Friedman Billings Ramsey

capped off a scandal-tainted first quarter by reporting a 73% plunge in earnings.

A week ago, the Virginia-based investment firm warned investors to expect a sharp drop in earnings, due to a combination of rising interest rates and the cost of settling a probe into Friedman's role in a 2001 stock sale.

The investigation, which involves allegations of insider trading, led to the departure of three top officials with the firm, including Emanuel Friedman, the firm's co-founder.

In the quarter, Friedman Billings earned $24.4 million, or 14 cents a share, compared with $89.6 million, or 54 cents a share, a year ago. Last week, Friedman told investors to expect earnings to range between 13 and 15 cents a share. Before the warning, the handful of analysts who cover the firm had been expecting earnings of 30 cents a share.

Net revenue fell 26% in the quarter to $163 million.

Net investment income, much of which comes from Friedman Billings' big portfolio of mortgage-backed securities, was negative in the quarter, apparently as a result of higher interest rates. The company had a net interest loss of $377,000 in the quarter, compared with income of $26.6 million a year ago.

In a conference call Thursday morning, Friedman Billings officials said it had been a difficult quarter, but said the firm's customers and clients stand behind it.

"Our clients continue to have a great confidence in our ability to execute,'' said Eric Billings, the chief executive.

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Friedman Billings previously said it would set aside $7.5 million in the quarter to cover the cost of the expected settlement with the

Securities and Exchange Commission

and the

NASD

. The regulators have yet to say whether they will accept the terms of the firm's proposed settlement, which also would require Friedman Billings to hire a consultant to review its procedures for separating its brokerage arm from its investment banking division.

The firm's executives said it could take up to two months for the regulators of a final settlement to be announced.

The firm also previously said Emanuel Friedman, as well as its former top trader and a former compliance officer are all in settlement talks with regulators over their roles in placing a $12 million private investment in

Compudyne

( CDCY), a small security-systems manufacturer.

The investigation of Friedman Billings is part of a broad inquiry by securities regulators into manipulative trading in the $14 billion-a-year market for such deals, which are known on Wall Street as private investment in a public equity, or PIPEs.