FRIDAY, DECEMBER 17, 2010


KLMNO BY YLAN Q.MUI The Federal Reserve proposed


on Thursday lowering the fees that merchants must pay when shoppers use debit cards, a move that could reduce retail prices but result in higher banking fees for consumers. Under the recommended new


rules, the interchange fee, or “swipe fee,” on debit cards would be capped at 12 cents — about 70 percent lower thantheaverage fee of 44 cents per transaction last year, according to the Fed. The total amount banks received from debit card interchange fees was $16.2 billion. The move was applauded by


retail industry groups and small businesses, which have long said the fees are excessive and they have little power to negotiate them down. Retailers have also said the cost of the fees is second only to labor and is growing faster than health-care expenses. On Thursday, they said the new rules wouldallowthemtodeliversignif- icant savings to shoppers. “This is not only good for busi-


nesses, but most importantly it’s good for consumers,” said Hank Armour, chiefexecutiveofNation- al Association of Convenience Stores. “There is an abundant amount of evidence cost savings will bepassedthrough.” Interchange rates are set by


card processors such as Visa and MasterCard and paid to banks as anincentivetousetheirnetworks. In a statement, the American Bankers Association, a trade group, said the proposal would have a “dramatic impact” on the industryatatimewhenbankreve- nue has also been curtailed by strict new regulations on credit card interest rates and overdraft fees. The swipe fee ruling would reduce banks’ ability to offer basic low-cost services,make loans and fight fraud,he said. “Theproposal seems littlemore


than direct government interfer- ence in the card payments system on behalf of large retailers and at the expense of everyday consum- ers,” ABA chief executive Edward L.Yingling said. Bankshave begunseekingways


to recoup their losses from the waveofnewregulationspassedby


Congress. Tower Group analyst BrianRileysaidtheywouldproba- bly consider instituting charges foraccountsthatcarrylowbalanc- es or areusedinfrequently. He noted there is no mandate


from the Fed or Congress that retailers lowerprices to reflect the reduced interchange rate — and the worst case-scenario for con- sumers is if banks raise their fees andmerchantsdon’t cutprices. Sen. Richard Durbin (D-Ill.),


whosponsoredthelegislationthat required the Fed to address the issue, said he will be monitoring anynewbank fees closely. “I worry that the banks and


credit card companies, facedwith change and reform, will do the same thing they’ve always done: Createanewproduct,createanew fee, findanewloophole,”he said. The Fed is gathering comments


for several options for determin- ing interchange fees. The first al- lows issuers to set the rate at a “safe harbor” of 7 cents or less. Issuers could also choose to deter- mine their own average cost of authorizing, clearing and settling debit transactions,withacapof 12 cents. The final option allows any


interchangerateof 12centsor less. One key issue the Fed did not


address in detail was fraud. Card processors andbankshave argued that the cost of preventing and investigating fraud should be in- cluded in the interchange fees. The Fed said that it is still consid- ering the issue andwould develop a separateproposal to address it. The law applies only to debit


cards — not credit cards — and exempts government benefit cards and prepaid cards. It also would not apply to banks with assets less than $10 billion, but community banks still oppose the rule, saying they will probably have to comply with lower inter- change rates or risk not being ac- ceptedbymerchants. “It is naïve to think that a


reduction in debit interchange of the scale proposed today to large issuers will not be felt with equal pain by those purportedly ‘carved out’ from the provision,” Karen Thomas, senior executive vice presidentofgovernment relations for the Independent Community Bankers of America, said in a statement.


muiy@washpost.com 4 arrested in insider trading probe centered on hedge funds


BY ZACHARY A. GOLDFARB Anational investigation into in-


sider trading escalated Thursday with the arrest of four executives accused of trafficking in confiden- tialcorporateinformationasafifth manpleadedguilty inthe case. Those arrested by the Justice


DepartmentandFBI includedsev- eral figures suspected of channel- ing secrets from technology com- panies to hedge funds that then tradedonthat informationbutdid not include any big names from Wall Street or corporateAmerica. Investigators are looking at “ex-


pert networks,” firms that con- nected corporate insiders with hedge fund executives. They have focused on Primary Global Re- search, aCalifornia-basedfirm. “A corrupt network of insiders


at some of the world’s leading technology companies served as so-calledconsultantswhosoldout their employers by stealing and then peddling their valuable in- side information,” Preet Bharara,


the U.S. attorney in Manhattan, saidina statement. Anumber of high-profile hedge


funds — including SAC Capital Advisors, led by billionaire inves- tor Steven A. Cohen — are being investigated as part of the probe. Several hedge funds have been raided by the FBI or received sub- poenas seeking information, but no hedge fund executives have beenarrestedor charged. Thursday’s arrests come at a


time of public hunger for high- profile prosecutions related to the financial crisis. But while target- ing financial wrongdoing, these arrests do not appear to have any connectionto the crisis. TheJusticeDepartmentalsore-


cently promoted “Operation Bro- ken Trust,” a group of unrelated and relatively small investment fraudcases. The probe that led to Thurs-


day’s arrests has underscored the government’s desire to crack down on what Bharara has called “rampant” insider trading. But it also highlights the legal gray area


thatmanylawyerssayexistsunder insider trading statues. Many in the financial industry say that the transfer of information frompeo- ple intimately familiar with com- panies to traders is common and doesn’t violate any law. Oneof thosearrestedbytheFBI


on Thursday morning was James Fleishman, an executive at Prima- ry Global Research. He was charged with wire fraud and con- spiracy to provide confidential corporate information. Several of the executives hired


as consultants by Primary Global Research were also arrested and chargedwithwirefraud,conspira- cy to commit securities fraud and conspiracy to commitwire fraud. These includedMarkA. Longo-


ria,whohadworkedfor chipmak- er Advanced Micro Devices; Wal- ter Shimoon,who hadworked for electronics manufacturing firm Flextronics International, and Manosha Karunatilaka, who had been with Taiwan Semiconductor Manufacturing. Daniel Devore, formerly an ex-


ecutive with computer giant Dell who had consulted for Primary Global Research, pleaded guilty to wire fraud and conspiracy to com- mitwirefraudandsecuritiesfraud. The charges against the five


people Thursday follow the late November arrest of Don Ching Trang Chu, who had worked as PrimaryGlobalResearch’sTaiwan liason for seven years. Chu’s attor- ney has not indicated whether he willpleadnot guilty or guilty. An attorney for Fleishman did


not return a call seeking com- ment. An attorney for Longoria said his client has been cooperat- ing with the investigation. An at- torney for Shimoon could not be immediately identified. An attor- ney for Karunatilaka said he was reviewing the criminal charges facing his client. An attorney for Devoredeclinedto comment. AspokesmanforPrimaryGlob-


alResearch said the company had put Fleishman on leave and had severed relationships with the others arrestedearlier this year. goldfarbz@washpost.com


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