Investigators at the Toronto Stock Exchange (TSE) are looking into the flurry of activity in shares of Midland Walwyn stock just prior to the announcement of the acquisition of the firm by Merrill Lynch on June 22. Although exchange officials will say little beyond acknowledging the investigation, many in the Canadian securities industry say that in the week before the $855 million (U.S.) deal was struck, Midland Walwyn brokers and employees used knowledge of the impending acquisition to profit.

You just have to look at the trading activity to note that lots of people had a pretty good idea what was happening, says an RBC Dominion broker in Toronto.

Prior to the acquisition announcement on Monday, June 22, shares of Midland stock gained in value all the previous week. The stock, which opened June 15 at $24.85 closed at $27.25 on Friday, June 20.

Of particular concern to regulators was that the most active traders in the stock that week were Midland employees themselves.

That by itself is not all that unusual, says firm spokesperson Peter Kanhart. About 20% of our stock is in employee hands and they are often active traders.

But many observers note that trading activity increased as rumors of the impending deal began to circulate within the firm and the industry.

By Thursday, June 18, news of the deal was flying through firm e-mails and Web sites, sources say.

The so-called Chinese Wall at Midland was more like a block of Swiss cheese, says Brendan Kyle, a Midland client and institutional money manager with Driehaus Capital Management in Chicago.

Adding to the activity, on Friday, the firm placed its own stock on alert, meaning that something was coming down the pike.

Placing our stock on alert was like waving a red flag in front of a bull. All it did was alert employees that something was up that could be turned into profit, says one Midland broker in Toronto.

According to TSE spokesperson Stephen Kee, there is nothing unusual about the exchange reviewing the trading activity leading up to a major announcement. Its one of our strict responsibilities as a regulator, he says.

But, according to sources at the exchange, the TSEs review is anything but routine. In fact, some say, the exchange is paying closer than usual attention because it is just plain angry with Midland for refusing its request for an explanation of the sudden surge of activity during that week.

In the meantime, information about the Midland trades is also on the desk of the Ontario Securities Commissions (OSC) enforcement director, Larry Waite.

At this time, we dont need to duplicate efforts Waite says. Were going to see what the TSE brings forth before making any decisions on our end.

According to Kee, when and if exchange investigators uncover any pattern of abuse, the exchange will immediately forward its report to the OSC.