Friedman Billings Ramsey ( FBR) may not be out of the woods yet on a stock sale that already has landed the firm in talks with securities regulators.

The Virginia-based investment outfit still could face potential litigation from Compudyne ( CDCY), the Maryland security-systems manufacturer that hired Friedman Billings four years ago to handle the $12 million deal.

Martin Roenigk, Compudyne's chairman and chief executive, says the small-cap company is considering "whatever remedies" are available to it in the wake of the revelation that Friedman Billings and three of the firm's top executives may have engaged in insider trading with regard to the company's 2001 PIPE, or private investment in public equity, deal.

FBR shocked Wall Street this week with the news that it proposed a $7.5 million settlement of the matter to securities regulators. The company said a charge associated with the settlement would slash first-quarter earnings.

One of the executives involved in discussions with regulators is Emanuel Friedman, a co-founder of FBR. He announced three weeks ago that he's stepping down as co-chairman and co-chief executive. Friedman's decision to suddenly leave the firm is related to his role in the scandal, sources say.

Compudyne "feels damaged and intends to pursue whatever remedies will result from that," says Roenigk, who has had lawyers looking into the matter for several months.

Bill Dixon, a Friedman Billings spokesman, declined to comment on the possibility of Compudyne suing the firm.

Trying to estimate Compudyne's potential damages is difficult, especially because much is still unknown about Friedman Billings' alleged misdeeds. People familiar with the inquiry say regulators have focused on trading activity by Friedman Billings in shares of Compudyne in advance of the PIPE becoming public. The investment firm may have been trying to profit from the typical decline in the shares of company that undertakes a PIPE deal.

One thing Compudyne surely might try to recoup is the $818,828 in investment banking fees it paid to Friedman Billings to place its discounted shares with more than two dozen hedge funds and wealthy individual investors.

The investigation of Friedman Billings is part of a broad inquiry by the Securities and Exchange Commission and the NASD 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.

Beyond the issue of Compudyne's damages, there's also the matter of how shareholders may respond to the investigation.

Sometime in the next few weeks, Friedman Billings is expected to file its annual proxy statement in which it details executive compensation for the past year. If the 2003 proxy statement is any guide, Friedman could be walking away from the firm he founded with a rich payday, even with the scandal hanging over his head.

In 2003, the firm paid Friedman a base salary of $480,000 and a $9 million bonus. In 2002, his bonus totaled $5.7 million.

The corporate scandals of the past few years have led to a number of shareholder class-actions in which investors seek to recoup gigantic bonuses paid to wayward executives. The list of scandal-tarred companies that have been sued by shareholders seeking to reclaim hefty bonuses includes Canadian-telecom Nortel ( NT) and software giant Computer Associates ( CA).

At this point, it's premature to predict how Friedman Billings' shareholders will respond to another big payday for the firm's departing founder. But it's a sure bet that some are waiting with anticipation for news of the firm's proxy statement to hit the tape.

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