Moody's Appeals Hong Kong Ruling That Penalized Critical Report

  • Information flow in Hong Kong will be limited, say officials
  • Freedom of opinion isn't absolute, Hong Kong tribunal said

Moody’s Investors Service has appealed a Hong Kong tribunal’s ruling that penalized the ratings business for publishing a critical report about Chinese companies.

The U.S. firm has served a notice of appeal with respect to the Securities and Futures Appeals Tribunal decision on March 31, Donough Foley, senior vice president for government and public affairs at Moody’s Asia Pacific, said in an e-mailed statement on Thursday.

The SFC charged Moody’s for a 2011 report about 61 Chinese companies, claiming it misled investors and caused notable share price drops at the corporations named in the note. Last month the tribunal backed the regulator and ordered Moody’s to pay a HK$11 million ($1.4 million) penalty. That judgment alarmed analysts and investors in Hong Kong, where some fear the SFC’s action could strangle critical commentary about the local markets. The case was the first disciplinary move taken by the regulator since it started overseeing credit ratings in June 2011.

“Sadly, while almost certainly not the intent, the SFC’s targeting of Moody’s will have the impact of limiting the flow of information in Hong Kong’s markets,” Tan Chin Hwee, chief executive officer for Trafigura Group Pte Ltd. in the Asia Pacific region, wrote in a note distributed by Smartkarma, an online research platform earlier this month. “This will harm the development of all of its financial markets, as ratings agencies and brokerages will be extra careful with any comments they may make.”

An SFC spokesman didn’t immediately respond to a request for comment.

Providing Services

The Securities and Futures Appeals Tribunal ruled that Moody’s was carrying on its regulated activity of providing credit rating services. The three-judge panel also found breaches of the code of conduct, which requires licensed persons to act fairly in the interests of clients and market integrity.

The ratings company had developed a framework of red flags that highlighted possible governance and accounting risks at the Chinese non-financial rated companies. The report examined the companies for possible credit rating reviews, but it was not the actual exercise of a review, according to Moody’s. Many of the companies were listed on the Hong Kong exchange. Several of those named in the research note have subsequently encountered financial difficulties, including filing for bankruptcy.

“They appear to have gone down the right path,” Trafigura’s Tan wrote. “If anything, the clear failing of Moody’s report was not being negative enough on these selected companies.”

Moody’s isn’t alone in being pursued by the SFC for matters relating to research. The authorities have gone after U.S. short-seller Andrew Left for his 2012 report on Evergrande Real Estate Group Ltd., a Chinese real estate developer, claiming the analyst misled investors, causing the company’s shares to plunge.

Some market participants agree with the SFC’s challenge of Moody’s and the tribunal’s determination that regulatory licensing enforces restrictions on freedom of opinions.

“It is more likely a case for SFC to play tough” on rating firms, said Jeffrey Chan, a founding partner at Oriental Patron Financial Group in Hong Kong. “The clear regulatory intention is to uphold integrity of the market of Hong Kong and SFC would not tolerate poor quality research reports.”

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