8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported) December 20, 2006

FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.

(Exact name of Registrant as specified in charter)

Virginia	000-50230	54-1873198
(State or other jurisdiction of incorporation)	(Commission file number)	(IRS employer identification no.)
1001 Nineteenth Street North, Arlington, Virginia		22209
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code (703) 312-9500

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Section 8 — Other Events

Item 8.01 Other Events

On December 20, 2006, Friedman, Billings, Ramsey Group, Inc. (the “Company”) issued a press release announcing that the Securities and Exchange Commission (the “SEC”) and NASD accepted the settlement offers made by the Company’s broker-dealer subsidiary, Friedman, Billings, Ramsey & Co., Inc. (“FBR & Co.”), with respect to alleged violations relating to FBR & Co.’s trading in a company account and the offering of a private investment in public equity (“PIPE”) on behalf of CompuDyne, Inc. (“CDCY”) in October 2001. The Company previously announced the offers of settlement in a press release on April 26, 2005 (as filed on Form 8-K on April 28, 2005).

In the SEC proceeding, FBR & Co., without admitting or denying any wrongdoing, agreed to pay disgorgement, civil penalties and prejudgment interest totaling approximately $3.7 million and to consent to the entry of a permanent injunction with respect to violations of the antifraud provisions of the federal securities laws. FBR & Co. also agreed to consent to an administrative proceeding under Section 15(b) of the Securities Exchange Act of 1934 in which FBR & Co. would be subjected to a censure and agreed to certain undertakings, including review by an independent consultant of its Chinese Wall procedures and implementation of any recommended improvements. In the parallel NASD settlement, FBR & Co. agreed to the same undertakings provided for in the SEC settlement, including agreeing to an independent consultant to review of its Chinese Wall procedures and implementing any recommended improvements, and also agreed pay a fine of $4 million to NASD. As previously disclosed, the Company recorded a $7.5 million charge in the first quarter of 2005 with respect to the settlement payments, and has recorded $0.2 million in additional pre-judgment interest since the offers of settlement.

Copies of the Company’s press release, the complaint and injunction to which FBR & Co. consented in the settlement with the SEC and the NASD Letter of Acceptance, Waiver and Consent are furnished herewith and attached hereto as Exhibits 99.1, 99.2 and 99.3, respectively.

Item 9.01. Financial Statements and Exhibits.

EXHIBITS

99.1	December 20, 2006 Press Release
99.2	Complaint
99.3	Letter of Acceptance, Waiver and Consent

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: December 26, 2006

FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
By:	/S/ ERIC F. BILLINGS
	Eric F. Billings Chairman and Chief Executive Officer

EX-99.1

Exhibit 99.1

Contacts:

Media: Lauren Burk at 703-469-1004 or lburk@fbr.com

Investors: Paul Beattie at 703-312-9673 or pbeattie@fbr.com

FBR Announces Previously Disclosed Offers of

Settlement Accepted by SEC and NASD

ARLINGTON, VA, December 20, 2006 – Friedman, Billings, Ramsey Group, Inc. (NYSE: FBR) today announced that the April 2005 offers of settlement made to the Securities and Exchange Commission and NASD by its broker-dealer subsidiary, Friedman, Billings, Ramsey & Co., Inc. (“the company”), concerning the company’s trading in a company account and the offering of a private investment in public equity (“PIPE”) on behalf of CompuDyne, Inc. (“CDCY”) in October 2001, have been accepted in their entirety by the two agencies. FBR previously announced the terms of its offers of settlement on April 26, 2005; those terms remain unchanged.

Friedman, Billings, Ramsey Group, Inc. provides investment banking*, institutional brokerage*, asset management, and private wealth services through its operating subsidiaries and invests in mortgage-related assets and merchant banking opportunities. FBR focuses capital and financial expertise on eight industry sectors: consumer, diversified industrials, energy and natural resources, financial institutions, healthcare, insurance, real estate, and technology, media and telecommunications. FBR is headquartered in the Washington, D.C. metropolitan area with offices in Arlington, Va., Boston, Dallas, Houston, Irvine, London, New York, Phoenix and San Francisco. Friedman, Billings, Ramsey Group, Inc. is the parent company of First NLC Financial Services, Inc., a non-conforming residential mortgage originator headquartered in Deerfield Beach, Florida. For more information, see http://www.fbr.com.

* Friedman, Billings, Ramsey & Co., Inc.

# # #

EX-99.2

Exhibit 99.2

UNITED STATES DISTRICT COURT

DISTRICT OF COLUMBIA

	:
SECURITIES AND EXCHANGE	:	Civil Action No. 06-cv-02160 (D.D.C.)
COMMISSION,	:
	:
Plaintiff,	:
	:
v.	:
	:
FRIEDMAN, BILLINGS, RAMSEY &	:
CO., INC., EMANUEL J. FRIEDMAN,	:
and NICHOLAS J. NICHOLS,	:
	:
Defendants.	:
	:

COMPLAINT

Plaintiff Securities and Exchange Commission (“Commission”) alleges as follows:

SUMMARY

1. This matter involves Defendant Friedman, Billings, Ramsey & Co., Inc. (“FBR”), a registered broker-dealer, which, in connection with a Private Investment in Public Equity (“PIPE”) offering: (i) failed to establish, maintain and enforce policies and procedures reasonably designed to prevent the misuse of material, nonpublic information; (ii) unlawfully traded while aware of material, nonpublic information; and (iii) conducted unregistered sales of securities.

2. At all relevant times, Defendant Emanuel J. Friedman (“Friedman”), FBR’s Co-Chairman and Co-Chief Executive Officer, and Defendant Nicholas J. Nichols (“Nichols”), FBR’s Executive Vice President and Director of Compliance, were

controlling persons of FBR. Friedman and Nichols managed and controlled the establishment, maintenance and enforcement of FBR’s policies and procedures regarding the handling of material, nonpublic information. Friedman, along with others, was further responsible for and controlled the day-to-day management of FBR, including FBR’s trading department.

3. In September 2001, FBR entered into an investment banking relationship with CompuDyne Corporation (“CompuDyne”) whereby FBR agreed to serve as placement agent for a PIPE offering by CompuDyne. While FBR had policies and procedures regarding the handling of material, nonpublic information, those policies and procedures were not appropriately tailored to the nature of FBR’s business, in connection with serving as a placement agent for a PIPE offering, and were not enforced by FBR, Friedman or Nichols during the CompuDyne PIPE offering. These deficiencies in FBR’s policies and procedures contributed to FBR’s misuse of material, nonpublic information whereby FBR improperly traded by selling short shares of CompuDyne stock in FBR’s market making account before CompuDyne’s public announcement of its PIPE offering. FBR and Friedman also engaged in unregistered sales of securities in connection with the PIPE offering. In particular, FBR’s head trader, consistent with Friedman’s prior trading directions, bought and sold short CompuDyne securities in its market making account when there was not a resale registration statement in effect for the PIPE shares and covered its net short position with CompuDyne shares FBR bought from its own customers, who purchased their shares in the PIPE offering.

