Attorneys today began outlining their defense for Dennis Levine, the investment banker accused by the Securities and Exchange Commission of making huge profits in the largest insider-trading case in history..

In a memorandum filed in federal court here today, attorney Martin Flumenbaum argued that the SEC has failed to produce any evidence that Levine traded stocks using confidential information about upcoming takeovers.

The SEC has alleged that Levine made $12.6 million in illegal profits by purchasing 54 stocks on the basis of insider information over the last five years. In all 54 cases cited by the SEC, Levine made a profit, the agency said.

However, Flumenbaum asserted today that more than 100 stocks were traded in the three Bahamian accounts linked to Levine by the SEC and that, in addition to profits, those trades produced more than $2 million in losses. Flumenbaum called those losses "a fact which belies the allegation that trades were made on foolproof inside information."

Flumenbaum said there are other reasons why the SEC's case against Levine, a managing director with Drexel Burnham Lambert Inc., "self-destructs."

Flumenbaum said the original target of the SEC's investigation was not Levine. Instead, the target was Bank Leu International, a Nassau, Bahamas, subsidiary of Bank Leu A. G. of Switzerland. In return for information identifying Levine as the customer directing the trades under investigation, the SEC and the Justice Department agreed in March not to prosecute Bank Leu or its employes except for Bernhard Meier, Levine's stockbroker.

"What we have here is an agreement giving Bank Leu an incentive to say many of the trades are in an account which they then named as Mr. Levine's," Flumenbaum said. Flumenbaum said one of the defenses he may assert is that trades linked to Levine belonged instead to senior Bank Leu officials, including Jean-Pierre Fraysse, former general manager of the bank, or Bruno Pletscher, now its general manager.

"The SEC's allegations are based on selective documents furnished by an untrustworthy source -- the original target of the SEC's own investigation, Bank Leu International," Flumenbaum said. "The bank has admitted that it and several of its officers committed both criminal and civil violations of the securities laws. In order to escape prosecution, the bank, apparently in violation of both Bahamian and Swiss law, provided the commission with carefully screened 'evidence' implicating Mr. Levine."

A copy of the agreement between the SEC and Bank Leu noted, however, that it was not an admission of guilt by the bank or its employes. "I can understand why a lawyer in his [Flumenbaum's] situation might want to make such an assertion," said Harvey Pitt, an attorney with Fried, Frank, Harris, Shriver & Jacobson, which represented Bank Leu in its dealings with the SEC.

In court today, SEC attorneys said there was nothing unusual about the commission's agreement with Bank Leu. "Deals are struck with witnesses all the time," said SEC attorney David Stanley. "The only thing unusual about the agreement is its length."

Flumenbaum made his arguments both in writing and in a hearing today. Several key points were contained in a memo outlining arguments against the SEC's attempt to continue a freeze on $10.8 million in illegal trading profits Levine allegedly has on deposit with Bank Leu in Nassau. On Thursday, U.S. District Judge Richard Owen will hear the SEC's motion for a preliminary injunction continuing the freeze of Levine's assets.

During a hearing today, the SEC indicated it would not try to prove on Thursday that Levine was guilty of insider trading in the 54 stocks identified by the agency previously. Instead, the SEC said it will focus on 21 transactions. In nine of those, Levine had direct, material information about pending deals when he made his stock purchases, according to the SEC. In 12 others, Levine's employers had such information.

As an investment banker who worked for three prominent Wall Street firms during the 5 1/2 years in question, Levine had access to confidential information about secret merger negotiations. The SEC has charged that, in at least 19 of the 54 stock transactions it cited, Levine had direct knowledge of the deals because either he or his employer served as a financial adviser. The SEC also has charged that Levine had confidential information about the other 35 or so deals, raising questions about what other Wall Street executives may be involved in the information and stock-trading scheme.

Wall Street investment bankers familiar with the Levine investigation said there are widespread fears about which firms or individuals may be charged next.

The SEC has charged that Levine directed his trades through three stock brokerage accounts he maintained with Bank Leu. But Levine's attorney stated that, in those deals of which Levine allegedly had personal knowledge, "The record shows that the [stock] purchases . . . occurred either after the companies were publicly identified as takeover candidates or at a time when there was no material nonpublic information regarding a possible takeover."

In addition to the SEC's civil insider-trading case, Levine is the target of criminal obstruction-of-justice charges relating to his alleged scheme to block the SEC investigation. SEC attorney David Stanley said that Levine, his wife, his father and his brother all have refused to answer questions by invoking their 5th Amendment rights against self-incrimination.

Alan Levine, an attorney representing Philip and Robert Levine, Dennis' father and brother, declined comment on the 5th Amendment pleas. Alan Levine, an attorney with the firm of Kronish, Lieb, Weiner & Hellman, is not related to Dennis Levine.

Meanwhile, Owen today rejected a motion by Dennis Levine's attorneys that a declaration by SEC attorney Leonard W. Wang be stricken from the record or that Wang be required to testify on Thursday. Wang's declaration spells out most of the details of the SEC's allegations against Levine.

The judge also rejected a request by Levine's attorneys that the SEC be ordered to provide more documents about trades handled by Bank Leu and additional information about the government's immunity agreement with the bank.

The SEC's Stanley said that the agency had turned over more than 11 large boxes of records to Levine's attorneys. "He obviously has not even read what has been given," Stanley said of Flumenbaum.

"I think the task is now yours to see that the documents add up another way," Judge Owen told Flumenbaum. "Mr. Wang and the commission add them up one way."

Dennis Levine did not appear in court.