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FBR's Friedman Quitting

Founder Leaving As Hedge Fund Deal Is Probed

By Terence O'Hara
Washington Post Staff Writer
Tuesday, April 5, 2005; Page E01

Emanuel J. Friedman yesterday abruptly announced his departure as co-chief executive of the Arlington firm he founded 16 years ago and built into the dominant investment bank in the Washington area.

Friedman, Billings, Ramsey Group Inc. said that the last of its founders for which it was named, Eric F. Billings, will solely assume the titles of chairman and chief executive, which he has shared with Friedman.

Emanuel J. Friedman, a founder who helped build Friedman, Billings, Ramsey into a powerhouse investment bank, unexpectedly announced that he will retire on June 9. (Olivier Douliery For The Washington Post)

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"Manny" Friedman, 58, will quit his executive post and the board of directors when the retirement becomes official June 9.

Neither the company nor Friedman disclosed the reasons for his departure.

The Securities and Exchange Commission and the NASD are investigating FBR's 2001 role in marketing shares of Annapolis-based CompuDyne Corp. to a group of hedge funds. A manager of one of those hedge funds has already been cited by the NASD for allegedly profiting from inside information.

Friedman was in charge of FBR's hedge fund investing.

"I'm not going to characterize his retirement beyond the announcement we released," said firm spokesman Bill Dixon, who said Friedman would not comment beyond his brief statement in yesterday's announcement.

"All of us at FBR owe Manny a tremendous debt of gratitude," Billings said in a written statement.

Friedman in a written statement said, "I have great confidence in FBR's future."

FBR began as a private money manager for clients of its three founders, but in the past decade it has morphed into one of the country's leading managers of initial stock offerings, especially for real estate and financial services companies.

The announcement came without notice, and several of FBR's 700 employees expressed surprise yesterday. Friedman was the most public face of the company. A former history teacher, he is a prolific day-trader of stocks who ran the firm's hedge funds and managed the portfolios of FBR's wealthiest clients.

W. Russell Ramsey resigned from FBR in 2001 to form his own money management firm, though he remains on FBR's board.

The hedge fund industry has been under increasing regulatory scrutiny in the past year. Hedge funds are investment partnerships that engage in risky and often complicated investment strategies for wealthy investors or institutions. The SEC has said it is scrutinizing the role of hedge funds in purchasing large blocks of stock from public companies through private transactions.

FBR manages its own hedge funds for clients.

The SEC and NASD are investigating an October 2001 deal in which FBR's investment banking department sold more than $24 million of CompuDyne's stock to 14 investors, mostly hedge funds. The shares in the transaction were sold by both CompuDyne and CompuDyne's largest shareholder, William Blair & Co.

NASD has already brought a civil complaint against one of the investors, former New York hedge fund manager Hilary L. Shane. According to a complaint filed against her by the enforcement arm of the securities industry, Shane made more than $1.1 million in profit by shorting CompuDyne's stock -- or betting that the stock would decline in value -- in late September and October 2001. An FBR representative had told her about the upcoming CompuDyne stock sale on Sept. 27 and invited her to invest, according to the NASD complaint.

Large private sales of stock usually depress the market value of a public company because the shares are sold at a discount to the then-trading price. In addition, shorting a stock often drives down a stock's price. NASD said that Shane shorted CompuDyne's stock while in possession of "non-public, material information" about CompuDyne and is asking that she give back the profit.

Friedman is not named in the Shane complaint. Shane, who left her New York money management firm in 2002, could not be reached for comment.

Both the SEC and NASD declined to comment.

In February, when they learned of the Shane action, CompuDyne and William Blair & Co. said they were "investigating this matter themselves and are evaluating their options for recovery."

In its most recent SEC filing, FBR did not say if it or any officers were the subject of the investigation, only that it was cooperating with the inquiry. FBR's Dixon declined to comment on the investigation.

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