4. FBR profited by $343,773 as a result of its improper trading in its market making account before the public announcement of the PIPE offering. FBR profited by

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an additional $97,831 as a result of its unregistered sales of securities relating to the PIPE offering. FBR further profited from the underwriting fee of $1,764,000 that CompuDyne paid to FBR for its work on the PIPE offering.

5. By engaging in the conduct described above, and as further described below, FBR violated Sections 5 and 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. §§ 77e, 77q(a)] and Sections 10(b) and 15(f) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. §§ 78j(b), 78o(f)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated thereunder.

6. By engaging in the conduct described above and further described below, Friedman violated Section 5 of the Securities Act [15 U.S.C. §§ 77e] and, as a controlling person of FBR, is liable for FBR’s violations of Sections 10(b) and 15(f) of the Exchange Act [15 U.S.C. §§ 78j(b), 78o(f)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder.

7. By engaging in the conduct described above and further described below, Nichols, as a controlling person of FBR, is liable for FBR’s violations of Section 15(f) of the Exchange Act [15 U.S.C. § 78o(f)].

JURISDICTION

8. The Commission brings this action pursuant to Section 20(b) of the Securities Act [15 U.S.C. § 77t(b)] and Sections 21(d) and 21A of the Exchange Act [15 U.S.C. §§ 78u(d), 78u-1].

9. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)] and Sections 21(e), 21A and 27 of the Exchange Act [15 U.S.C. §§ 78u(e), 78u-1 and 78aa].

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10. Venue lies in this Court pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)] and Section 27 of the Exchange Act [15 U.S.C. § 78aa]. Venue is proper because act(s) or transaction(s) constituting the violations herein occurred in the District of Columbia and/or the Defendants are found, inhabit, or transact business in the District of Columbia.

11. In connection with the conduct alleged in this Complaint, the Defendants each made use of a means or instrument of transportation or communication in interstate commerce, a means or instrumentality of interstate commerce, the mails, and/or a facility of a national securities exchange.

DEFENDANTS

12. FBR, a Delaware corporation with a principal place of business in Arlington, Virginia, has been a broker-dealer registered with the Commission since January 25, 1989.

13. Friedman, age 60, resides in Washington, DC. Friedman was employed by FBR as either its Chairman or Co-Chairman and either its Chief Executive Officer or Co-Chief Executive Officer from 1989 until on or about April 26, 2005, when he retired from FBR.

14. At the time of the transactions and events alleged in this Complaint, Friedman, directly or indirectly, was a controlling person of FBR for purposes of Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)] and a controlling person of FBR for purposes of Section 21A of the Exchange Act [15 U.S.C. § 78u-1]. As Co-Chairman and Co-CEO of FBR, Friedman, along with others, had responsibility for, actively participated in and directed or controlled, and possessed, directly or indirectly, the power

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to direct or control, or cause the direction or control of, the day-to-day management of FBR. Friedman, among other things, was a member of FBR’s underwriting committee, participated in meetings regarding the progress of investment banking transactions and supervised FBR’s compliance and trading departments.

15. Nichols, age 66, resides in Washington, DC. Nichols was FBR’s Executive Vice President and Director of Compliance from 1995 until on or about April 26, 2005, when he retired from FBR.

16. At the time of the transactions and events alleged in this Complaint, Nichols, directly or indirectly, was a controlling person of FBR for purposes of Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)]. As FBR’s Executive Vice President and Director of Compliance, Nichols had responsibility for, actively participated in and directed or controlled, and possessed, directly or indirectly, the power to direct or control, or cause the direction or control of, the management and day-to-day operations of FBR’s Compliance Department, including FBR’s establishment, maintenance and enforcement of policies and procedures to prevent the misuse of material, nonpublic information. In addition, Nichols was identified as a control person of FBR on FBR’s Form BD.

OTHER RELEVANT ENTITY

17. CompuDyne, a Nevada corporation, is a public safety and security business currently based in Annapolis, Maryland. At times relevant to this action, CompuDyne was based in Hanover, Maryland. CompuDyne provided, among other things, attack protection services, federal security systems, institutional security systems, and services enhancing public safety and justice. At all times relevant to this action, CompuDyne’s stock was registered with the Commission pursuant to Section 12(g) of the

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Exchange Act [15 U.S.C. § 78l(g)]; CompuDyne stock is currently registered with the Commission pursuant to Section 12(b) of the Exchange Act [15 U.S.C. § 78l(b)] and is traded on the NASDAQ under the symbol CDCY.

FACTS

In Connection with the CompuDyne PIPE Offering,

FBR Failed to Establish, Maintain and Enforce Policies and Procedures

Reasonably Designed To Prevent The Misuse of Material, Nonpublic Information.

18. In September and October 2001, FBR had policies and procedures relating to the handling of material, nonpublic information. These policies and procedures were not reasonably designed, however, to prevent the misuse of material, nonpublic information in the context of a PIPE offering and were not enforced by FBR, Friedman and Nichols in connection with the CompuDyne PIPE transaction.

19. One of FBR’s primary lines of business is its investment banking and underwriting operations. However, at the time of the CompuDyne PIPE transaction, which was FBR’s first PIPE offering, FBR neither had, nor adopted procedures relating specifically to maintaining the confidentiality of information received in the context of PIPE offerings.

20. A PIPE is a private investment in public equity. In a PIPE offering, a placement agent or underwriter privately places restricted securities of a public company with investors meeting certain criteria (“accredited investors”). Accredited investors enter into a purchase agreement with the public company committing the investors to purchase a certain number of shares at a specified price. The public company agrees, in turn, to file a resale registration statement with the Commission within a specified period so that the investors can resell the shares to the public. The investors do not pay for the shares until the closing of the transaction, which does not occur until shortly before or after the resale registration statement is declared effective.

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21. In connection with the CompuDyne PIPE offering, certain FBR employees, including Friedman and FBR’s head trader, were permitted or directed to function in multiple roles within the firm and, as a result, material, nonpublic information flowed from the underwriting and sales departments to the trading department. For example, Friedman became aware of information regarding the PIPE offering through his service on FBR’s underwriting committee and he also supervised FBR’s market making activities, including directing the trading department to engage in market making in CompuDyne securities. Likewise, FBR’s head trader, became aware of information concerning the CompuDyne PIPE offering because he also served as a member of FBR’s institutional sales staff and participated in the sale of shares in the PIPE offering. The information concerning the PIPE offering was material, nonpublic information. On September 24, 2001, members of FBR’s compliance department informed Nichols that FBR was engaged to underwrite an investment banking transaction for CompuDyne. FBR, Friedman and Nichols did not establish any policies or procedures to address, in the context of a PIPE offering, the flow of material, nonpublic information from one department to others resulting from FBR employees serving in multiple roles within the firm.

22. Furthermore, while FBR had a policy to restrict the flow of material, nonpublic information to only those people with “a need to know,” this policy was not enforced by FBR, Friedman or Nichols in connection with the CompuDyne PIPE offering.

