Friedman, Billings, Ramsey Group Inc. has agreed to pay $7.5 million in fines to securities regulators for improperly trading shares of CompuDyne Corp. while it was engaged as an investment banker for CompuDyne in 2001, the company said yesterday.
The agreement is with the enforcement staffs of NASD, the securities industry's main self-regulatory arm, and the Securities and Exchange Commission and must still be formally approved by both agencies.
The announcement came as two more top employees left the Arlington investment company in connection with the firm's trading in CompuDyne. Their departure follows the planned retirement of company co-founder and co-chief executive Emanuel J. Friedman. FBR said all three are negotiating settlements with regulators for their role in the improper trading.
"We take this incident very seriously and are pleased to be moving toward what we believe will be a satisfactory resolution with the regulators," FBR chief executive Eric F. Billings said in a written statement. "We cooperated fully with the investigations and believe that we have made the changes necessary to put this behind us and move forward for our clients and our shareholders."
FBR's proposed settlement would be the largest so far in the SEC's ongoing inquiry into hedge fund involvement in private stock sales by public companies. CompuDyne's 2001 deal was a private sale of a large block of company stock to 14 hedge funds, and a manager of one of those hedge funds has already been cited by NASD for insider trading in CompuDyne stock ahead of the deal. Last week, the SEC charged a former managing director of investment banking firm SG Cowen & Co. with insider trading and fraud, saying he profited from trades in 10 companies that sold blocks of their stock in private sales.
FBR disclosed on Monday that it had set aside $7.5 million to cover the fine and repay profit from the improper trades. An NASD spokesman declined to comment, and officials with the SEC did not return phone calls. FBR stock fell 13 percent yesterday to close at $12.52.
Friedman, who remains employed at FBR but has not been involved in company operations since announcing his retirement this month, declined through a firm spokesman to comment. Billings, who co-founded the firm with Friedman in 1989, also declined through a spokesman to comment beyond his statement.
The two men who left the firm yesterday were Nicholas J. Nichols, the firm's head of compliance and one of FBR's 17 original employees, and Scott E. Dreyer, the head of trading, who joined the firm in 1992. Nichols declined to comment yesterday. Dreyer, who managed all trading by the firm in more than 440 public companies, did not return a phone message left at his home last night.
The investigation of FBR was sparked by an NASD examination of unusual trading in the stock of CompuDyne, a publicly traded security products company in Annapolis.
FBR had been hired to manage the sale to private investors of a large block of CompuDyne stock in October 2001. Securities industry regulations require that investment banking departments not share information about major transactions they are managing with the stock trading side of the firm. Known in industry parlance as a Chinese wall, the regulation is meant to prevent the firm or any of its brokerage clients from making trades based on inside information.
A source with knowledge of the FBR settlement said Dreyer's department handled "short" trades in CompuDyne prior to its October private placement. A short trade allows an investor to profit from a drop in the market price of a stock. Large private placements of publicly traded stocks typically are sold at a discount to the market price of the stock and can depress the market value once they are announced.
In his position as co-chief executive of the firm, Friedman would have known about the investment banking transaction for CompuDyne before it was announced, said the source, who spoke on the condition of anonymity because the three men's settlement discussions are ongoing. Nichols, the compliance officer, did not participate in any exchange of insider information or trading but was responsible for making sure the Chinese wall rules were followed.
