A regulatory investigation into

Friedman Billings Ramsey's

( NT) role in a 4-year-old stock deal officially has touched Emanuel Friedman, the co-founder of the investment firm that bears his name.

Late Tuesday, the investment firm confirmed that Friedman, who recently announced he is stepping down as co-chairman and co-chief executive of the firm, is "in discussions" with regulators about the stock deal.

When Friedman announced he was retiring earlier this month, he offered no explanation for his decision. But people familiar with the inquiry said his resignation was tied to the regulatory investigation by the

Securities and Exchange Commission

and the



The investment firm also said two other former employees, the firm's head trader and chief compliance officer, also are "in discussions with regulators." The firm said the two employees had recently retired.

The firm did not identify the other officials, but information from the firm's Web site listed Scott Dreyer as head of trading at the firm and Nicholas Nichols as the compliance officer. 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.

The firm, meanwhile, said it has reached a proposed settlement with the SEC and NASD over its role in the so-called PIPE, shorthand for private investment in public equity. The company said it has proposed paying a $3.5 million fine and hiring a consultant to review its procedures for separating its brokerage arm from its investment banking division.

Late Monday, the firm said that in an expectation of a deal with regulators, it would take a $7.5 million charge against first-quarter earnings. The cost of settling the regulatory matter contributed to the firm's warning that earnings would fall 50% short of analyst expectations.

The news of the earnings miss chopped 13% from Friedman Billing's stock price to $12.52.

The investigation of Friedman Billings is part of a broad inquiry by securities regulators into manipulative trading in the $14 billion-a-year 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 SEC is working in tandem with a parallel inquiry by the NASD.

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.

The investigation of the 2001 PIPE deal for


( CDCY) already has resulted in securities charges against hedge fund manager Hilary Shane.

The NASD complaint alleges Shane improperly bet against shares of Compudyne in advance of the stock sale, for both her own account and the hedge fund she formerly managed, First New York's FNY Millennium Partners fund. The NASD's complaint against Shane is still pending, although sources say the parties are close to reaching a settlement.