U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19950 / December 20, 2006
Securities and Exchange Commission v. Friedman, Billings, Ramsey & Co., Inc., Emanuel J. Friedman and Nicholas J. Nichols, Civil Action No. 06-CV-02160 (D.D.C.)
SEC Files Settled Charges Against Broker-Dealer Friedman, Billings, Ramsey & Co., Inc., in Connection with CompuDyne Pipe Offering, for Policies and Procedures Failures Relating to Handling of Material, Nonpublic Information, Insider Trading and Unregistered Sales of Securities
FBR'S Former CEO and Former Compliance Director Also Settle as Controlling Persons
On December 20, 2006, the Securities and Exchange Commission (Commission) filed a complaint against Friedman, Billings, Ramsey & Co., Inc. (FBR), a registered broker-dealer, in the United States District Court for the District of Columbia alleging that FBR, in connection with a Private Investment in Public Equity (PIPE) offering: (i) failed to establish, maintain and enforce policies and procedures reasonably designed to prevent the misuse of material, nonpublic information; (ii) unlawfully traded while aware of material, nonpublic information; and (iii) conducted unregistered sales of securities.
The Commission's complaint alleges that in September 2001, FBR entered into an investment banking relationship with CompuDyne Corporation (CompuDyne) whereby FBR agreed to serve as placement agent for a PIPE offering by CompuDyne. FBR's policies and procedures regarding the handling of material, nonpublic information were not appropriately tailored to the nature of FBR's business, in connection with serving as a placement agent for a PIPE offering, and were not enforced by FBR, its former Co-Chairman and Co-Chief Executive Officer, Emanuel Friedman, or its former Director of Compliance, Nicholas Nichols, during the CompuDyne PIPE offering. These deficiencies in FBR's policies and procedures contributed to FBR's misuse of material, nonpublic information. In particular, FBR engaged in unlawful insider trading by selling short CompuDyne securities in FBR's market making account while aware of material, nonpublic information regarding the PIPE offering and prior to its public announcement. FBR and Friedman also conducted unregistered sales of securities in connection with the PIPE offering. In particular, FBR's head trader, consistent with Friedman's prior trading directions, bought and sold short CompuDyne securities in its market making account when there was not a resale registration statement in effect for the PIPE shares and covered its net short position with CompuDyne shares FBR bought from its own customers, who purchased their shares in the PIPE offering.
The complaint further alleges that FBR profited by $343,773 as a result of its improper trading in its market making account before the public announcement of the PIPE offering. FBR profited by an additional $97,831 as a result of its unregistered sales of securities relating to the PIPE offering. FBR further profited from the underwriting fee of $1,764,000 that CompuDyne paid to FBR for its placement agent services.
The Commission's complaint also alleges that FBR's short selling of CompuDyne shares prior to the public announcement of the PIPE offering violated Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. In addition, the complaint alleges that, pursuant to Section 20(a) of the Exchange Act, Friedman is liable as a controlling person for FBR's violations of Section 10(b) of the Exchange Act and Rule 10b-5. The complaint also alleges that FBR violated Section 15(f) of the Exchange Act by failing to establish, maintain and enforce policies and procedures reasonably designed to prevent the misuse of material, nonpublic information. The complaint alleges that, pursuant to Section 20(a) of the Exchange Act, Friedman and Nichols are liable as controlling persons for FBR's violations of Section 15(f) of the Exchange Act. The complaint further alleges that FBR and Friedman violated Sections 5(a) and 5(c) of the Securities Act by short selling CompuDyne shares prior to the effective date of the resale registration statement for the PIPE shares and covering those short sales with the shares they purchased from FBR's customers, who acquired their shares in the PIPE offering.
Without admitting or denying the allegations in the complaint, FBR consented to the entry of a final judgment, subject to the court's approval, in which it is: permanently enjoined from further violations of Sections 5 and 17(a) of the Securities Act and Sections 10(b) and 15(f) of the Exchange Act and Rule 10b-5 thereunder; and ordered to pay disgorgement of its trading profits and placement agent fees, plus prejudgment interest, and civil penalties totaling $3,755,839. FBR also has consented to the entry of a Commission order censuring FBR and ordering it to comply with certain undertakings. Without admitting or denying the allegations in the complaint, Friedman consented to the entry of a final judgment, in which he is: permanently enjoined from violating Section 5 of the Securities Act and, as a controlling person, from violating Sections 10(b) and 15(f) of the Exchange Act and Rule 10b-5 thereunder; and ordered to pay civil penalties of $754,046. Friedman also consented to the entry of a Commission order barring him from association in a supervisory capacity with any broker or dealer with a right to reapply for such association after two years. Without admitting or denying the allegations in the complaint, Nichols consented to the entry of a final judgment in which he is: permanently enjoined as a controlling person from violating Section 15(f) of the Exchange Act; and ordered to pay a civil penalty of $60,000.
The staff coordinated its investigation with the NASD, which also announced today separate settlements with FBR, Friedman and Nichols.
Administrative Proceeding No. 33-8761; Complaint