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23. For example, FBR broadcast over the firm’s audio system material, nonpublic information regarding the CompuDyne PIPE offering. On September 24, 2001, FBR conducted an informational meeting for its institutional sales staff regarding the CompuDyne offering during which the instructors, among other things, described the nature of CompuDyne’s business, the number of CompuDyne shares available for public trading, and the terms of the offering including the number of shares being offered and that a significant portion of the proceeds of the offering would go to a long-term institutional shareholder, which was liquidating its shares, and cautioned the audience that the information concerning CompuDyne’s prospective PIPE offering was confidential (the “teach-in”). While the CompuDyne teach-in was intended for FBR’s sales staff, it was transmitted throughout FBR over FBR’s audio system and FBR did not have a mechanism to monitor who listened to the teach-in and/or to limit access to the teach-in. Both Friedman and Nichols knew or should have known that access to FBR’s teach-in broadcast was not restricted.

24. FBR also disseminated material, nonpublic information via electronic mail to a larger audience than required, and in some instances, to the entire firm in connection with the PIPE offering. For example, FBR distributed an informational sheet about the CompuDyne PIPE offering (the “tear sheet”), which provided a general overview of CompuDyne’s business including balance sheet and income statement summaries and a summary of the terms of the offering, including that the offering would be a PIPE, that 2.4 million shares would be offered and that a portion of the proceeds of the offering would be used to buy back shares from a long-term institutional shareholder and pay down debt, among other things. FBR sent the CompuDyne tear sheet via electronic mail to all members of the sales and trading departments, rather than just to the sales staff.

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25. Likewise, FBR disseminated via electronic mail a written sales script for the PIPE offering to all sales and trading personnel, rather than just to the sales staff. The e-mail instructed all recipients that they were required to use the sales script when they contacted prospective investors for the CompuDyne PIPE offering. The sales script also directed the recipients to refrain from disclosing the name of the issuer and the details of the offering until they informed the prospective investor that the offering was confidential and obtained an oral agreement to keep such information confidential. It further noted that the price of shares sold through a PIPE is typically set at a modest discount to the market price. Friedman knew about, and Nichols received a copy of, the sales script and both knew it was disseminated to all sales and trading personnel.

26. FBR also sent several messages via electronic mail to all FBR employees notifying them about meetings regarding the CompuDyne PIPE offering and updating all employees about when the PIPE offering would be priced.

27. Furthermore, while FBR had policies and procedures to review and restrict employee and proprietary trading under certain circumstances, those procedures were not enforced by FBR, Friedman or Nichols in connection with the CompuDyne PIPE offering. For example, while FBR had procedures regarding the maintenance and distribution to all employees of a “restricted list,” which identified securities in which proprietary and employee accounts should not trade, FBR did not place CompuDyne on a restricted list even though FBR had disseminated material, nonpublic information concerning the PIPE offering throughout the firm.

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28. Nichols was responsible for FBR’s Compliance Department, including FBR’s policies and procedures relating to the handling of material, nonpublic information. Nichols, along with others, initially drafted FBR’s Compliance Manual and he reviewed every revision to the Manual.

29. Friedman supervised Nichols, the head of FBR’s Compliance Department. Friedman reviewed drafts of the Manual, as well as final versions of the Manual.

30. At all relevant times, both Friedman and Nichols were familiar with FBR’s policies and procedures relating to the handling of material, nonpublic information and were in positions to enforce compliance with those policies and procedures, maintain policies and procedures consistent with the nature of FBR’s business and implement new policies and procedures, as needed.

31. Friedman and Nichols each knew or should have known that material, nonpublic information flowed freely between certain departments at FBR, including the investment banking and trading departments in connection with the CompuDyne PIPE offering. Nichols, and, on occasion, Friedman sat on the trading floor within a few feet of trading department personnel, and were each in a position to observe that FBR’s head trader had been provided with confidential information about the PIPE offering.

32. In addition, other FBR employees notified Friedman and Nichols that FBR’s head trader was short selling CompuDyne stock in FBR’s market making account prior to the public announcement of the PIPE offering. For example, on October 4, a member of FBR’s compliance department, who was monitoring proprietary and employee trading, notified Nichols that FBR’s head trader was short selling CompuDyne stock in FBR’s market making account. In addition, on October 5 a member of FBR’s

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risk management group notified Friedman, among others, that FBR’s net short position in CompuDyne securities had exceeded FBR’s internal trading limit policy, which specified that the firm’s exposure in any one security should not exceed a certain threshold amount. While Friedman did not waive the internal trading limit with regard to the trading in CompuDyne securities, neither Friedman nor Nichols stopped FBR’s short selling and did not require the trading department to unwind the short position prior to the public announcement of the PIPE offering.

33. In general, a “short seller” sells shares of stock that he or she does not own, ultimately “covering” the sale with shares that the seller purchases at a later date, anticipating that the stock price will decline.

FBR and Its Employees Owed a Duty of Confidentiality to CompuDyne.

34. On September 12, 2001, CompuDyne entered into a written engagement agreement with FBR in which FBR agreed to act as financial adviser and placement agent for an offering of 1,374,000 shares of CompuDyne’s common stock held by a private investor. On September 27, 2001, the engagement agreement was amended, in relevant part, to include an additional 1,076,569 shares of common stock to be issued by CompuDyne, and to further describe a PIPE offering. The September 12, 2001, engagement agreement, as amended on September 27, 2001, is referenced herein as the “Engagement Agreement.”

35. Pursuant to the terms of the Engagement Agreement, FBR received $1,764,000 from CompuDyne for its placement agent services in connection with the PIPE.

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36. In the Engagement Agreement, FBR agreed that FBR and its employees would maintain the confidentiality of information provided to them in connection with the offering.

37. In addition, FBR’s Compliance Manual requires FBR employees in possession of material, nonpublic information to preserve the confidentiality of that information and to abstain from trading until that information is made public.

Information About CompuDyne’s Plan to

Conduct a PIPE Offering was Material and Nonpublic.

38. Prior to the terrorist attacks on September 11, 2001, CompuDyne had issued approximately five million shares of common stock, about one million of which were available for public trading (the “public float”). It was a thinly-traded common stock that was consistently priced in the $8 - $9 per share range. In the two months prior to September 11, no more than 18,400 shares traded in one day.

39. When securities trading resumed following the terrorist attacks, the amount of trading (“volume”) and price of CompuDyne stock increased dramatically. On September 17, the day that the securities markets reopened, investors traded 258,300 shares of CompuDyne stock, and the stock price at the close of trading that day was $13 per share. Between that date and October 8, trading in CompuDyne stock was volatile with volumes ranging from 71,500 shares to 749,400 shares, prices ranging from $9.33 to $19.55 and an average closing price of $15.11 per share.

40. The CompuDyne PIPE offering would likely have and, in fact, did have, a significant dilutive effect on the value of existing shares. Through the PIPE offering, CompuDyne planned to increase the number of shares of common stock available to the public by 2.45 million, an increase to the public float of more than 200%. Moreover,

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these 2.45 million shares were ultimately sold at $12 per share – a significant discount to $17.38, which was the price per share of CompuDyne stock at the close of trading on October 8, 2001, the day before the public announcement of the PIPE offering.

41. In addition, not all of the funds raised by the PIPE were to go to CompuDyne. Rather, a significant portion of the amount raised was to go to a long-term institutional shareholder, which was liquidating approximately 1,374,000 shares of common stock through the PIPE offering.

