New Floating-Rate Notes, HP Autonomy Probe: Compliance

The U.S. Treasury Department said it plans to sell the first floating-rate notes in January and expects to lower coupon auction sizes gradually over the coming quarter as the nation’s fiscal health improves.

A final rule on the floating-rate notes was published in the Federal Register yesterday, the Treasury said in a statement yesterday in Washington. So-called floaters may help expand the Treasury’s investor base and limit borrowing costs, while appealing to those seeking to protect against the potential for rising interest rates or faster inflation stemming from the Federal Reserve’s unprecedented monetary stimulus.

Floaters would be the first added U.S. government debt security since Treasury Inflation-Protected Securities, known as TIPS, were introduced in 1997. In yesterday’s quarterly refunding statement, the department also said sales next week of notes and bonds will be unchanged from last quarter at $72 billion, while reductions are expected to occur in the two- and three-year securities.

The Treasury indicated that the first floaters auction probably will take place at the end of January, according to minutes of a July 30 meeting of Treasury officials and bond market participants. The term sheet says it would be the last calendar day of the month.

“The upcoming inaugural two-year maturity floating rate note issuance in January 2014 would be a replacement for Treasury bill issuance,” the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association said in a report to the Treasury secretary released yesterday.

Given the introduction of the floaters, the Treasury doesn’t plan to add any more debt instruments, such as 50-year or 100-year bonds, Rutherford said at the press conference.

Compliance Policy

SEC Amends Rules for Investors With Assets Held by Broker-Dealer

The U.S. Securities and Exchange Commission has adopted amendments to rules that protect investors doing business with broker-dealers. The amendment to the Net Capital Rule requires a broker-dealer to maintain more than a dollar of highly liquid assets for each dollar of liabilities.

Broker-dealers are barred from using customer securities and cash in “proprietary business activities,” under the amendment to the Customer Protection Rule.

The new measures also cover Books and Records Rules and the Notification Rule.

Compliance Action

SEC Faults Two Investment Advisers on Best-Execution Claims

The U.S. Securities and Exchange Commission sanctioned two investment advisory firms for failing to seek best execution on client trades placed with their in-house brokerage units.

A.R. Schmeidler & Co., the New York-based subsidiary of Hudson Valley Bank, agreed to pay more than $1 million to settle claims that it failed to re-evaluate whether it was providing advisory clients best execution when it negotiated with its clearing firm, the SEC said yesterday in a statement. As a result of the failures, Schmeidler retained a greater share of commissions it received from clients, the SEC said.

The SEC also took action against Indianapolis-based Goelzer Investment Management and its owner, who agreed to pay $500,000 to resolve the agency’s claims that it misled investors about the process of selecting itself as the broker for advisory clients, according to the statement.

Elliot Schimel, a spokesman for Schmeidler, said in an e-mailed statement that the company “has taken steps to address the issues that arose in this matter and looks forward to continuing to serve its clients.”

A phone call to Jeffrey Bailey, an attorney for Goelzer at Bose McKinney & Evans LLP, wasn’t immediately returned.

UBS Said to Settle CDO Case for Less Than $60 Million With SEC

UBS AG, Switzerland’s largest bank, is poised to settle U.S. regulatory claims that it misled investors in a 2007 mortgage-bond deal that soured as housing prices collapsed, a person familiar with the matter said.

The bank will pay less than $60 million in a deal with the Securities and Exchange Commission, said the person, who asked not to be named because the matter isn’t public. None of UBS’s executives will be targeted, the person said.

Zurich-based UBS is seeking to wrap up legal claims left over from the U.S. housing slump.

The case follows a string of litigation involving collateralized debt obligations beginning with the SEC’s lawsuit against Goldman Sachs Group Inc. in 2010. Fabrice Tourre, a Goldman Sachs executive who worked on the deal known as Abacus, is awaiting a jury verdict over the SEC’s fraud claims against him.

Florence Harmon, an SEC spokeswoman, and Karina Byrne, a spokeswoman for UBS in New York, declined to comment.

