The Hong Kong financial watchdog is investigating possible insider dealing prior to Hong Kong telecom PCCW's Monday announcement that it was to acquire Sunday Communications, according to people close to the regulator.

The Securities and Futures Commission is also probing Sunday, Hong Kong's smallest mobile operator, after the company's share price and trading volume rose sharply last Friday, the last trading day before the takeover deal was announced, the people said. The SFC declined to comment.

PCCW, Hong Kong's largest fixed-line operator, on Monday said it had agreed to buy 59.9 per cent of Sunday for HK$1.163bn ($150m), or HK$0.65 per share. It will then offer a mandatory cash offer for the remaining shares.

But according to a disclosure to the Hong Kong stock exchange, PCCW chairman Richard Li had been accumulating shares in PCCW in the nine weeks prior to the deal.

Mr Li has spent HK$138m buying shares in PCCW in 11 tranches since April 6, raising his stake from 26.14 per cent to 26.56 per cent, records show. He bought 29.9m shares at between HK$4.45 and HK$4.804 per share in that period. The latest dealings took place on Monday and Tuesday last week.

Jack So, PCCW's deputy chairman and managing director, said on Tuesday: ?We have not received any notification on any inquiry. If we get anything, we will be fully co-operative.?

Analysts said the SFC might not have a very strong case against Mr Li as share price and trading volume at PCCW had been flat before and after the Monday deal. PCCW's shares were suspended from trading on Monday and dropped 1 per cent to HK$4.75 on Tuesday. Yesterday's trading volume was similar to last week's average.

?If the SFC wants to make a case, they have to prove that Richard Li was acting on price-sensitive information, which is information that would lead to similar responses from other investors,? one analyst said.

Mr So declined to comment whether Mr Li knew about the acquisition before it was announced. Alex Arena, chief financial officer, said he and Mr So were the only PCCW executives that had been involved in the negotiations to purchase Sunday.

However, people close to the SFC said the regulator had ?a prima facie case? against Sunday, which declined to comment on Tuesday.

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