In an ironic bit of prophesy, the managing director of Bank Leu International Ltd.'s Bahamian office warned colleagues five years ago that the Securities and Exchange Commission was getting tough on illegal insider trading.

Jean-Pierre Fraysse advised, "We had to be quite careful if we had clients sailing a bit too close to the wind. We have one," Fraysse said in the interoffice memo.

Bank Leu's client, Dennis B. Levine, the subject of the memo, was not only sailing too close to the wind, he pitch-poled and sank the boat.

Now, the question is how many others Levine will take down with him following his guilty plea last week to federal charges of illegal insider trading and his pledge to cooperate with prosecutors. Levine is expected implicate others in important positions in New York's investment community who, like Levine, will be accused of taking personal advantage of confidential information about takeovers and mergers to make a killing on the stock market or boost their careers.

While the SEC's crackdown has drawn applause from Congress and many other quarters, there is some faint growling from a few critics who warn that the commission may be stretching its enforcement powers too far.

By reaching past Levine to the loose network of arbitrageurs, traders and lawyers who are hooked up to the Wall Street grapevine, the SEC risks disrupting the innocent flow of tips, speculation and inside dope that helps grease the stock market, the critics say.

For the first time, the SEC's targets are not just classic "insiders" -- corporate directors or executives who know of big news within the company and buy the stock; nor are they only those outside the company who get inside information based on a clear position of trust and accountability, like a lawyer or investment adviser.

Now, using its new Rule 14e-3, the SEC has its sights on anyone who buys stock in a merger or takeover situation using confidential inside information and knowing that it came from an inside source.

"A chill has settled on Wall Street's community of risk arbitrageurs, traders who speculate in takeover stocks and who have played a key rule in this decade's corporate takeover surge," said Barron's this week. Especially at risk are the arbitrageurs, professional traders whose profits come from carefully calculated moves in and out of a company's stock during takeover situations.

Barron's noted that the trading volume on the New York Stock Exchange had dropped to 110 million shares last Thursday from 135 million shares the week before. Market followers saw this dip as evidence that uneasy traders were on the sidelines, Barron's said.

While the SEC is taking its full swing at inside traders, it doesn't want to be accused of mucking up markets.

SEC Commissioner Joseph Grundfest sought to reassure the securities industry that the recent insider cases against Levine and others don't signal a general war on traders.

"Absolutely nothing that has happened in the past month should cause any concern to arbitrageurs or bankers who have not clearly traded on the basis of misappropriated information or information obtained in the breach of a fiduciary duty," Grundfest said in a recent speech.

"However, if an arbitrageur has traded on the basis of inside information and the information was misappropriated, I think he has a good reason to be concerned and I encourage that concern," Grundfest said.

He added that the SEC is not trying to eliminate the quest for information. And it isn't trying to create a "level playing field" where all investors have the same access to information at the same time. It just doesn't want people to steal the information.

"In the stock market, the race is to the swift, not the thieves," he said in an interview. Assuming that most traders are not thieves, there should be no drop-off in trading even with the publicity of the Levine case, Grundfest maintains. (He cited newly gathered statistics to back his claim: In the year before Levine's guilty plea last week, trading on the New York Stock Exchange averaged about 126 million shares daily. Since then, the average has been almost 124 million shares.)

Some attorneys who defend accused inside traders contend the level of risk has been greatly elevated by the SEC's Rule 14e-3 and its use in the Levine case and the recent prosecutions of five young professionals in the financial community.

The rule appears to make a trader responsible for finding out where a hot stock tip comes from, says Eugene Propper, a former federal prosecutor and now a Washington trial attorney. Investors can't trade on information they know -- or have reason to know -- is covered by the rule, he said.

"The real question is, how far can an arb go" -- without risking a jail term -- in seeking out strategic information about a company's prospects and then using that information to invest, said Propper. "At what point as information passes along does it melt into a general rumor and surmise that surrounds the market place?"

It's a gray area, he said.

Grundfest responds that the SEC will take care to avoid the grayer, murky applications of the insider laws. "I think it makes sense to focus on those cases that present stark black-and-white issues rather than become protracted in endless litigation over fuzzy fact patterns, and perhaps strained interpretations of the law," he said.

Of course, the first line of defense remains with the financial institutions, law offices and investment banking firms who deal directly with the inside information. If they can't tell black from white, no one can. And it will help if they ask.

In one of the current insider cases, a 27-year-old analyst was purportedly bringing back some of the hottest possible information about confidential, upcoming takeover deals to his superiors at a prominent investment firm.

The analyst says he told his superiors that the dope was inside information improperly obtained. The firm disputes it. But accepting its version, the firm didn't try to find out how a young rookie could come up with such scoops.

If a colleague comes back from lunch with a $20 bill he says he found on the sidewalk, you'd call him lucky. If he repeats the trick once or twice a week, you might start to wonder.