Investment firm

Friedman Billings Ramsey

(FBR)

is paying $4.5 million to a company it managed a controversial private placement for in 2001.

The payment settles a lenghty dispute with

CompuDyne

( CDCY), a small Maryland security services company, that had retained Friedman Billings. The dispute stems from Friedman Billings' handling of a PIPE, or private investment in public equity, that raised about $12 million for CompuDyne.

A fund managed by William Blair, which also sold shares as part of the PIPE, is getting some of the settlement proceeds.

For several years, the CompuDyne PIPE deal has drawn great scrutiny form securities regulators looking into allegations of improper trading in the $22-billion-a-year market for PIPEs. The transaction has led to the filing of civil and criminal charges against some hedge fund managers who invested in the deal.

Friedman Billings itself has proposed paying $7.5 million to the

Securities and Exchange Commission

and the NASD to resolve allegations that some of its proprietary hedge funds misused confidential information about the CompuDyne PIPE.

A PIPE is a financing transaction in which small-cap companies raise cash by selling either discounted stock or a bond that converts into shares to hedge funds and other fast-money traders. The share price of a company doing a PIPE typically falls after a deal is announced to the public.

Friedman Billings says it set aside money for the settlement with CompuDyne in September. In the PIPE deal, CompuDyne sold 2.45 million shares at a sharp discount to the price they were selling for at the time.

"We are pleased to have settled with CompuDyne and look forward to resuming a mutually beneficial business relationship in the future," Friedman Billings says in a press release.

Meanwhile, securities regulators have yet to accept Friedman Billings' proposed settlement. The scandal involving FBR reached the highest levels of the investment firm and led to last year's resignation of Emanuel Friedman as co-chief executive of the firm he co-founded. FBR has said that Friedman and two other former top executives are also involved in settlement talks with regulators.

Last month

TheStreet.com

reported that a

federal grand jury in New York is looking into the possibility of filing criminal charges against other investors in the CompuDyne deal. The grand jury also has indicted one former hedge fund manager, Hilary Shane, who reached a $1.4 million civil settlement with the SEC and NASD some 16 months ago.

The grand jury is also looking at other questionable PIPE deals.