Investment banker Emanuel Friedman, a co-founder and former chairman and CEO of Friedman Billings Ramsey ( FBR), is receiving a harsh penalty from securities regulators for his role in an improper insider trading scheme in a five-year-old private placement. The Securities and Exchange Commission jointly imposed a $1.2 million fine as part of settlement with Friedman, who resigned from the investment firm more than a year ago after it became clear regulators intended to bring an enforcement action against him and the firm he helped start. Friedman Billings is paying a $7.7 million penalty for its role in the improper trading affair. Friedman, who recently launched a new unregistered investment firm called EJF Capital, is barred from serving in a supervisory role for a brokerage firm for the next two years. The settlement with Friedman stems from a long-running investigation into allegations of improper short-selling by hedge funds and other traders in a so-called PIPE, or private investment in public equity, that raised $12 million for Compudyne ( CDCY), a small Maryland security firm. The Compudyne investigation arises from a two-year-old probe into improper trading in the $22 billion-a-year market for PIPEs, which is a popular financing method for cash-strapped small companies. Friedman Billings arranged the PIPE deal for Compudyne and lined up hedge funds to buy the sharply discounted shares that the company was selling in order to raise capital. As the investment banker on the deal, Friedman Billings earned a fee in excess of $1.76 million dollars.