend them vigorously.

The SEC has cracked down on abuses on bankruptcy committees before. The agency sued Van Greenfield, manager of New York-based hedge fund Blue River, for gaining a spot on WorldCom's creditors' panel in 2002 by falsely claiming to own $400 million of the company's bonds. Mr Greenfield settled in 2005.

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