NEW YORK (Reuters) -A Wall Street watchdog is probing trading activity ahead of a failed takeover bid for Douglas Elliman and has asked the luxury real estate brokerage who knew about the offer before it became public in late May, according to letters seen by Reuters and three people familiar with the matter.

The inquiry by the Financial Industry Regulatory Authority, reported here for the first time, is in the early stages, according to screenshots of the two letters and the sources. 

FINRA oversees trading in U.S. markets and refers hundreds of suspected insider trading cases to the U.S. Securities and Exchange Commission each year. 

FINRA's market abuse division, which investigates suspicious trades, in June and August sought details from Douglas Elliman about the sequence of events before news reports of a takeover bid by rival Anywhere Real Estate sent its share price soaring 50% on May 23, according to the sources and screenshots of two letters between the watchdog and the company. 

In its June 9 letter to Douglas Elliman, the watchdog said it was "conducting a routine review of trading" in the company's shares surrounding the May 23 news reports.

"In connection with this review, FINRA requests that the Company provide a detailed written chronology of the events which preceded" the reports.

Spokespeople for Douglas Elliman, FINRA and the SEC declined to comment. Anywhere, one of the country's largest real estate groups, did not respond to requests for comment. 

FINRA's documentation requests included board minutes, a list of anyone privy to the offer, details of communications with advisers, its policy for employees dealing in its shares, and details of clearance requests for any such trades in the month prior to May 23, the letter shows. 

"This inquiry should not be construed as an indication that FINRA has determined that any violations...have occurred," the letter said.

In its response to FINRA's information request, Douglas Elliman flagged that on May 7 one of its board directors Patrick Bartels sought permission from the company to buy $250,000 of Douglas Elliman stock, a screenshot of that letter dated June 25 shows. The company cleared the trade.

Bartels' trade was disclosed in an SEC filing after its completion. It was the only trade Douglas Elliman highlighted in the letter.

Reuters could not ascertain what triggered the FINRA review or if it was focused on Bartels' or any other specific trades. 

Bartels did not respond to multiple requests for comment via phone, text, and email while his attorneys at Akin Gump did not respond to requests for comment.

The scrutiny is a fresh headache for the 114-year-old New York-based Douglas Elliman known for brokering deals for multi-million-dollar homes. Its clients include the rich and famous, while its own agents have starred in reality TV shows "Selling the City" and "Million Dollar Listing." In 2019, it brokered hedge fund boss Ken Griffin's $238 million Manhattan penthouse purchase, a record at the time.

Douglas Elliman this year faces civil litigation alleging the company enabled sexual assault by two of its former agents - an allegation which it denies. Last year, the company was targeted by an activist shareholder, which criticized its poor financial performance. It has reported several consecutive quarterly losses. 

FINRA is a non-governmental independent body overseen by the SEC charged with monitoring trading in U.S. equity markets for manipulation, fraud and insider trading -- willfully or recklessly using material non-public information to trade in a company's shares prior to material market-moving news.

ANYWHERE TALKS FIZZLE OUT IN JUNE

On March 5, Douglas Elliman received an offer from Anywhere worth $5 per share, according to the sources and Douglas Elliman's June 25 response to FINRA, which reveals new details about Anywhere's approach.

In the following days, Douglas Elliman and its advisors evaluated the bid and decided to move ahead, but on April 16 Anywhere backtracked, leading Douglas Elliman to scrap the talks, according to the letter.

On the evening of May 7, Anywhere's advisors at Evercore contacted Douglas Elliman's advisors at Bank of America communicating that Anywhere was working on a revised offer which Evercore subsequently submitted on May 20. Bartels sought permission for his trade on the morning of May 7 and it was executed in the following days, the letter shows.

On May 23, Bloomberg reported that Anywhere had made an offer and Douglas Elliman's shares closed up more than 30% that day. 

Bank of America and Evercore declined to comment. 

The talks fizzled out in early June after Douglas Elliman found the revised offer to be inadequate, the sources said. On Monday, brokerage Compass agreed to acquire Anywhere in a deal valued at about $4.2 billion.