June 6 (Bloomberg) -- French regulators are examining whether Deutsche Bank AG enabled hedge funds to trade on inside information, destroying tapes and failing to keep written records of phone conversations when lining up buyers for a 2002 Vivendi Universal SA securities sale.

This is the fourth time since April 2006 that European regulators have targeted Germany's biggest bank for allegedly breaking securities rules that led to market manipulation or allowed hedge funds to engage in insider trading. The company was fined a year ago by U.K. regulators for misleading investors about a stock offering. French officials accused Frankfurt-based Deutsche Bank in January of improperly leaking information about a securities sale and two months later Spanish regulators made similar allegations.

In the Vivendi case, Deutsche Bank and four hedge funds that allegedly traded on inside information may have to pay 9 million euros ($12.2 million) in fines, five people with direct knowledge of the case said. Deutsche Bank faces as much as 3 million euros in sanctions, while the hedge funds may have to pay 1.5 million euros each, the people said. The combined fines would be the biggest in France related to improper trading. Deutsche Bank denies all the allegations, said two people involved in the case.

``Regulators are very keen to show they will protect investors from insider trading, and they're getting more aggressive,'' said Gilles Amsallem, a Paris-based lawyer at Taylor Wessing LLP. No individuals are being pursued by French regulators in the Vivendi probe.

Phone Records

Vivendi marks at least the second time this year that Paris- based Autorite des Marches Financiers has gone after Deutsche Bank for allegedly failing to track the way inside information is passed on to investors. The AMF is among regulators in Europe stepping up oversight of the $1.4 trillion hedge fund industry by focusing on bets before market-moving news. Still, insider- trading probes in Europe trail the U.S., lawyers said, where the Securities and Exchange Commission has filed more than 300 cases since 2001, targeting more than 600 companies and individuals.

In France, Deutsche Bank and hedge fund GLG Partners LP were fined in January in a probe related to an Alcatel SA convertible- bond sale. Both companies are appealing the decision.

``Alcatel and Vivendi represent the first AMF decisions involving very specific trades handled by sophisticated investors like hedge funds in the context of financial operations such as the issuance of securities,'' said Charles Arsouze, a Paris-based lawyer at Skadden, Arps, Slate, Meagher & Flom LLP and a former AMF representative.

Stock Drops

In the Vivendi investigation, the AMF is reviewing telephone conversations that took place between Deutsche Bank and London- based hedge fund managers at GLG, UBS O'Connor Ltd., Ferox Capital Management Ltd. and Meditor Capital Management Ltd., said the people, who declined to be identified before the French regulator announces its decision.

An AMF official alleges in an 80-page report that hasn't been released that Deutsche Bank helped the hedge funds by giving them a chance to trade Vivendi shares before the convertible-bond sale, said the five people who have seen the report. Deutsche Bank broke French rules because it allegedly failed to keep proper records of the conversations and destroyed the relevant tapes, said two of the people.

Deutsche Bank has received the AMF report on Vivendi, said Pierre Folacci, a Paris-based spokesman for the bank, without elaborating further. Charlotte Judet, a spokeswoman for the AMF, declined to comment, as did officials from Ferox, GLG, Meditor and UBS O'Connor.

Vivendi shares fell 14 percent in the three days before the offering on Nov. 14, 2002, prompting an investigation. Vivendi that month asked the French market regulator to examine the drop in the stock price.

AMF Hearing

Convertible bonds can depress stock prices because they are exchanged for new shares that dilute per-share earnings. Vivendi sold $1 billion of three-year, 8.25 percent notes.

Jean-Pierre Morin, the AMF's rapporteur appointed to investigate the allegations, sent his recommendation in April and the AMF will make a final ruling after a hearing scheduled for tomorrow in Paris, three people said.

Underwriters typically sound out investors to gauge demand before selling securities. They are required by the AMF to tell buyers they can't trade on the information and they must store the dates and times of the conversations.

In the U.S., Linda Thomsen, the SEC enforcement chief, has said the agency will be relentless in pursuing cases of misconduct. The SEC also has gotten involved in insider-trading investigations of firms based outside the U.S.

Barclays Settles

London-based Barclays Plc, the third-biggest underwriter of corporate bonds, agreed on May 30 to pay $10.9 million to settle an SEC lawsuit claiming the bank made millions of dollars in illegal profit trading bonds based on confidential bankruptcy data.

Barclays didn't admit any wrongdoing as part of the agreement. In a March 26 filing with the SEC, Barclays said it ``independently addressed the practices, policies and procedures at issue'' before the regulator's probe began. The bank declined to comment beyond this statement.

Regulators worldwide are focusing on improper trading as equity markets rally and corporate takeovers surge to record levels. The SEC sued a Hong Kong couple last month for using inside information to make $8.2 million from purchases of Dow Jones & Co. stock before News Corp. unveiled a $5 billion bid for the company.

`Cozy Relationship'

The AMF on May 15 said it fined Italy's Banca Popolare di Milano Scrl and Chief Executive Officer Fabrizio Viola a combined 1.05 million euros for insider trading before a French investor disclosed an offer for a stake in Galeries Lafayette SA.

The U.K.'s Financial Services Authority fined Deutsche Bank the equivalent of about $11 million in April 2006 for giving a misleading impression about the progress of a Scania AB stock offering and misleading investors in the sale of Cytos Biotechnology AG shares, both in 2004. This year it was fined 1 million euros and suspended from underwriting some equity offerings in Spain for leaking information about a share sale in 2004.

``The cozy relationship between investment banks and their clients will take a long time to root out,'' said Laurent Assaya, a lawyer at Fried, Frank, Harris, Shriver & Jacobson LLP in Paris.

To contact the reporters on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net; Jacqueline Simmons in Paris at jackiem@bloomberg.net

Last Updated: June 5, 2007 20:08 EDT