Capital Markets

FBR, Three ex-Execs Settle PIPE Probe

The broker-dealer and former executives are charged with selling short before a PIPE deal was made public.
Stephen TaubDecember 21, 2006

Friedman, Billings, Ramsey—and three of its former executives—have settled charges with the Securities and Exchange Commission related to a PIPE (private investment in public equity) deal involving CompuDyne Corp.

FBR was accused of unlawful insider trading, failure to establish, maintain and enforce policies and procedures, and unregistered sales of securities while serving as the placement agent for the PIPE offering. Three of the company’s former executives were also charged: Emanuel Friedman, the company’s former co-chairman and co-chief executive officer; Nicholas Nichols, a one-time director of compliance; and head trader Scott Dreyer.

The Arlington, Virginia-based broker-dealer agreed to pay $3,755,839, while Emanuel Friedman and Nichols each agreed to pay $754,046 and $60,000, respectively. FBR, Emanuel Friedman, and Dreyer also consented to the entry of SEC orders censuring FBR and Dreyer. Emanuel Friedman was barred from serving in a supervisory capacity with any broker or dealer for two years. Furthermore, the order mandated that Dreyer pay $19,870, while FBR was ordered to comply with certain remedial endeavors.

The Commission’s complaint filed against FBR, Emanuel Friedman, and Nichols alleges that the company and individuals failed to establish, maintain, and enforce policies and procedures reasonably designed to prevent the misuse of material, nonpublic information in connection with the CompuDyne PIPE offering. FBR also unlawfully traded while aware of material, nonpublic information, and conducted unregistered sales of securities, according to the SEC. The CompuDyne transaction took place between September and October 2001.

The deficiencies in FBR’s policies and procedures contributed to FBR’s misuse of nonpublic information, the SEC maintains. In particular, the SEC charged that FBR improperly traded by selling short CompuDyne securities in its market making account while aware of nonpublic information regarding the PIPE offering. FBR earned $343,773 as a result of the suspected unlawful trading, stated the complaint. FBR further profited from the underwriting fee of $1,764,000 that CompuDyne paid to the firm for its placement agent services, according to the complaint.

The SEC also charges that FBR and Emanuel Friedman engaged in unregistered sales of securities in connection with the PIPE offering. What’s more, the complaint alleges that Dreyer—adhereing to Friedman’s prior trading directions—bought and sold short CompuDyne securities when there was not a resale registration statement in effect for the PIPE shares. Dreyer also covered FBR’s net short position with CompuDyne PIPE shares that FBR bought from its own customers.

These transactions effectively constituted unregistered sales of securities in violation of the Securities Act of 1933, according to the SEC. FBR profited by an additional $97,831 as a result of these unregistered sales, insists the regulator.

Without admitting or denying the allegations in the complaint, FBR consented to the entry of a final judgment, subject to the court’s approval, permanently enjoining the company from further violations of the antifraud, registration and other provisions of the federal securities laws. Similarly, Emanuel Friedman and Nichols consented to the final order, without admitting or denying the allegations in the complaint. Again, subject to the court’s approval, the two executives are permanently enjoined as controlling persons from certain violations of the federal securities law

Without admitting or denying the order’s findings, Dreyer also consented to the issuance of an SEC order, requiring him to cease-and-desist from committing or causing any registration violations. The Washington Post reported that FBR lawyer, Wallace L. Timmeny, said the matter was “absolutely finished,” contending that, “We are all very pleased that it is completely over.”