ONE of Europe’s largest hedge funds and its star trader face censure by the City regulator as early as this week over an insider-trading scandal that has rocked the financial capital.

Sources close to the Financial Services Authority (FSA) say Philippe Jabre, a fund manager at GLG Partners, may be fined and barred from trading after a two-year investigation. GLG, his employer, could be fined.

But people familiar with the investigation say GLG and Jabre are already considering appeals. So far the probe has taken place behind closed doors. An appeal would be held in public before The Financial Services and Markets Tribunal, a body that has been critical of the FSA in the past.

An open hearing may prove embarrassing for the FSA as well as for Goldman Sachs, the US investment firm that managed the 2003 stock sale by Japan’s Sumitomo Mitsui bank, which is at the heart of the FSA’s investigation.

GLG and Jabre are expected to argue Goldman supplied privileged information about the stock sale in a way that left Jabre free to deal without breaking insider trading rules.

GLG and Jabre are also expected to claim that Goldman and the FSA sat on evidence that supported this defence.

“Goldman had a note summarising conversations between Jabre and one of its London salesmen,” said a source. “The note showed that Goldman left it unclear whether Jabre could continue trading in Sumitomo after the conversations. Yet neither Goldman nor the FSA made that note available to the defence team until late last year, months and months after the investigation began.”

A public airing of the FSA’s insider-trading case against GLG could stir a wider controversy about the rules governing conversations between bankers and investors in the run-up to stock and bond sales.

The FSA has focused its efforts on proving that GLG funds made $480,000 (£272,000) by dealing in Sumitomo securities after Goldman told the hedge fund the Japanese bank planned to sell up to $3 billion in preferred stock.

At issue is the precise language Goldman salesman John Rustum used on February 12, 2003 when cautioning GLG trader Jabre against trading in Sumitomo securities ahead of the Sumitomo stock sale launched five days later.

Goldman and the FSA say the US investment firm made it clear Jabre could not legally trade until the stock sale was announced. GLG and Jabre say that Goldman did not make this clear, and that the ambiguity meant Jabre did not break insider trading rules.

GLG is expected to argue that a Goldman note detailing conversations between the US firm’s salesmen and potential investors in London would support its claim, but that the note was not made available to it until late last year.

The FSA declined to comment, as did GLG, Jabre, Goldman Sachs and Rustum.

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