The £52 million flotation in London of a private equity-backed financial services group was pulled last night after a collapsed American hedge fund took legal action, blaming the firm for its spectacular downfall.

GlobeOp Financial Services, which is part-owned by the Boston private equity house TA Associates, said that it was no longer in a position to proceed with the sale of shares for its planned main market flotation.

Earlier, grey market trading in its shares ahead of the listing was halted after news that Archeus Capital Management, a former client, had filed a near-$500 million lawsuit in New York.

Archeus’s assets shrank from about $3 billion in May 2005 to $700 million by October last year. It claimed that GlobeOp’s “reckless indifference” in carrying out its role helping to run the fund pushed it into a “death spiral from which they could never recover”.

Archeus, run by a group of former Salomon Brothers traders, is demanding at least $465 million (£230.5 million) in damages from GlobeOp for its role in the fund’s demise, accusing it of accounting and other errors in the running of the fund.

GlobeOp, founded in 2000 by Hans Hufschmid, a former executive from the collapsed hedge fund Long Term Capital Management (LTCM), initially dismissed the lawsuit yesterday morning but later requested that the preliminary trading of the shares be suspended until further notice.

GlobeOp, which has 1,600 staff in Britain, America, India and the Cayman Islands, had planned to list on the London Stock Exchange today.

A number of other former LTCM executives also work at GlobeOp. Other key staff include Clay Brendish, co-founder of the UK insurance group Admiral, who is nonexecutive chairman, and David Gelber, a consultant to the bond trading group Icap.

Jonathan Meeks, a managing director at TA Associates, which is reported to own 40 per cent of GlobeOp, is another nonexecutive director.

The flotation is being arranged by Merrill Lynch, the American investment bank, which declined to comment.

GlobeOp reiterated its plans to defend itself against the lawsuit and accused Archeus of trying to scupper its flotation. “GlobeOp believes that the nature and timing of Archeus’ complaint is calculated to gain maximum leverage against GlobeOp during its initial public offering [of shares],” it said. “GlobeOp rejects Archeus’s claims and intends to vigorously assert a strong defence as well as counterclaims.” The group added that it planned to revive its float plans at an unspecified later date.

GlobeOp declined to give further details of its proposed defence, but it is understood that the fund will claim that any errors or omissions on its part were a consequence of incomplete and inaccurate information provided by Archeus’s management.

Archeus told investors last October that it was winding down, blaming GlobeOp for its failure. The fund could not be reached for comment yesterday. Its collapse was the second-biggest hedge fund closure of 2006, according to the industry journal Absolute Return.

Of the 83 hedge funds that folded last year, Amaranth Advisers, the $9.1 billion fund caught out by sharp swings in natural gas prices, was the largest.

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