42. For the foregoing and other reasons, a reasonable investor would have viewed information about CompuDyne’s plan to conduct a PIPE offering as being important to his or her investment decision. A reasonable investor also would have viewed this information as having significantly altered the total mix of information made available to the public. Accordingly, this information was material.

43. The market reacted negatively when CompuDyne disclosed the PIPE offering to the public. On October 9, 2001, at 11:44 a.m., CompuDyne issued a press release announcing the PIPE offering. The price for CompuDyne stock dropped throughout the day to close at $14.25 per share, with a daily trading volume of 1,219,400 shares. The price for CompuDyne stock continued to drop the following day to close at $13.90 per share. Thereafter, during the approximately three weeks while the resale registration statement for the PIPE shares was pending before the Commission, the closing prices for CompuDyne stock trended downward to as low as $12.41 per share.

44. After the stock market closed on October 29, 2001, the Commission declared the resale registration statement for the CompuDyne PIPE shares effective, thereby enabling investors in the PIPE to resell their shares to the public. The next day, on October 30, 2001, CompuDyne stock closed at $12.02 per share with a trading volume of 769,600 shares.

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FBR Traded In Its Market Making Account While Aware of

Material, Nonpublic Information About the CompuDyne PIPE Offering.

45. In or around August 2001, CompuDyne and FBR began the negotiations which ultimately led to the Engagement Agreement for the PIPE offering. As a member of FBR’s underwriting committee, Friedman was involved in these negotiations. During these negotiations, he became aware of the details of the CompuDyne PIPE offering, including the confidential nature of that offering.

46. Friedman also participated in a meeting on or about October 3, 2001 at which FBR’s investment bankers explained that, based upon the indications of interest coming in from prospective purchasers of the PIPE shares, the price for the PIPE shares would likely be in the $12 to $14 range, which was substantially below the current market price for CompuDyne stock of $17.55 at the close of trading that day.

47. In addition, FBR’s head trader knew about the CompuDyne offering and its confidential nature no later than the afternoon of September 24, 2001. Specifically, after 4:00 p.m. on September 24, 2001, he received the tear sheet and listened to the teach-in. In addition, beginning on September 25, 2001, FBR’s head trader received a series of e-mails containing instructions for approaching prospective investors as well as the sales script. FBR’s head trader also learned from a member of FBR’s institutional sales staff, on or about October 4, that based upon the indications of interest coming in from prospective purchasers of the PIPE shares, the price for the PIPE shares would likely be in the $12 to $13 range.

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48. FBR sold short CompuDyne stock in FBR’s market making account while aware of material, nonpublic information regarding the PIPE offering, in breach of a duty of trust and confidence FBR and its employees owed to CompuDyne.

49. In particular, on September 24, 2001, Friedman told FBR’s head trader that FBR was trying to obtain an investment banking deal with CompuDyne and he directed the head trader to make a “deep market” in CompuDyne stock. At the time Friedman gave this directive, Friedman knew or should have known that there was buying pressure in the market for CompuDyne stock, which was driving up the stock price, and the head trader likely would sell short in order to comply with Friedman’s directive.

50. In accordance with Friedman’s directive to make a “deep market” in CompuDyne stock, FBR’s head trader registered FBR with the NASDAQ as a market maker in CompuDyne and sold short 8,475 shares of CompuDyne stock in FBR’s market making account.

51. After executing these short sales on September 24, FBR’s head trader learned through the teach-in, the tear sheet and e-mails, about the CompuDyne PIPE offering. After learning about the PIPE offering and between September 25 and September 27, the head trader reduced FBR’s short position in its market making account to 4,885 shares. FBR executed no other trades in CompuDyne stock for its market making account until October 2.

52. In the first few days of October 2001, Friedman told FBR’s head trader that FBR needed to be “very, very, active” in CompuDyne stock and that if the stock price continued moving up, FBR should not be afraid to sell short. On October 2, the

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head trader resumed short selling CompuDyne stock in FBR’s market making account. At or about that same time, he confirmed with FBR that increasing FBR’s short position was not improper under Regulation M. Rule 101 of Regulation M under the Exchange Act prohibits participants in a distribution of securities from, among other things, purchasing the securities during a certain restricted period prior to the determination of the offering price. Between October 2 and October 3, FBR sold short an additional 12,110 shares of CompuDyne stock. On October 4, FBR’s net short position increased by 70,400 shares and on October 5, FBR sold short an additional 91,300 shares of CompuDyne stock.

53. Shortly before the market close on Friday, October 5, an e-mail was disseminated to all FBR employees, including FBR’s head trader, notifying all recipients that the CompuDyne PIPE offering would be priced the following Monday, October 8. FBR’s head trader reduced his trading activity in CompuDyne stock on October 8, increasing FBR’s net short position by only 800 additional shares. As a result, by the market close on October 8, FBR, through its head trader and based on Friedman’s directions as described above, had sold short a total of 189,185 shares of CompuDyne stock in FBR’s market making account and had a net short position of 179,495 shares.

54. Friedman was aware that FBR’s head trader was short selling CompuDyne stock in FBR’s market making account and that FBR’s head trader was aware of nonpublic information about the CompuDyne PIPE offering at the time he was accumulating the short position in CompuDyne stock for FBR’s market making account. This nonpublic information was material.

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55. Despite this awareness, Friedman did not direct anyone in FBR’s trading department to reduce or eliminate FBR’s short position prior to the public announcement of the PIPE.

56. After the market close on October 8, FBR, in consultation with CompuDyne, and in consideration of the indications of interest by investors in the PIPE, priced the PIPE shares at $12 per share.

57. On October 9, 2001, the day of the public announcement of the PIPE, FBR’s head trader began decreasing FBR’s net short position by purchasing CompuDyne shares. By the market close on October 9, FBR’s head trader had reduced FBR’s short position in CompuDyne stock to 132,995 shares. FBR ultimately covered its short position through a series of purchases of CompuDyne stock between October 10 and October 30.

58. By short selling CompuDyne securities prior to the public announcement of the PIPE offering and covering those short sales after the public announcement, FBR profited by $343,773.

59. FBR engaged in unlawful insider trading by short selling CompuDyne securities while aware of material, nonpublic information.

FBR and Friedman Conducted Unregistered Sales of Securities.

60. Shortly before the pricing of the PIPE, the sales force, including FBR’s head trader, learned that FBR was having difficulty obtaining investors for the PIPE offering and was asked to solicit FBR customers to invest in the PIPE. As a result, FBR’s head trader did solicit one of FBR’s customers to invest in the PIPE.

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61. That customer agreed to purchase 100,000 shares in the PIPE offering. Friedman was aware that FBR’s head trader had asked this customer to purchase shares in the PIPE offering and that the customer had been allocated 100,000 shares in the offering.

62. Consistent with Friedman’s earlier directions to trade CompuDyne stock, FBR’s head trader continued executing trades in CompuDyne stock for FBR’s market making account after the public announcement of the PIPE offering. Between the announcement of the PIPE offering on October 9 and through the end of trading on October 26, the day before the resale registration statement for the PIPE shares was declared effective, FBR purchased 173,800 and sold short 138,700 CompuDyne shares resulting in a net short position of 143,995 in FBR’s market making account on October 26.

