Friedman Billings Emerges in Feds' PIPEs Investigation

A 10-month regulatory investigation into the murky world of private placements and hedge funds might have found its first target in Friedman Billings Ramsey(FBR).

The Arlington, Va., investment firm disclosed late Tuesday that the Securities and Exchange Commission and the NASD are jointly investigating the firm's role as the placement agent for a private stock deal in 2001.

This spring, the SEC issued subpoenas and requests for documents to 20 brokerages that have arranged so-called PIPE deals -- private placements in public equity -- for cash-strapped companies. Regulators subsequently issued subpoenas to about 10 hedge funds, seeking information about their trading activity in certain PIPE transactions.

Friedman is the first Wall Street firm to publicly acknowledge that regulators are scrutinizing its role as a PIPE placement agent. Shares of the securities firm fell 64 cents, or 3.6%, to $16.95, on the news.

The investigation into the $14 billion PIPEs market is focusing on allegations of stock manipulation by hedge funds, which tend to be the biggest investors in these shadowy stock sales. PIPEs are popular with hedge funds because the buyers can get preferred stock or bonds that convert into shares at a discount to market prices. The deals often include sweeteners, such as warrants, that permit the private investors to buy additional shares at prices well below what ordinary investors would pay for them.

Friedman, in the filing, didn't identify the company that issued the PIPE. Bill Dixon, a Friedman spokesman, says the company will let "the filing speak for itself."

But people familiar with the investigation say the deal drawing regulatory scrutiny is a $12 million stock sale in October 2001 for CompuDyne(CDCY), a Maryland-based security systems manufacturer.

Martin Roenigk, a CompuDyne spokesman, says he can neither confirm nor deny that the SEC is looking into three-year-old PIPE deal. He said the company is not being investigated.