Friedman, Billings, Ramsey Group Inc.'s brokerage subsidiary is close to settling a Securities and Exchange Commission investigation into a 2001 investment banking transaction, a source with knowledge of the matter said yesterday.
Last night, the Arlington-based investment house said it had set aside $7.5 million to cover an expected civil settlement for its role managing the private sale of $24 million in CompuDyne Corp. stock to 14 hedge funds. One of the managers of those hedge funds has already been cited by the NASD, the securities industry's main self-regulatory body, for improperly profiting on inside information given to her by FBR in advance of the offering.
The source, who spoke on the condition of anonymity because the settlement talks between the SEC and the firm have not been finalized, said Emanuel J. Friedman, who recently said he would retire as co-chief executive of the firm he founded in 1989, is involved in the settlement talks with the SEC for his role in the 2001 private stock placement. In addition, other individuals employed by the firm could be involved in the settlement, the source said.
The investigation stems from a broad inquiry into hedge fund involvement in private investments in public equity, or PIPE transactions, wherein a public company places stock to institutional investors in a private sale.
The 2001 CompuDyne transaction was a PIPE, managed by FBR. Annapolis-based CompuDyne, which sells security products, has said it will probably take legal action against investors in the 2001 PIPE on the grounds that the pricing of the offering was adversely affected by hedge funds trading on inside information.
FBR last night said its first-quarter earnings were $22 million to $25 million. The profit figures released by the firm were preliminary and compare with profit of $89.6 million in last year's first quarter.
Eric F. Billings, who is set to become sole chief executive after Friedman's retirement in June, said the "disappointing" results were less than what the firm anticipated in mid-March, the result of the $7.5 million reserve for the SEC settlement and the delay of several anticipated investment banking transactions from the first quarter into the second.
"While our first quarter results were clearly disappointing, we remain optimistic about our capital markets and principal investment portfolio businesses," Billings said in a statement.
An FBR spokesman said the firm declined to comment on the SEC investigation, and neither Billings nor Friedman was available for comment. The company will hold an investor conference call at 9 a.m. today.