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Wall Street banker Emanuel Friedman could be charged with "aiding and abetting" insider trading in a 2001 private stock placement that was handled by

Friedman Billings Ramsey


, the investment firm he co-founded, a brokerage document shows.

Friedman learned of the potential civil charges on April 28, a day after he resigned as co-chairman and co-chief executive of FBR. Regulators from the

Securities and Exchange Commission

and the


both served Friedman with a so-called Wells notice, according to a recently updated copy of his brokerage registration statement.

A Wells notice is a preliminary determination by regulators that an investigation warrants the filing of civil charges.

The potential charges against Friedman stem from a 2001 private placement FBR managed for


( CDCYE), a small Maryland security-systems manufacturer. The $12 million Compudyne stock sale has become a major headache for FBR, leading not only to Friedman's sudden resignation but the resignations of the firm's top trader and its compliance officer.

The Arlington, Va.-based firm previously has said it's involved in settlement talks with the SEC and NASD over allegations that it, too, violated insider trading rules involving shares of Compudyne. The firm proposed paying $7.5 million in fines and restitution for misusing confidential information about the Compudyne deal, which was a type of financing known on Wall Street known as private investment in public equity, or PIPE. Friedman also offered to hire a consultant to review its procedures for separating its brokerage arm from its investment banking division.

The regulators have yet to say whether they will accept the terms of the firm's proposed settlement.

Last week, former hedge fund manager Hilary Shane agreed to pay $1.45 million in fines and restitution after being charged by securities regulators with fraud and insider trading in the same PIPE deal. The settlement with Shane is the first one to emerge from a yearlong investigation into stock manipulation in the $14 billion market for PIPEs, which are used mainly by small, cash-strapped companies.

The fallout from the regulatory investigation has contributed to a 31% slide in FBR's stock price this year and spawned a flood of class-action lawsuits.

The disclosure of the filing of the Wells notices against Friedman is the first official confirmation that the 58-year-old banker could be formally charged in the investigation. Up until now, all FBR has said is that Friedman and two other top executives were also involved in settlement discussions with regulators.

The other two executives -- Scott Dreyer, head of trading at the firm, and Nicholas Nichols, FBR's compliance officer -- also have left. Dreyer is the brother-in-law of Jonathan Billings, the firm's senior managing director for trading. Jonathan Billings is the brother of Eric Billings, the chairman of the firm.

Securities regulators also have served Wells notices on Dreyer and Nichols, contending they aided and abetted wrongful activity.

To date, FBR has shed little light on the nature of violations alleged by regulators. People familiar with the investigation say it has focused on trading activity by FBR in shares of Compudyne in advance of the PIPE becoming public. The investment firm may have been shorting shares of Compudyne in order to profit from the typical decline in the shares of a company doing a PIPE deal.

Friedman's registration statement says "the activities being investigated include trading done in the subject issuer's stock on behalf of FBR (in a firm account)."

Friedman's attorney, Harry Weiss, could not be reached for comment.

An FBR spokesman said, "Mr. Friedman is no longer with the firm and is dealing with the regulators as an individual. Because these are pending matters, we are not able to comment further at this time."

The investigation of the Compudyne deal is part of a broader inquiry by securities regulators into manipulative trading in the PIPEs market. A year ago, the SEC issued subpoenas and requests for documents to 20 brokerages that arranged PIPE deals for cash-strapped companies. Regulators subsequently issued subpoenas to about 10 hedge funds.

The probe is focusing on allegations of stock manipulation by hedge funds, which tend to be the biggest investors in these shadowy stock sales, and allegations of wrongdoing by the Wall Street firms that round up buyers. PIPEs are popular with hedge funds because the buyers can get preferred stock or bonds that convert into common shares at a discount to market prices.