June 22 (Bloomberg) -- One evening in 2003, a star money manager at GLG Partners LP, one of Europe's biggest hedge fund firms, answered the telephone at his office near London's Hyde Park. The news: Project Shoot was about to commence.

The manager, Philippe Jabre, listened as a Goldman Sachs Group Inc. salesman divulged the plan. Shoot was Goldman code for Sumitomo Mitsui Financial Group Inc. John Rustum, the caller, confided that the Tokyo-based bank planned to sell billions of dollars of convertible bonds. The sale would sink Sumitomo stock.

What Jabre did next would unleash one of the biggest market abuse cases in British history. He shorted the shares of the Japanese bank, betting they would decline.

The U.K. Financial Services Authority pounced. It accused Jabre, 47, of trading on inside information and fined him a record 750,000 pounds ($1.48 million). The regulator stopped short of calling his actions intentional, a ruling that might have prompted the FSA to ban Jabre from working in the City of London. Jabre eventually quit GLG Partners and, in August 2006, paid his fine, saying he'd gotten a fair hearing but disagreed with FSA. Then he dropped from sight.

``As far as I'm concerned, he doesn't exist, and I don't want to comment,'' says Noam Gottesman, chief executive officer of GLG Partners, where Jabre oversaw about $7 billion and more than quadrupled investors' money from 1998 to 2005.

Jabre hasn't vanished -- or stopped managing money. He's moved his base to Switzerland. There, in an anonymous concrete building in Geneva, he's quietly building a new hedge fund empire.

Swiss Headquarters

Today, Jabre runs a firm called Jabre Capital Partners from an office on Rue du Conseil-General, next door to a used-camera shop and down the road from a McDonald's. It's far from fashionable Rue du Rhone, where Genevese private bankers discreetly tend fortunes and watchmaker Patek Philippe displays its diamond-studded wares.

Behind this unassuming facade, Jabre has launched one of the hottest hedge funds to hit Europe in years. While Jabre Capital doesn't disclose its assets under management, a person familiar with the firm says investors have pumped almost $3 billion into its funds. Half of the money has come from Jabre's former clients at GLG Partners, which manages about $20 billion. The rest has flooded in from new investors lured by his record of making money.

Jabre was back on top in late May, when he walked into the Hotel de la Paix on the shore of Lake Geneva to find about 100 investors waiting for him.

No one asked about his scrape with regulators. What everyone wanted to know was how he'd made money in 2005, when stagnant stock markets and credit downgrades for General Motors Corp. hurt many rivals' returns.

``I've always tried to survive falling markets, and every one is different,'' Jabre told the crowd.

Privileged Info

It's a remarkable comeback for Jabre, an extreme skier with a taste for Havana cigars and high-stakes trades. His downfall at GLG Partners exposed a dark truth at the heart of London finance: Inside information greases the City's wheels.

Jabre's Sumitomo stock trades, which the FSA made public in an August 2006 report, laid bare the way information routinely flows -- legally -- from investment bankers to a privileged corps of fund managers.

Bankers typically alert select managers to coming securities sales before companies disclose them. Such chatter helps underwriters measure demand for new stocks and bonds so they can price them.

Under Section 118 of the U.K. Financial Services and Markets Act 2000, money managers are barred from trading on such information. In City parlance, these managers have been brought over the wall, or wall crossed, a reference to the so-called Chinese walls inside investment banks that are designed to prevent conflicts of interest.

Leaky Market

That's the law. In practice, stock prices often move before companies issue new stocks or bonds, says Philip Augar, a former investment banker at London-based Schroders Plc. ``That says to me information is leaking somewhere in the chain,'' says Augar, author of ``The Greed Merchants: How the Investment Banks Played the Free Market Game'' (Portfolio, 241 pages, $24.95).

Market abuse, the British euphemism for insider trading, runs rampant in the City. It may have occurred in almost a quarter of U.K. takeover announcements in 2005 and a third in '04, according to a March report by the FSA. Since April 2006, the U.S. Securities and Exchange Commission has filed more than 20 insider-trading cases, double the number logged during the entire '90s. As of mid-June, Jabre was the only hedge fund manager ever snared by the FSA for market abuse.

