SEC Files Settled Enforcement Action Against Broker-Dealer Friedman, Billings, Ramsey & Co., Inc.
FBR's Former CEO, Compliance Director and Head Trader Also Settle Charges
FOR IMMEDIATE RELEASE
Washington, D.C., December 20, 2006 - The Securities and Exchange Commission announced today that it has filed settled charges against a Virginia based broker-dealer, Friedman, Billings, Ramsey & Co., Inc. (FBR) for its unlawful insider trading, failure to establish, maintain and enforce policies and procedures, and unregistered sales of securities while serving as the placement agent for a Private Investment in Public Equity (PIPE) offering by CompuDyne Corporation.
Also charged today with separate violations were three of the company's former executives, Co-Chairman and Co-Chief Executive Officer, Emanuel Friedman, Director of Compliance, Nicholas Nichols, and Head Trader, Scott Dreyer.
To settle these charges, FBR consented to pay $3,755,839. Friedman and Nichols have each consented to pay $754,046 and $60,000, respectively. FBR, Friedman and Dreyer also consented to the entry of Commission orders censuring FBR and Dreyer, requiring Dreyer to pay $19,870, ordering FBR to comply with certain undertakings, and barring Friedman from association in a supervisory capacity with any broker or dealer with a right to reapply for such association after two years.
The Commission's complaint filed against FBR, Friedman and Nichols alleges that FBR 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.
Linda Chatman Thomsen, Director of the Commission's Division of Enforcement, said, "Insider trading by regulated entities is completely unacceptable. Broker-dealers have an especially high duty to maintain adequate policies and procedures to prevent the misuse of the material, nonpublic information with which they are entrusted. FBR violated that duty and today's action holds the firm accountable for its conduct."
Daniel M. Hawke, District Administrator of the Commission's Philadelphia Office, stated, "Individuals who exercise control over regulated entities will be held responsible when they fail to ensure that those entities comply with their obligations under the federal securities laws. The individuals charged in today's complaint failed to do so and are being held accountable for their failures to ensure FBR's compliance with those obligations."
The Commission's complaint, filed in the United States District Court for the District of Columbia, alleges that FBR's policies and procedures regarding the handling of material, nonpublic information were not reasonably designed to prevent the misuse of such information in the context of a PIPE offering and were not enforced by FBR, Friedman and Nichols in connection with the CompuDyne PIPE transaction in September and October 2001. These deficiencies in FBR's policies and procedures contributed to FBR's misuse of material, nonpublic information. In particular, FBR improperly traded by selling short CompuDyne securities in its market making account while aware of material, nonpublic information regarding the PIPE offering and prior to its public announcement. FBR profited by $343,773 as a result of this unlawful trading. FBR further profited from the underwriting fee of $1,764,000 that CompuDyne paid to the firm for its placement agent services.
The complaint further alleges that FBR and Friedman also engaged in 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 when there was not a resale registration statement in effect for the PIPE shares and covered its net short position with CompuDyne PIPE shares FBR bought from its own customers. These transactions effectively constituted unregistered sales of securities in violation of Section 5 of the Securities Act of 1933. FBR profited by an additional $97,831 as a result of these unregistered sales.
As a result of the above, the complaint alleges that FBR violated Sections 5 and 17(a) of the Securities Act and Sections 10(b) and 15(f) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, Friedman violated Section 5 of the Securities Act and is liable as a controlling person for FBR's violations of Sections 10(b) and 15(f) of the Exchange Act and Rule 10b-5. Nichols is also liable as a controlling person for FBR's violation of Section 15(f) of the Exchange Act. The Commission's order finds that Dreyer violated Section 5 of the Securities Act.
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 it from further violations of the antifraud, registration and other provisions of the federal securities laws. Friedman and Nichols also consented to the entry of a final judgment, without admitting or denying the allegations in the complaint and subject to the court's approval, permanently enjoining them as controlling persons from certain violations of the federal securities laws. Scott Dreyer consented to the issuance of a Commission order, without admitting or denying the order's findings, requiring him to cease-and-desist from committing or causing any registration violations.
The staff coordinated its investigation with the NASD, which also announced today separate settlements with FBR, Friedman and Nichols.
Daniel M. Hawke, District Administrator
Elaine C. Greenberg, Assistant District Administrator
Philadelphia District Office, (215) 597-3100
Additional materials: Litigation Release No. 19950; Administrative Proceeding No. 33-8761