Regulators May Sue FBR FiguresBy Terence O'Hara

Thursday, May 26, 2005

Securities regulators have told Emanuel J. Friedman and two other former executives of Friedman, Billings, Ramsey Group Inc. that the agencies are considering civil litigation against them for FBR's alleged improper trading in a client company's stock.

According to documents FBR filed yesterday, the Securities and Exchange Commission and NASD gave Wells notices to Friedman, former compliance chief Nicholas J. Nichols and former equity trading head Scott E. Dreyer.

A Wells notice reveals the results of an investigation and provides the target of the investigation an opportunity to argue why a civil suit should not be filed. Such a notice is an indication that the enforcement staff of the SEC or NASD has decided that a lawsuit is justified.

Spokesmen for NASD and the SEC said the agencies had no comment. NASD is the main self-regulatory body of the securities industry.

The investigations stem from an FBR-managed private sale of stock in 2001 for CompuDyne Corp., a Maryland security-products company. One investor in the stock placement, former New York hedge fund manager Hilary Shane, has been fined $1.45 million for improperly trading in CompuDyne stock before the private sale.

FBR has been under investigation since late last year, and last month offered $7.5 million to settle charges that it improperly traded CompuDyne stock. Friedman, Dreyer and Nichols resigned last month when the investigation in the CompuDyne deal targeted them personally.

Neither Dreyer nor lawyers for Nichols and Friedman returned phone calls requesting comment.

"The firm's broker-dealer subsidiary is awaiting consideration of an offer of settlement made to the staffs of the SEC and NASD," FBR spokesman Bill Dixon said in a written statement. "Mr. Friedman is no longer with the firm and is dealing with the regulators as an individual. Mr. Nichols and Mr. Dreyer are no longer with the firm, and are dealing with the regulators as individuals. Because these are pending matters, we are not able to comment further at this time."

Yesterday's filings, procedural papers that stock brokerages must provide NASD and state securities regulators whenever one of their brokers leaves a firm, indicate that the SEC and NASD have accused the men of violating securities laws. "The activities being investigated include trading done in [CompuDyne's] stock on behalf of FBR (in a firm account) during the offering process," the filings said.

As manager of CompuDyne's private offering, FBR was in possession of material, nonpublic information about the company and the pricing of the pending stock sale, and so was barred from making any trades in the company's stock based on that information, according to sources familiar with the case who declined to comment because negotiations with the three men are ongoing. Yesterday's filing indicates that trading was done in an FBR account, with the firm's own capital, in addition to any possible trades that took place in FBR client accounts.

The filings also say the investigations are focusing on FBR's so-called Chinese wall procedures, rules designed to keep investment banking client information from reaching stock traders and brokerage clients of the investment bank.

As former co-chief executive, Friedman was involved in both the stock trading activities and investment banking activities of FBR, and Dreyer would have approved any trades in CompuDyne stock. Nichols was responsible for making sure the firm complied with Chinese wall rules.

Annapolis-based CompuDyne has sued Shane for her improper trading before the 2001 stock sale, and the company has said it is considering other legal options.

Private stock placements in public companies, such as the 2001 deal, often cause stock prices to fall. To profit from that expectation, Shane "shorted" CompuDyne stock in the weeks before the offering, a type of trade in which investors replace high-price borrowed stock with lower-price purchased stock, and keep the difference in price.