63. At the time of these short sales, FBR, through its head trader, anticipated using shares FBR’s customers obtained in the PIPE offering to cover the shares sold short. Friedman discussed reducing FBR’s net short position with the head trader but did not take any steps to ensure that FBR did not use its customers’ PIPE shares to cover the short sales.

64. In fact, after the resale registration statement for the PIPE shares became effective, between 4:16 and 4:27 p.m., on October 29, FBR’s head trader, after the earlier discussions he had with Friedman described above, purchased for FBR’s market making account 100,000 shares of CompuDyne stock from the customer and 40,000 shares from two other FBR customers, all of whom had obtained their shares through the PIPE. FBR’s head trader purchased all 140,000 shares at the same price of $13.50 per share.

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65. By short selling CompuDyne stock prior to the effective date of the resale registration statement for the CompuDyne PIPE shares and covering these sales with shares purchased from FBR’s customers who acquired those shares in the PIPE offering, FBR and Friedman, in effect, sold their customers’ PIPE shares prior to their registration.

66. At the time FBR’s head trader, consistent with Friedman’s earlier directions to trade CompuDyne stock, executed these short sales of CompuDyne securities in FBR’s market making account, there was no resale registration statement in effect with respect to the CompuDyne PIPE shares and sales of those shares were not exempt from registration.

67. As a result of its short sales prior to the effective date of the resale registration statement and covering those sales with its customers’ PIPE shares, FBR profited by an additional $97,831.

CLAIMS FOR RELIEF

FIRST CLAIM FOR RELIEF

Violations of Section 15(f) of the Exchange Act

(Against FBR)

68. The Commission realleges and incorporates by reference each and every allegation in paragraphs 1 through 67 above, as if the same were fully set forth herein.

69. Section 15(f) of the Exchange Act requires every registered broker or dealer to establish, maintain and enforce written policies and procedures reasonably designed, taking into consideration the nature of such broker’s or dealer’s business, to prevent the misuse in violation of the Exchange Act or the rules and regulations thereunder, of material, nonpublic information by such broker or dealer or any person associated with such broker or dealer.

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70. In the manner set forth above, FBR, while a registered broker or dealer, failed to establish, maintain and enforce written policies and procedures reasonably designed, taking into consideration the nature of its business, to prevent the misuse of material, nonpublic information by FBR or any person associated with FBR.

71. By reason of the foregoing, FBR violated Section 15(f) of the Exchange Act [15 U.S.C. § 78o(f)].

SECOND CLAIM FOR RELIEF

Controlling Person Liability under Section 20(a) of the Exchange Act

for FBR’s Violations of Section 15(f) of the Exchange Act

(Against Friedman and Nichols)

72. The Commission realleges and incorporates by reference each and every allegation in paragraphs 1 through 71 above, as if the same were fully set forth herein.

73. By engaging in the conduct described above, FBR, while a registered broker or dealer, failed to establish, maintain and enforce written policies and procedures reasonably designed, taking into consideration the nature of its business, to prevent the misuse of material, nonpublic information by FBR or any person associated with FBR.

74. During the relevant time period, each of Friedman and Nichols was, directly or indirectly, a controlling person of FBR for purposes of Section 20(a) of the Exchange Act [15 U.S.C. §78t(a)].

75. By reason of the foregoing, Friedman and Nichols are each liable as controlling persons pursuant to Section 20(a) of the Exchange Act [15 U.S.C. §78t(a)], for FBR’s violations of Section 15(f) of the Exchange Act [15 U.S.C. § 78o(f)].

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THIRD CLAIM FOR RELIEF

Violations of Section 10(b) of the Exchange Act and Rule 10b-5

(Against FBR)

76. The Commission realleges and incorporates by reference each and every allegation in paragraphs 1 through 75 above, as if the same were fully set forth herein.

77. FBR, by engaging in the conduct described above, directly or indirectly, in connection with the purchase or sale of a security, and by use of a means or instrumentality of interstate commerce, the mails or a national securities exchange, has:

(a) Employed a device, scheme or artifice to defraud;

(b) Made an untrue statement of material fact or omitted to state a material fact necessary in order to make the statement made, in light of the circumstances under which it was made, not misleading; and/or

(c) Engaged in an act, practice or course of business which operated or would operate as a fraud or deceit upon any person.

78. By reason of the foregoing, FBR violated Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].

FOURTH CLAIM FOR RELIEF

Controlling Person Liability under Section 20(a) of the Exchange Act for FBR’s

Violations of Section 10(b) of the Exchange Act and Rule 10(b)-5 thereunder

(Against Friedman)

79. The Commission realleges and incorporates by reference each and every allegation in paragraphs 1 through 78 above, as if the same were fully set forth herein.

80. By engaging in the conduct described above, FBR, directly or indirectly, in connection with the purchase or sale of a security, and by use of a means or instrumentality of interstate commerce, the mails or a national securities exchange, has knowingly or recklessly: (a) employed a device, scheme or artifice to defraud; (b) made

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an untrue statement of material fact or omitted to state a material fact necessary in order to make the statement made, in light of the circumstances under which it was made, not misleading; and/or (c) engaged in an act, practice or course of business which operated or would operate as a fraud or deceit upon any person; and therefore has violated Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].

81. During the relevant time period, Friedman was, directly or indirectly, a controlling person of FBR for purposes of Section 20(a) of the Exchange Act [15 U.S.C. §78t(a)].

82. By reason of the foregoing, Friedman is liable as a controlling person pursuant to Section 20(a) of the Exchange Act [15 U.S.C. §78t(a)] for FBR’s violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].

FIFTH CLAIM FOR RELIEF

Violations of Section 17(a) of the Securities Act

(Against FBR)

83. The Commission realleges and incorporates by reference each and every allegation in paragraphs 1 through 82, above, as if the same were fully set forth herein.

84. FBR, by engaging in the conduct described above, in the offer or sale of a security, by the use of a means or instrument of transportation or communication in interstate commerce or by use of the mails, directly or indirectly, has:

(a) employed a device, scheme or artifice to defraud;

(b) obtained money or property by means of an untrue statement of material fact or an omission to state a material fact necessary in order to make the statement made, in light of the circumstances under which it was made, not misleading; and/or

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(c) engaged in a transaction, practice or course of business which operated or would operate as a fraud or deceit upon the purchaser of securities.

85. By reason of the foregoing, FBR violated Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)].

SIXTH CLAIM FOR RELIEF

Violations of Section 5 of the Securities Act

(Against FBR and Friedman)

86. The Commission realleges and incorporates by reference each and every allegation in paragraphs 1 through 85 above, as if the same were fully set forth herein.

87. By short selling CompuDyne stock in its market making account prior to the effective date of the resale registration statement and covering those short sales with shares of CompuDyne stock purchased from FBR’s customers who obtained their shares in the PIPE offering, each of FBR and Friedman, directly or indirectly, in connection with certain unregistered sales of securities:

(a) made use of a means or instrument of transportation or communication in interstate commerce or of the mails to sell such securities through the use or medium of any prospectus or otherwise;

(b) carried or caused to be carried through the mails or in interstate commerce, by any means or instruments of transportation, such securities for the purpose of sale and/or for delivery after sale; and/or

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(c) made use of the means or instrument of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy such securities through the use or medium of any prospectus or otherwise.