New GLG Fine

Jabre has traded on privileged information more than once. He sold shares of Alcatel SA in 2002 after Deutsche Bank AG alerted him to an Alcatel convertible bond sale, according to the Autorite des Marches Financiers, or AMF, France's securities regulator. The AMF fined GLG Partners 1.2 million euros ($1.6 million). The firm was appealing the ruling in French court in mid-June. Jabre wasn't investigated or penalized.

The AMF on June 21 fined Deutsche Bank, GLG Partners and three other hedge funds a combined 6.25 million euros after an insider trading probe into a Vivendi Universal SA securities sale in 2002. All parties can appeal the decision. GLG plans to do so, a London-based spokeswoman says.

In Geneva, Jabre has set out to replicate his London success. He has hired about 40 people and is continuing to branch out from convertible arbitrage, or trading convertibles and their underlying shares. That was his specialty at GLG Partners.

Jabre loves trading so much he could never give it up, says Robert Sursock, former CEO of Paris-based Banque Arabe et Internationale d'Investissement SA, or BAII, which Banque Nationale de Paris bought out in 1990.

Jabre's Strategy

Jabre, a Lebanese Christian educated at French schools in Beirut, got his start at BAII in the '80s, managing oil money for Middle Eastern countries. He often trades around the clock.

``He likes it, like a painter who would never stop painting,'' says Sursock, who's now the head of Paris-based investment bank PrimeCorp Finance SA. Jabre hasn't lost his touch. His new Multi-Strategy Fund, which opened on Feb. 1, returned more than 7 percent as of the end of May, according to two Jabre Capital investors. Jabre deploys a third of the fund's assets in convertible arbitrage.

Jabre also bets on volatility via the options market; trades debt of companies he thinks are overstretched; buys and bets against shares; and tries to capitalize on mergers.

Jabre has also opened two so-called long-only funds that buy and hold stocks and bonds. Jabre is always trading. In the past, he's turned over his funds' equity holdings as many as five times a year. Jabre declined to comment for this story.

``He's got something to prove now, and he'll prove it,'' says Peter Fletcher, managing director of Parly Co., a Geneva- based money management firm that has invested with Jabre.

Switzerland's Allure

Back in London, where Jabre's white Georgian home in Chelsea was shuttered in early June, Jabre has no FSA mandate to manage money. He relinquished it when he left GLG Partners in February 2006. He chose to not seek FSA authorization so he could return to work quickly, according to people familiar with his new fund.

In Switzerland, where a tradition of banking secrecy dates back to the Middle Ages, almost anyone can open a hedge fund. The only requirement is that managers register with one of the 11 self-regulatory organizations that check for money laundering, says Shelby du Pasquier, a former director of Jabre Capital. No other approval is needed as long as administration and marketing are conducted outside Switzerland, says du Pasquier, a solicitor at Lenz & Staehelin in Geneva.

Jabre has done more than Swiss regulations require. He's drawn up a rule book that mirrors FSA rules and hired a compliance officer, and he was pulling together an independent five-member board as of mid-June, according to a person familiar with the fund.

FSA Registration

Given Jabre's transgressions, the FSA might have held up renewing his registration, says David Mayhew, former acting FSA director of enforcement. ``He wouldn't have wanted to go through all that,'' says Mayhew, now a partner at London law firm Herbert Smith. FSA spokesman David Cliffe says applications are treated one case at a time.

The British regulator maintains that Jabre broke the rules. In the lawyerly language of its 36-page report on the case, the FSA says Jabre failed to use ``due skill, care and diligence'' or observe ``proper standards of market conduct'' when trading the Sumitomo Mitsui stock.

In the hedge-fund world, successful managers survive scrapes with regulators---and worse. Last year, energy trader Brian Hunter brought down Greenwich, Connecticut-based Amaranth Advisors LLC by running up $6.6 billion in losses. Hunter has since opened Calgary, Alberta-based Solengo Capital Advisors.