The settlement was reported yesterday by the Wall Street Journal.

IBM Stands Behind Cloud-Computing Accounting Amid SEC Probe

International Business Machines Corp., facing a U.S. Securities and Exchange Commission investigation into how it reports revenue from offsite cloud services, said it stands by its accounting methods.

IBM is cooperating with the SEC in the probe, which it learned about in May, it said yesterday in a filing. The company books its revenue from cloud services, such as storing customers’ data and software applications remotely, under generally accepted accounting principles, said Ed Barbini, a spokesman for Armonk, New York-based IBM.

“IBM’s reporting of cloud revenue is the result of a rigorous and disciplined process, and we are confident that the information we have provided has been consistently accurate,” Barbini said.

Chief Executive Officer Ginni Rometty has identified cloud computing as one of IBM’s chief sources of growth amid a slowdown in demand for hardware and for consulting services. The investigation at the company, known for consistently meeting analysts’ earnings estimates, underscores confusion about how cloud revenue should be booked, said Michael Cusumano, a management professor at the Massachusetts Institute of Technology’s Sloan School of Management.

While IBM doesn’t disclose its revenue from cloud services, it said the sales rose 70 percent in the first half of 2013 from a year earlier. In its filing yesterday, the company didn’t provide details on what information the SEC was seeking.

Florence Harmon, an SEC spokeswoman, declined to comment.

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Fed Swipe-Fee Rules Rejection Will Help Merchants at Banks’ Cost

Retailers battling banks over debit-card transaction costs may benefit from lower fees after winning a court ruling on claims they were overcharged billions of dollars under an unlawful rate set by the Federal Reserve.

U.S. District Judge Richard Leon in Washington ruled Tuesday that the Fed considered data it wasn’t allowed to use under the Dodd-Frank law in setting the cap on debit-card transaction fees, known as swipe fees, at 21 cents, and neglected to bolster competition in card networks.

“The board’s final rule not only fails to carry out Congress’s intention; it effectively countermands it!” Leon wrote in his ruling.

The decision, unless overturned on appeal, will force regulators to revisit rules that bankers said would cost them 45 percent of their swipe-fee revenue. Lenders collected about $16 billion annually from those fees before the Fed’s regulation and responded by cutting back on perks such as rewards programs and free checking to soften the blow to their profits.

The Fed’s rule, in effect since October 2011, will stay in place until the central bank drafts new regulations or interim standards, Leon said.

More than 38 billion debit-card transactions took place in 2009 at retailers including grocery and electronics stores, gas stations and large chains such as Wal-Mart Stores Inc. and Target Corp., according to court documents. The Fed rule was written after merchants successfully lobbied for a measure pushed by Senator Dick Durbin, an Illinois Democrat, to limit the power of banks and payment networks to impose fees.

Swipe, or interchange, fees are set by Visa Inc. and MasterCard Inc., the biggest electronic-payment networks, which collect the money and remit it to banks that issues the cards.

James Issokson, a spokesman for Purchase, New York-based MasterCard, had no immediate comment on the ruling. Joe Pavel, a spokesman for the Fed, said the central bank is reviewing the decision.

Frank Keating, the president of the American Bankers Association, said the decision “will harm banks of all sizes and make it more difficult for institutions to serve their customers.”

The case is NACS v. Board of Governors of the Federal Reserve System, 11-cv-02075, U.S. District Court, District of Columbia (Washington).

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Former Galleon Trader Drimal’s Wife Gets Access to Wiretaps

The wife of former Galleon Group LLC trader Craig Drimal won access to federal wiretap recordings after she sued the Federal Bureau of Investigation over its monitoring of calls between the couple.

Arlene Villamia-Drimal filed suit in federal court in New Haven, Connecticut, last year against 16 current and former FBI agents who worked on the Galleon investigation, alleging that from November 2007 to January 2008, the agents “wrongfully intercepted” more than 180 confidential and privileged marital calls. On June 6, the federal judge presiding over the case declined to dismiss the suit.