88. By reason of the foregoing, each of FBR and Friedman violated Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)].

WHEREFORE, the Commission respectfully requests that this Court:

I.

Issue a judgment permanently enjoining FBR, and its agents, officers, servants, employees, attorneys, and those persons in active concert or participation with FBR, directly or indirectly, singly or in concert, from violations of Sections 5 and 17(a) of the Securities Act [15 U.S.C. §§ 77e and 77q(a)] and Sections 10(b) and 15(f) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78o(f)] and Rule 10b-5 promulgated thereunder [17 C.F.R. §240.10b-5].

II.

Issue a judgment permanently enjoining Friedman, and his agents, officers, servants, employees, attorneys, and those persons in active concert or participation with them, directly or indirectly, singly or in concert, from violations of Section 5 of the Securities Act [15 U.S.C. §§ 77e] and, as controlling persons pursuant to Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)], from violating, directly or indirectly, Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Section 15(f) of the Exchange Act [15 U.S.C. § 78o(f)] and Rule 10b-5 promulgated thereunder [17 C.F.R. § 240.10b-5].

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III.

Issue a judgment permanently enjoining Nichols, and his agents, officers, servants, employees, attorneys, and those persons in active concert or participation with them, directly or indirectly, singly or in concert, as controlling persons pursuant to Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)], from violating, directly or indirectly, Section 15(f) of the Exchange Act [15 U.S.C. § 78o(f)].

IV.

Issue a judgment requiring FBR to pay disgorgement in the amount of $2,205,604 plus prejudgment interest in the amount of $502,689.

V.

Issue a judgment requiring FBR to pay a civil penalty in the amount of $687,546 pursuant to Section 21A of the Exchange Act [15 U.S.C. § 78u-1], a civil penalty in the amount of $300,000 pursuant to Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)] and a civil penalty in the amount of $60,000 pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77u(d)].

VI.

Issue a judgment requiring Friedman to pay: (i) a civil penalty in the amount of $6,500 pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77u(d)]; (ii) as a controlling person pursuant to Section 21A of the Exchange Act [15 U.S.C. § 78u-1], a civil penalty in the amount of $687,546; and (iii) as a controlling person pursuant to Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)], a civil penalty in the amount of $60,000 under Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)].

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VII.

Issue a judgment requiring Nichols to pay, as a controlling person pursuant to Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)], a civil penalty in the amount of $60,000 under Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)].

VIII.

Grant such other and further relief as the Court may deem just and appropriate.

IX.

Retain jurisdiction of this action for purposes of enforcing any Final Judgment(s) and Order(s).

Respectfully submitted,

/s/

Mark A. Adler

SECURITIES AND EXCHANGE COMMISSION

100 F Street, NE

Washington, D.C. 20549-4030

Phone: (202) 551-4402

Fax:     (202) 772-9245

Daniel M. Hawke

Amy J. Greer

Elaine C. Greenberg

Tami S. Stark

Patricia A. Kuzma Trujillo

SECURITIES AND EXCHANGE COMMISSION

701 Market Street, Suite 2000

Philadelphia, PA 19106

Phone: (215) 597-3100

Fax:     (215) 597-2740

Attorneys for Plaintiff

Dated: December 20, 2006

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EX-99.3

Exhibit 99.3

NASD

LETTER OF ACCEPTANCE, WAIVER AND CONSENT

NO. ##

TO: Market Regulation Department

NASD

RE: Friedman, Billings, Ramsey & Co., Inc., Broker-dealer No. 25027

Emanuel J. Friedman, CRD No. 214565.

Nicholas J. Nichols, CRD No. 347673.

Pursuant to Rule 9216 of NASD Code of Procedure, Respondents submit this Letter of Acceptance, Waiver and Consent (“AWC”) for the purpose of proposing a settlement of the alleged rule violation described in Part II below. This AWC is submitted on the condition that, if accepted, NASD will not bring any future actions against Respondents alleging violations based on the same factual findings.

Respondents understand that:

1. Submission of this AWC is voluntary and will not resolve this matter unless and until it has been reviewed and accepted by NASD’s Department of Enforcement and National Adjudicatory Council (“NAC”), pursuant to NASD Rule 9216;

2. If this AWC is not accepted, its submission will not be used as evidence to prove any of the allegations against Respondents; and

3. If accepted:

a. this AWC will become part of Respondents’ permanent disciplinary records and may be considered in any future actions brought by NASD or any other regulator against them;

b. this AWC will be made available through NASD’s public disclosure program in response to public inquiries about Respondents’ disciplinary records;

c. NASD may make a public announcement concerning this agreement and the subject matter thereof in accordance with NASD Rule 8310 and IM-8310-2; and

d. Respondents may not take any action or make or permit to be made any public statement, including in regulatory filings or otherwise, denying, directly or indirectly, any finding in this AWC or create the impression that the AWC is without factual basis. Nothing in

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this provision affects Respondents’ testimonial obligations or right to take legal or factual positions in litigation in which NASD is not a party.

Respondents also understand that their experience in the securities industry and relevant disciplinary history may be factors that will be considered in deciding whether to accept this AWC. That experience and history are as follows:

Friedman, Billings, Ramsey & Co., Inc. (“FBR”) became an NASD member in 1989. The firm has no relevant disciplinary history.

Emanuel J. Friedman was first registered with NASD in 1973. From 1989 until April 2006, Friedman was employed by FBR as either its Chairman or Co-Chairman. Upon his retirement on May 24, 2005, FBR filed a U-5 terminating his registration. He has not been registered with NASD since that date. Friedman, who held Series 7, 24, 27, 63, and 65 licenses, has no relevant disciplinary history.

Nicholas J. Nichols was first registered with NASD in 1986. From 1995 until April 2005, he was FBR’s Vice President and Chief Compliance Officer. Upon his retirement, FBR filed a U-5 terminating his registration on May 24, 2005. He has not been registered with NASD since that date. Nichols, who held Series 7 and 24 licenses, has no relevant disciplinary history.

I.

WAIVER OF PROCEDURAL RIGHTS

Respondents specifically and voluntarily waive the following rights granted under NASD’s Code of Procedure:

A. To have a Formal Complaint issued specifying the allegations against them;

B. To be notified of the Formal Complaint and have the opportunity to answer the allegations in writing;

C. To defend against the allegations in a disciplinary hearing before a hearing panel, to have a written record of the hearing made and to have a written decision issued; and

D. To appeal any such decision to the NAC and then to the U.S. Securities and Exchange Commission and a U.S. Court of Appeals.

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Further, Respondents specifically and voluntarily waive any right to claim bias or prejudgment of the General Counsel, the NAC, or any member of the NAC, in connection with such person’s or body’s participation in discussions regarding the terms and conditions of this AWC, or other consideration of this AWC, including acceptance or rejection of this AWC.

Respondents further specifically and voluntarily waive any right to claim that a person violated the ex parte prohibitions of Rule 9143 or the separation of functions prohibitions of Rule 9144, in connection with such person’s or body’s participation in discussions regarding the terms and conditions of this AWC, or other consideration of this AWC, including its acceptance or rejection.

II.

