U.K. Agency Struggles in Fight Against Insider Trading

Critics Point to Rapid Staff Turnover, Insufficient Financial Expertise; 'FCA Hasn't Yet Had a Big Scalp'

Carl Linderum was getting ready for work one morning at his London home when he heard a pounding on his door. He figured the group of men outside were employees of his gas provider, there to badger him over a disputed bill.

In fact, they were plainclothes police officers and agents from the U.K.'s financial regulator. They had come to arrest the 36-year-old trader, who ran a small hedge fund, for suspected insider trading.

The arrests last February of Mr. Linderum and a colleague led to the collapse of their roughly $100 million hedge fund, Lodestone Investment Partners LLP. Seven people lost their jobs.

Nearly 10 months later, the Financial Conduct Authority dropped the investigation of the two Lodestone executives and a third trader from another hedge fund who was arrested at the same time.

Carl Linderum was investigated over trades. Patrick McMullan

The investigation's outcome underscores the challenges facing the agency as it tries to remake itself as a tough-on-crime financial watchdog after years of rarely prosecuting such cases.

To critics of the FCA, the probe shows the potential for collateral damage as regulators pursue insider-trading investigations. To the agency's defenders, it illustrates how hard it can be for regulators to prove that suspicious-seeming transactions are illegal.

The FCA stepped up its pursuit of insider trading after British officials came to believe financial wrongdoing was damaging London's standing as a financial center. Last April, in an effort to wash away the agency's laissez-faire reputation, it changed its name and mandate. It has poured tens of millions of pounds into hiring staff and developing computer systems to identify suspicious trading.

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