FBR Settles Allegations of CompuDyne Inside Trades
Washington Post Staff Writer
Thursday, November 23, 2006; Page D01
Friedman, Billings, Ramsey Group will pay $4.5 million to settle allegations by former investment banking client CompuDyne that it engaged in insider trading of CompuDyne stock.
The transaction in question, the private sale in 2001 of $24 million worth of CompuDyne stock to 14 hedge funds, led to investigations into the company, normally known by its initials FBR, and a number of its hedge fund clients by NASD and the Securities and Exchange Commission. It also led to the departure of several FBR executives, including co-founder Emanuel J. Friedman. FBR last year offered to pay $7.5 million in civil fines to NASD, the securities industry's self-regulatory body, and the SEC, but neither accepted the offer and both are continuing to investigate the matter.
The Arlington investment company is alleged to have used insider information on the CompuDyne deal to profit from trades in CompuDyne stock. Several hedge fund managers who participated in the stock sale also profited from the inside information, according to court and regulatory cases. One, former hedge fund manager Hilary L. Shane, was indicted in September on five counts of securities fraud in connection with the deal. She pleaded not guilty. Shane paid $1.45 million to settle a civil investigation by the SEC and was banned from the industry by NASD.
As part of the settlement with CompuDyne, an Annapolis security products company, FBR admitted no wrongdoing. FBR said in a written statement that the settlement would allow the two companies to do business again. An FBR spokeswoman declined further comment, and officials from CompuDyne did not return calls yesterday seeking comment.
CompuDyne and William Blair Mezzanine Capital Fund II, which at the time of the deal was CompuDyne's largest shareholder, previously said they would evaluate their options for recovering money lost in the FBR-managed transaction.
The SEC and NASD have been investigating dozens of deals like this one. Known as PIPEs -- private investments in public equity -- the deals have the potential to breach the separation between the firm's investment bankers and stock traders, NASD officials said.
For FBR, the settlement adds to two years of financial problems. The company has lost more than $240 million since the beginning of 2005, mostly on its mortgage-related businesses. FBR lost money on its large portfolio of mortgage investments, on its direct investments in mortgage banking companies, and on its Florida-based mortgage banking subsidiary.
FBR sold 28 percent of its investment banking business this year to outside investors for about $242 million. The sale was part of the firm's strategy of putting some distance between its profitable investment banking operations and its mortgage business. While FBR's stock price rose to nearly $12 a share after the deal was announced in June, it has since fallen and closed yesterday at $7.49, up 12 cents.