ACCEPTANCE AND CONSENT

This matter arose out of the Department of Market Regulation’s investigation (No. 20050002450) of FBR’s investment banking relationship with Compudyne Corporation (“Compudyne” or “CDCY”), a homeland defense company, in 2001.

A. Respondents hereby accept and consent, without admitting or denying the findings, and solely for the purposes of this proceeding and any other proceeding brought by or on behalf of NASD, or to which NASD is a party, prior to a hearing and without an adjudication of any issue of law or fact, to the entry of the following findings by NASD:

Policies and procedures

1. During September and October 2001, FBR had in place written supervisory procedures requiring the maintenance of an information barrier (“Chinese Wall”) between the firm’s traders and principals and employees with non-public information, but FBR failed to enforce these procedures with respect to the Compudyne PIPE, in violation of NASD Conduct Rules 3010(b) and 2110. This failure resulted in FBR’s making a market in Compudyne shares while the firm was in possession of material, nonpublic information.

2. By failing to recognize and correct these deficiencies, Friedman and Nichols were liable, as control persons under Section 20(a) of the Exchange Act, for FBR’s violation of Section 15(f) of the Securities Exchange Act of 1934 in connection with FBR’s failure to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information. This conduct also violated NASD Conduct Rule 2110.

3

B. FBR and Friedman hereby accept and consent, without admitting or denying the findings, and solely for the purposes of this proceeding and any other proceeding brought by or on behalf of NASD, or to which NASD is a party, prior to a hearing and without an adjudication of any issue of law or fact, to the entry of the following findings by NASD:

The firm’s trading in CDCY

1. In September 2001, Compudyne entered into an investment banking relationship with FBR to raise capital by means of a private placement. Compudyne and FBR agreed to structure the private placement as a “private investment in public equity,” also commonly referred to as a PIPE. A PIPE is a private offering whereby accredited investors agree to privately purchase securities issued by a reporting company on the condition that a re-sale registration statement will be effective within a certain period of time. Once the SEC approves the registration statement, the investors obtain their shares, which they can then sell to public investors on the open market.

2. In the Compudyne PIPE, the company offered to sell 1,080,000 new shares of common stock and arranged for the sale of another 1,370,000 shares of common stock controlled by William Blair Mezzanine Capital Partners II (“Blair”) (including shares underlying Blair warrants). Ultimately, the PIPE generated $29,400,000 in gross proceeds. Of this, Compudyne received $16,009,947, from which it paid off a $9 million, 13.15% loan from Blair as well as the expenses of the offering.

3. On September 28, 2001, FBR began to market the Compudyne PIPE offering to its clients. Using a script prepared by its counsel, and without initially divulging Compudyne’s identity, FBR representatives told the firm’s clients that FBR represented an issuer in the electronic security sector that might soon sell some equity, that the deal would be structured as a PIPE and that, if the customer were interested, FBR would disclose who the issuer was and the terms of the potential PIPE transaction, but only if the customer agreed to keep the information confidential.

4. Beginning no later than September 24, 2001, Friedman was aware of information concerning the upcoming PIPE transaction, including ongoing discussions with Compudyne regarding the structuring and other aspects of the offering. This information was material, non-public information. Friedman was responsible for supervising the firm’s Head Trader.

5. FBR’s Head Trader was also a salesman in contact with customers. In his role as salesman, the Head Trader also participated in the Compudyne PIPE offering using confidential materials. On September 24, 2001,

4

FBR’s Head Trader became aware of information concerning the PIPE transaction through an information session about the Compudyne PIPE offering that was broadcast by FBR throughout the firm after the close of trading. This information was material, nonpublic information.

6. Earlier that trading day, September 24, 2001, Friedman instructed the Head Trader to make a market in Compudyne, and the Head Trader began to do so. During the first few days of October 2001, Friedman gave specific trading instructions to the Head Trader to make a deep and liquid market in the stock, not to hide, and not to be afraid to sell the stock short if the price continued to rise. FBR and Friedman failed to focus on concerns related to the Head Trader’s possession of confidential information regarding the Compudyne PIPE.

7. Believing that his buy-side market activities were restricted by Regulation M (“Reg M”), beginning on October 4, 2001, FBR’s Head Trader began trading CDCY in FBR’s proprietary market-making account. By the time the Compudyne PIPE transaction was made public on the morning of October 9, 2001, FBR had a net short position of approximately 179,495 shares of CDCY. After the public disclosure of the Compudyne PIPE until October 26, 2001, FBR bought approximately 180,000 shares and sold approximately 145,000 shares of CDCY. After the registration of the PIPE shares, FBR covered its net short position, mostly by purchasing approximately 140,000 shares on October 29, 2001.

8. Accordingly, FBR traded Compudyne stock in a proprietary market making account before the public announcement of the PIPE deal, while aware of material, non-public information, in violation of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5, and NASD Conduct Rules 2110 and 2120.

9. FBR realized a profit of approximately $343,773 as a result of its improper trading in the market-making account before the public announcement of the PIPE deal.

10. By engaging in the conduct described above as a controlling person of FBR, Friedman violated NASD Conduct Rule 2110. In addition, under Section 20(a) of the Securities Exchange Act of 1934, Friedman is liable as a controlling person for FBR’s violations of Section 10(b) and Rule 10b-5.

5

C. FBR hereby accepts and consents, without admitting or denying the findings, and solely for the purposes of this proceeding and any other proceeding brought by or on behalf of NASD, or to which NASD is a party, prior to a hearing and without an adjudication of any issue of law or fact, to the entry of the following findings by NASD:

Failure to make affirmative determinations

1. FBR’s trading of CDCY before the public announcement of the confidential PIPE deal was intended to help market the private placement by demonstrating to institutional investors that FBR was willing to risk its capital to make a deep and liquid market and to advertise FBR’s capabilities as a market maker of homeland defense stocks. These goals were not normal market-making functions, and they resulted in trading disproportionate to the usual market-making patterns or practices of the member in that security. Therefore, the trading was not bona fide market making and was therefore not exempt from NASD Conduct Rule 3370, which at the time required members not engaged in bona fide market making to make an affirmative determination that shares are available to borrow before selling short.

2. FBR failed to make such affirmative determinations for the Compudyne shares it sold short, in violation of NASD Conduct Rules 3370 and 2110.

Inaccurate U-5

3. During 2002 and 2003, FBR’s compliance department conducted a review of the outside business activities of the branch manager of FBR’s Charlotte, North Carolina, office. The review concerned potential violations of securities laws and regulations and industry standards of conduct.

4. In November 2003, FBR filed with NASD a U-5 (Uniform Termination Notice for Securities Industry Termination) form that inaccurately certified that its Charlotte branch manager: a) was not under internal review for violating investment-related statutes, regulations, rules or industry standards of conduct when he terminated his association with the firm; and b) had not been accused of violating investment-related statutes, regulations, rules or industry standards of conduct before he voluntarily resigned from the firm. In connection with this inaccurate filing, FBR violated NASD By-Laws, Article V, Section 3, and NASD Conduct Rule 2110.

6

D. FBR also consents to the imposition, at a maximum, of the following sanctions:

A censure by NASD;

Payment of $2,205,604, representing disgorgement of monies FBR obtained in the conduct described above, which FBR shall pay in accordance with the terms of a final judgment of the United States District Court for the District of Columbia, in Securities and Exchange Commission v. Friedman, Billings, Ramsey & Co., Inc.