U.S. District Judge Richard Sullivan in New York, who presided over Drimal’s criminal case, on Tuesday signed an order granting Drimal’s wife access to the wiretaps for the purposes of her suit. The order was made public yesterday.

Prior to trial, Drimal made a bid to suppress the wiretaps, arguing that the government listened in on “scores” of phone calls with his wife which he said were “of a particularly intimate and personal nature.”

Drimal’s lawyer argued that rather than “minimize” the recordings and halt the wiretaps, the agents continued to listen. After a hearing in 2011, Sullivan denied the request although he said he was “deeply troubled” by the FBI’s failure to stop listening to unrelated, intimate phone calls.

Drimal, who pleaded guilty to insider trading, was sentenced to 5 1/2 years in prison. He has appealed his conviction. John R. Williams, a lawyer representing Drimal’s wife, didn’t immediately return a voice-mail message left at his office seeking comment about the case.

The cases are U.S. v. Goffer 10-CR-56, U.S. District Court Southern District of New York (Manhattan); Villamia-Drimal v. Makol, 12-cv-717, U.S. District Court, District of Connecticut (New Haven).

HP Says Ex-SEC General Counsel Advising on Autonomy Deal Probe

Hewlett-Packard Co. said it has hired a former U.S. Securities and Exchange Commission general counsel and interviewed 25 people in a company investigation of alleged fraud at its Autonomy unit.

Ralph Ferrara, a partner at Proskauer Rose LLP and ex-general counsel at the SEC, is leading a probe by a three-member committee of independent directors investigating shareholder allegations that Hewlett-Packard ignored warnings about accounting irregularities and failed to vet its finances before acquiring the British software maker, the company’s lawyers said in filings yesterday in federal court in San Francisco.

Hewlett-Packard, the largest personal computer maker, faces shareholder lawsuits stemming from its Nov. 20 announcement that it was taking an $8.8 billion writedown on the value of Autonomy, which it agreed to buy for $10.3 billion in 2011. Hewlett-Packard alleges it was a victim of fraud and that Autonomy overstated its revenue, growth and prospects. Autonomy’s ex-chief executive officer, Michael Lynch, has denied HP’s claims and said the company botched the acquisition.

Company lawyer Marc Wolinsky asked in a filing that the so-called derivative shareholder lawsuit be put on hold until Jan. 10 to allow regulators to complete their investigations. The U.S. Justice Department, the SEC and the U.K. Serious Fraud Office have all opened investigations related to Autonomy, he said.

Michael Thacker, a spokesman for Palo Alto, California-based Hewlett-Packard, declined to comment on the filing.

The case is In Re Hewlett-Packard Co. Shareholder Derivative Litigation, 12-06003, U.S. District Court, Northern District of California (San Francisco).

Tourre Asserts Portfolio Was Good Investment as Jury Gets Case

The jury in the civil fraud trial of Fabrice Tourre, the former Goldman Sachs Group Inc. vice president sued by the Securities and Exchange Commission over his role in a failed billion-dollar investment, went home without a verdict after its first day of deliberations.

The jury of four men and five women spent about six hours yesterday considering the case, in which the SEC claims Tourre misled participants in a 2007 transaction known as Abacus. The SEC claims Tourre hid the role of hedge fund Paulson & Co. in selecting the subprime mortgage bonds behind the investment, then made a $1 billion bet they’d fail.

The jury will reassemble to continue deliberations today at 9:30 a.m.

It’s considering seven claims that Tourre violated U.S. securities laws in the construction and marketing of Abacus. Tourre faces money penalties and a possible lifetime ban from the securities industry if he’s found liable.

The deliberations followed a two-week trial that featured testimony from former Paulson hedge fund executive Paolo Pellegrini and from Tourre himself. Lawyers for Tourre and the SEC stayed close to Forrest’s courtroom throughout the day.

The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).

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Ellen Rosen in New York at

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