Record of Returns

Investors have given Jabre a second chance because he makes so much money, says Jacob Schmidt, founder of Schmidt Research Partners Ltd., a London-based hedge fund advisory firm. ``He has enough investors who still think he's a great guy,'' Schmidt says.

Jabre has beaten the odds before. He grew up in Beirut, the financial center of the Middle East until civil war broke out in Lebanon in 1975.

As the son of prominent Maronite Christians -- the Jabre family once owned brewer Almaza SAL -- Philippe was schooled by French-speaking Jesuits at the city's elite Collège Notre-Dame de Jamhour. During the summer, his family escaped to a country home in Bois de Boulogne, in the hills northeast of Beirut.

When Jabre was 15, escalating strife between Lebanon's Christians and Muslims boiled over into all-out conflict. The spiral of sectarian violence eventually left Beirut in ruins and drove thousands of Lebanese into exile.

The Jabres didn't run. ``They spent most of the wartime in Lebanon, running the factory,'' says George Asseily, acting secretary general of the London-based Arab-British Chamber of Commerce and a friend of the Jabre family. The family sold the brewery to Heineken NV in 2002 for an undisclosed price.

War in Lebanon

The war took its toll on the Jabres. In the summer of 1978, soldiers from Syria, which by then had entered the conflict, seized the Jabres' home in Bois de Boulogne and threatened to kill the family. Jabre wasn't there at the time. The army occupied the house until 2005.

As the war raged, Jabre spent a year at the American University of Beirut and then left for Concordia University in Montreal, where he earned a bachelor's degree in economics in 1980. He then attended Columbia Business School in New York. He collected his MBA in 1982, just as Israel invaded southern Lebanon, and joined J.P. Morgan & Co. in its convertible-bond training program.

For Jabre, J.P. Morgan was merely a stopover. Khaled Abu Su'ud, an adviser to the Kuwaiti royal family, soon introduced him to executives at BAII, says John Ginsbury, former head of capital markets at BAII. Jabre joined the Paris firm in 1983, a step that would lead him to the world of hedge funds.

Arab governments owned half of BAII, and non-Arab banks such as Paris-based BNP, now BNP Paribas SA, owned the rest. That made it the perfect place for Jabre, says Ginsbury, now executive director of investments for Hong Kong-based Winnington Capital Ltd.

`Mini-UN'

BAII was established in 1973 to manage the oil riches of Middle East nations. Its clients included the London-based Kuwait Investment Office.

``BAII was a mini UN,'' Ginsbury says. ``Philippe fit right in.

Jabre soon established himself as one of BAII'S top traders. In 1986, he moved to London, where Ginsbury ran capital markets. By the late '80s, BAII sat atop $6 billion in assets; Jabre oversaw a third of that and ran convertible arbitrage, Sursock says. ``His performance was probably the best in the market,'' he says.

Jabre seized on the computer-driven program trading that was by then revolutionizing Wall Street and the City. He and fellow arbs at BAII used computers to spot price discrepancies among financial instruments -- stocks, bonds, warrants and convertibles, as well as derivatives such as futures and swaps - - and profit from those differences.

Finding an Edge

Under Jabre, the convertibles team posted average annual returns of 10-12 percent, says Kais Laouiti, who worked for Jabre at BAII and is now an investment adviser at Beechrock Holdings Ltd., a London-based family office.

Tim Smith, who ran stock borrowing for BAII's convertibles desk, says he still marvels at the way Jabre could stay on top of every trade.

``He's got a photographic memory,'' says Smith, who's now president of Boston-based consulting firm Data Explorers Ltd. ``He could remember the details of every ticket he wrote, and he wrote an awful lot of tickets.''

While Jabre was making his name at BAII, Gottesman, a former private banker at Goldman Sachs, formed the firm that would make Jabre's fortune. In 1995, Gottesman and two Goldman colleagues, Pierre LaGrange and Jonathan Green -- the G, L and G in GLG Partners -- formed a hedge fund unit within Lehman Brothers Holdings Inc.

