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.

"We are not being investigated, but that doesn't mean someone hasn't asked questions about what someone may else have done," he says.

In 2001, Friedman managed only one other PIPE deal, a $15 million transaction for mortgage lender

New Century Financial

(NEW) - Get Report

, according to PlacementTracker, a PIPE tracking service. A spokeswoman for New Century says she's not aware of any regulatory investigation involving that transaction.

People familiar with the PIPEs inquiry say regulators are not looking into the conduct of the issuing companies. Rather, regulators are looking for evidence that a select group of investors took unfair advantage of the usual decline in a company's share price after a stock placement is announced.

Common shares often decline in a PIPE transaction when hedge fund investors sell shares short to lock in a profit. The hedge funds then use the discounted stock they get in the deal to close out previously established short positions.

Regulators are concerned that some hedge funds may be finding out prematurely that a company is considering a PIPE deal. With that inside information, a hedge fund can then set up a short position on stock, betting that a flood of discounted shares will drive down the price. In some instances, the hedge funds making these short bets don't even end up investing in the PIPE.

Regulators also are looking into allegations of stock manipulation by some of the hedge funds that invest in PIPEs. And at least one of the investors in the CompuDyne deal had ties to Rhino Advisors, a now-defunct investment advisory firm that's no stranger to controversy when it comes to PIPE transactions.

In February 2003, Rhino was involved in one of the first enforcement actions brought by the SEC in a PIPE transaction. The defunct firm was fined $1 million for manipulating the stock of

Sedona

, a tiny software company, in conjunction with a $3 million PIPE deal.

The SEC imposed a $1 million fine on Rhino, charging it with orchestrating a scheme to short Sedona's stock on behalf of an overseas hedge fund, Swiss-based

Amro International

. Federal prosecutors in New York subsequently charged the principals of Rhino, Thomas Badian and Andreas Badian, with conspiracy to commit securities fraud.

Just before the criminal charges were filed, Thomas Badian left the country and hasn't returned.

In the CompuDyne deal, Rhino was the investment adviser to

Radyr Investments

, according to PlacementTracker.