June 12 (Bloomberg) -- Insider trading barely takes place in the U.K. based on the number of penalties by the nation's securities regulator: none this year and eight since 2001.

Stock movements ahead of acquisitions suggest otherwise. Reuters Group Plc rose as much as 8.3 percent minutes before the company said it received a takeover approach on May 4. Hanson Plc climbed 4.8 percent just an hour ahead of HeidelbergCement AG's takeover announcement. Northgate Information Solutions Plc gained 10 percent a day before saying it had received ``a number'' of offers from potential buyers.

The Financial Services Authority, regulator of the world's third-largest equity market, says insider trading occurs before a quarter of all deals, and officials at the agency blame U.K. laws for limiting them from prosecuting more offenders. The situation may get worse because takeovers have doubled in the past year to the equivalent of $859 billion, according to data compiled by Bloomberg.

``Unlike America, we are not even making noises about investigation,'' said Justin Urquhart Stewart, who helps oversee $3 billion as director of 7 Investment Management in London. ``The FSA should be seen to be stronger. We've had too many examples of significant movements in shares.''

Regulators can't afford to let insider trading flourish as London challenges New York as the world's biggest financial center, said Peter Hahn, a former Citigroup Inc. investment banker.

Gaining Ground

The U.K. has become the most active market for initial public offerings, with $19.2 billion so far this year, up 75 percent from the same period last year and more than three times higher than in 2005, Bloomberg data show. The London Stock Exchange, the world's third-largest equity market after New York and Tokyo, accounts for about a fifth of all trades executed in Europe, according to data from European exchanges.

``If the U.K. aims to become a central place for international business then we must have impeccable quality control,'' said Hahn, a fellow in corporate finance and government at Cass Business School in London. ``The scale of the problem is serious.''

Insider trading, or profiting from non-public information, may have taken place before almost 25 percent of announced deals in 2005, according to the FSA's annual ``market cleanliness'' survey published March 7. That's about the same as five years ago.

Lacking Tools

The FSA says it lacks the tools to fight in part because English law prohibits regulators from using plea bargains or promises of immunity from prosecution to persuade suspects to cooperate in their investigations. The U.S. Securities and Exchange Commission faces no such restrictions.

The SEC filed more than 300 insider trading cases since 2001 targeting more than 600 companies and individuals, Linda Thomsen, the agency's enforcement chief, said in testimony at a U.S. Senate hearing in September.

``There is criticism of us not bringing enough enforcement actions, but there is also a huge recognition of the difficulty in doing so and the enormity of the task,'' said Sally Dewar, the FSA's director of markets.

Investors' increased use of derivatives is making the regulators' job more difficult by forcing them to monitor more markets and trading outside stock exchanges. People with inside information may use options, futures, and private contracts derived from stocks, bonds, currencies and commodities that may be harder to trace.

Jabre Case

``The moment more innovative instruments come into play, it becomes even more difficult to bring any kind of legitimate action even when there is strong suspicion of wrongful activity,'' said Abesh Choudhury, head of the financial services regulatory practice at U.S. law firm Dewey Ballantine LLP's London office.

The last insider trading case was completed in August, when the FSA fined Philippe Jabre, a former director of hedge fund GLG Partners, 750,000 pounds ($1.5 million), the highest penalty imposed on an individual.

Jabre bet that Sumitomo Mitsui Financial Group, a Japanese bank, would decline after he received a tip from a trader on Feb. 11, 2003, that the company would sell shares, according to FSA filings. The stock dropped about 22 percent between the time the sale was announced on Feb. 17 and its pricing, according to FSA documents.

Seven other cases resulted in fines of 25,000 pounds or less, generally for people who worked at smaller firms.

`Ambiance of Fear'

The SEC in Washington accused former employees of Zurich- based UBS AG, and New York-based Morgan Stanley and Bear Stearns Cos. in March of running an insider-trading ring. On May 8, it sued a Hong Kong couple for trading on inside information about News Corp.'s $5 billion offer for Dow Jones & Co. a week after the bid was announced. Both companies are located in New York.

The agency sued five people as part of its probe into suspicious trading in options of TXU Corp., a Dallas-based utility, including a Pakistani investment banker and a married couple in the U.K.

``The SEC has managed to create an ambience of fear,'' said Hahn. ``The FSA has failed to do so.''

More takeovers provide additional opportunities to abuse inside knowledge. The number of transactions rose last year to 3,215, the highest since at least 2000.

Shares of Reuters, the biggest publicly traded financial news and information company, jumped as much as 41 pence to 533.25 pence 37 minutes before the company said on May 4 that it had been approached about a possible takeover. The stock rose 25 percent that day after the London-based company confirmed it had attracted the interest of a potential buyer.

Reuters, Hanson

Thomson Corp. of Toronto agreed to acquire Reuters two weeks later for 8.7 billion pounds ($17.2 billion), making it the world's biggest financial news and information company.

Bloomberg LP, the New York-based parent of Bloomberg News, competes with Reuters and Thomson in selling information and trading systems to the financial-services industry.

Hanson, a cement maker based in London, gained as much as 40.5 pence to 892 pence 16 minutes before HeidelbergCement of Heidelberg, Germany, said on May 3 it was considering a takeover. The stock extended gains after the announcement, which came shortly before the close of trading, ending the day 20 percent higher at 1,025 pence.

Shares in Northgate, the U.K.'s biggest supplier of payroll systems, jumped 7.1 percent on Oct. 4 as the Hemel Hempstead, England-based company said it was in takeover talks after receiving ``a number of unsolicited approaches.'' The stock plunged 12 percent on Oct. 25 after Northgate said it ended negotiations.

Burden of Proof

The FSA won't say whether it's investigating the cases.

Regulators are improving computers for monitoring trades and increasing penalties to help curb abuse. The agency's director of enforcement, Margaret Cole, in March said she that planned to increase fines for the wealthiest culprits.

The FSA is also lobbying the U.K. government for permission to adopt plea bargaining and guarantees of immunity to get suspects to cooperate, Dewar said.

``There is a strong perception that plea bargains play a large part in the prosecution success of the SEC,'' said David Mayhew, a lawyer at Herbert Smith, and a former FSA prosecutor.

Even when British authorities go after offenders in a civil action, insider trading is considered serious enough to require a criminal-level burden of proof.

``If the FSA has strong reasons to believe that insider dealing has taken place, it is still difficult to prove,'' said Ian Mason, a former FSA lawyer now in private practice at London-based law firm Barlow Lyde & Gilbert. ``The suspect might claim that he had other legitimate reasons for dealing.''

Failure to prosecute and the perception that insider traders ``can get away with it'' put London's reputation and credibility at stake, said Urquhart Stewart at 7 Investment Management.

``I'd like to see the financial version of a policeman at the corner,'' he said. ``I cannot see one now.''

To contact the reporters on this story: Alexis Xydias in London at at axydias@bloomberg.net; James Lumley in London at jlumley1@bloomberg.com

Last Updated: June 11, 2007 19:01 EDT