Operating from makeshift offices in Lehman's London headquarters, GLG Partners looked and felt like a startup. In the early days, before furniture arrived, people sat on boxes, says Caroline Reyl, who joined as an analyst in 1996.

Joining GLG

``It was very much like a family business,'' says Reyl, now a Geneva-based fund manager at Pictet & Cie.

Jabre signed on in 1997 as a managing director. His timing was perfect. Like most hedge fund firms, GLG Partners charges an annual management fee of 1-2 percent of funds under management and then takes 20 percent of any profits. As the Nasdaq Stock Market soared from record to record, GLG Partners rode the boom and raked in fees.

In the early days, the partners threw Christmas parties at Bibendum, a South Kensington restaurant known for its oyster bar. GLG Partners could afford to shell out. Its Performance Fund, managed by Belgian partner LaGrange, soared 62 percent in 1999, according to Bloomberg data. Jabre's Market Neutral Fund, which focused on convertible arbitrage, rocketed 45 percent that year, while his Global Convertible Fund surged 34 percent. By 2000, GLG Partners oversaw about $4 billion.

The firm spun off from Lehman Brothers and began to split profits five ways, with equal shares going to Lehman Brothers; founders Gottesman, Green and LaGrange; and Jabre. GLG swapped its offices at Lehman for new digs in Mayfair. On good days, Jabre would occasionally light up a cigar. Away from the office, Jabre would go heli-skiing in Canada and hit the slopes in the French Alps.

Bear Market

In 2000, when the Nasdaq sank 39 percent, Jabre's Market Neutral Fund returned 25 percent. He established himself as a star of GLG Partners in 2003, when that fund returned 34 percent, in part because he bet against bonds of Collecchio, Italy-based dairy company Parmalat Finanziaria SpA, which collapsed in December of that year. LaGrange's European Long- Short Fund gained 7 percent that year, while Gottesman's North American Opportunity Fund climbed 9 percent.

Jabre began questioning why he got only a fifth of the profits when he managed more money and generated higher returns than his partners, according to people familiar with the situation. The same year, Jabre got the fateful call from Goldman Sachs. This is what the FSA says happened:

Goldman Calls

Around 7 p.m. on Feb. 11, 2003, Rustum, the Goldman Sachs salesman, called Jabre about Sumitomo Mitsui. Jabre was well acquainted with the Japanese bank. He'd tried to borrow $100 million of its stock in January and had shorted some shares a few days before Rustum's call.

Rustum told Jabre that Sumitomo Mitsui -- aka Shoot-- planned to sell $2.5 billion-$3 billion of convertibles. Jabre agreed to have Rustum bring him over the wall on the deal.

The two discussed how Goldman Sachs planned to price the convertibles. Jabre told Rustum that hedge funds wouldn't be able to buy all of the securities and Goldman Sachs would have to lower the price to entice buy-and-hold investors. He also told Rustum that he'd borrowed Sumitomo shares and had been trading the stock. He asked if he could maintain his ``existing trading pattern,'' according to the FSA.

Rustum tapped out an e-mail to Goldman's compliance department.

Project Shoot

``Spoke to Philippe Jabre at GLG on Shoot,'' Rustum wrote in the e-mail, which was disclosed in the FSA report. ``He has already borrowed Shoot stock along with the stocks of the other three big Japanese banks and has orders out with multiple brokers to borrow more if available of all four stocks. Does his wall crossing preclude him from putting out any new orders to borrow Shoot stock, or does he have any problem having any pre- existing orders getting filled? I told him I would get back to him.''

A Goldman Sachs compliance officer e-mailed back. ``Pre- existing orders can be left in place--in fact, changing them now could be an issue,'' the message read. ``He cannot put out any new orders or trade the name at all.''

``I spoke to him just now, and he understands,'' Rustum wrote in response.

Only Jabre did trade Sumitomo Mitsui stock. On Feb. 12-14, he shorted $16 million worth of shares in three separate trades-

To contact the reporters on this story: Stephanie Baker-Said in London ssaid@bloomberg.net; Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net

Last Updated: June 21, 2007 22:50 EDT