A fine of $4,000,000 payable to NASD, and a civil penalty of $1,047,546 that FBR shall pay in accordance with the terms of a final judgment of the United States District Court for the District of Columbia, in Securities and Exchange Commission v. Friedman, Billings, Ramsey & Co., Inc., et al.;

Prejudgment interest of $502,689, which FBR shall pay in accordance with the terms of a final judgment of the United States District Court for the District of Columbia, in Securities and Exchange Commission v. Friedman, Billings, Ramsey & Co., Inc., et al.; and

An undertaking to hire an independent consultant, acceptable to NASD and the SEC, to review FBR’s operational and supervisory procedures designed to prevent the misuse of non-public information, to make recommendations for improvement in the content and enforcement of such procedures, and to review the implementation of the recommendations.

E. Friedman also consents to the imposition, at a maximum, of the following sanctions:

A fine of $500,000 payable to NASD and a civil penalty of $746,056 that Friedman shall pay in accordance with the terms of a final judgment of the United States District Court for the District of Columbia, in Securities and Exchange Commission v. Friedman, Billings, Ramsey & Co., Inc., et al.; and

Suspension of association with any NASD member in a supervisory capacity for two years.

F. Nichols also consents to the imposition, at a maximum, of the following sanctions:

A censure by NASD; and

A fine of $50,000 payable to NASD and a civil penalty of $60,000 that Nichols shall pay in accordance with the terms of a final judgment of the United States District Court for the District of Columbia, in Securities and Exchange Commission v. Friedman, Billings, Ramsey & Co., Inc., et al.

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Respondents agree that they shall not seek or accept, directly or indirectly, reimbursement or indemnification, including but not limited to payment made pursuant to any insurance policy, with regard to all fine/penalty amounts that Respondents shall pay pursuant to this AWC and any fines Respondents shall pay to the SEC in the related settlement, whether such fine/penalty amounts or any part thereof are added to a distribution fund account or otherwise used for the benefit of investors. Respondents further agree that they shall not claim, assert, or apply for a tax deduction or tax credit with regard to any federal, state, or local tax for any fine/penalty amounts that they shall pay pursuant to this AWC and any fines Respondents shall pay to the SEC in the related settlement, regardless of whether such fine/penalty amounts or any part thereof are added to a distribution fund account or otherwise used for the benefit of investors.

The sanctions imposed herein shall be effective on a date set by NASD staff.

III.

OTHER MATTERS

A. Respondents understand that each of them may attach a Corrective Action Statement to this AWC that is a statement of demonstrable corrective steps taken to prevent future misconduct. Respondents understand that they may not deny the findings or make any statement that is inconsistent with the AWC in this Statement. This Statement does not constitute factual or legal findings by NASD, nor does it reflect the views of NASD or its staff.

B. Respondents agree to pay any monetary sanctions imposed on them upon notice that this AWC has been accepted and that such payments are due and payable and has attached an Election of Payment form showing the method by which they proposes to pay any fine imposed.

C. Respondents specifically and voluntarily waive any right to claim that they are unable to pay, now or at any time hereafter, any monetary sanction imposed in this matter.

Respondents certify that they have read and understands all of the provisions of this AWC and has been given a full opportunity to ask questions about it, and that no offer, threat, inducement, or promise of any kind, other than the terms set forth herein, has been made to induce them to submit it.

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December 14, 2006	/s/ William J. Ginivan
Date	Friedman, Billings, Ramsey & Co., Inc.
	Respondent
	Name:	William J. Ginivan
	Title:	General Counsel

Reviewed by:

Vincent J. Badolato

Counsel for Respondent FBR

Dec 14, 2006	/s/ Emanuel J. Friedman
Date	Emanuel J. Friedman
	Respondent

Reviewed by:

Colleen Doherty-Minicozzi

Counsel for Respondent Friedman

14 Dec 06	/s/ Nicholas J. Nichols
Date	Nicholas J. Nichols
	Respondent

Reviewed by:

Mike Trager, Arnold & Porter LLP

Counsel for Respondent Nichols

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Accepted by NASD:
12/19/06	/s/ Cameron K. Funkhouser
Date	Cameron K. Funkhouser
	Senior Vice President
	Department of Market Regulation
	Signed on behalf of the Director of ODA, by delegated authority

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Attachment

ELECTION OF PAYMENT FORM

Friedman, Billings, Ramsey & Co., Inc. intends to pay the fine proposed in Section II of the Letter of Acceptance, Waiver and Consent by the following method (check one):

x A firm check or bank check for the full amount;

¨ Credit card authorization for the full amount;¹

¨ The installment payment plan (only if approved by NASD staff and the National Adjudicatory Council).²

	Respectfully submitted,
	Friedman, Billings, Ramsey & Co., Inc.
December 14, 2006	By:	/s/ William J. Ginivan
Date	Name:	William J. Ginivan
	Title:	General Counsel

¹ Only Mastercard and Visa are accepted for payment by credit card. If this option is chosen, the appropriate forms will be mailed to you, with an invoice, by NASD’s Finance Department. Do not include your credit card number on this form.

² The installment payment plan is only available for fines of $5,000 or more. Certain interest payments, minimum initial and monthly payments, and other requirements apply. You must discuss these terms with NASD staff prior to requesting this method of payment.

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Attachment

ELECTION OF PAYMENT FORM

Emanuel J. Friedman intends to pay the fine proposed in Section II of the Letter of Acceptance, Waiver and Consent by the following method (check one):

x A firm check or bank check for the full amount;

¨ Credit card authorization for the full amount;¹

¨ The installment payment plan (only if approved by NASD staff and the National Adjudicatory Council).²

	Respectfully submitted,
Dec 14, 2006	/s/ Emanuel J. Friedman
Date	Emanuel J. Friedman

¹ Only Mastercard and Visa are accepted for payment by credit card. If this option is chosen, the appropriate forms will be mailed to you, with an invoice, by NASD’s Finance Department. Do not include your credit card number on this form.

² The installment payment plan is only available for fines of $5,000 or more. Certain interest payments, minimum initial and monthly payments, and other requirements apply. You must discuss these terms with NASD staff prior to requesting this method of payment.

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Attachment

ELECTION OF PAYMENT FORM

Nicholas J. Nichols intends to pay the fine proposed in Section II of the Letter of Acceptance, Waiver and Consent by the following method (check one):

x A firm check or bank check for the full amount;

¨ Credit card authorization for the full amount;¹

¨ The installment payment plan (only if approved by NASD staff and the National Adjudicatory Council).²

	Respectfully submitted,
14 Dec 06	/s/ Nicholas J. Nichols
Date	Nicholas J. Nichols

¹ Only Mastercard and Visa are accepted for payment by credit card. If this option is chosen, the appropriate forms will be mailed to you, with an invoice, by NASD’s Finance Department. Do not include your credit card number on this form.

² The installment payment plan is only available for fines of $5,000 or more. Certain interest payments, minimum initial and monthly payments, and other requirements apply. You must discuss these terms with NASD staff prior to requesting this method of payment.

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