Moody's Loses Hong Kong Credit Note Appeal Against Regulator

  • U.S. company was ordered to pay $1.4 million at earlier stage
  • Appeals court disagrees with some of tribunal’s findings

Moody’s Corp. lost an appeal against a judgment that found it broke Hong Kong’s regulatory code of conduct.

Moody’s Investors Service was appealing a decision by the Securities and Futures Appeals Tribunal in March 2016 that resulted in a HK$11 million ($1.4 million) fine and affirmed an action against the company by the city’s Securities and Futures Commission.

The regulator had said a 2011 report on public companies breached the code by failing to provide sufficient explanations for its judgments and not ensuring the accuracy of its claims. That ruling alarmed investors and analysts, concerned that it could strangle critical commentary about Hong Kong’s markets.

“The conclusion that outsiders might draw from this case is that Hong Kong’s chief securities regulator is policing the content of market research and analyses, even when issued by licensed firms,” said Basil Hwang, a Hong Kong-based partner who specializes in financial regulation at Zhong Lun Law Firm. “This is something that in other jurisdictions would be a matter of civil liability lawsuits taken up by private individuals or corporations.”

While the judges on Thursday rejected the appeal, they did agree with some of Moody’s arguments. The tribunal was wrong to call the research note a credit-rating report, they said, because it did not meet the necessary criteria.

That distinction has wider significance for the market, according to Timothy Loh, a Hong Kong-based securities lawyer.

Less Risk

“There is far less risk that laymen, financial advisers, journalists and others giving opinions as to credit-worthiness would be inadvertently carrying out a Type 10 regulated activity,” Loh said, referencing the SFC rules that govern credit-rating firms.

“The SFC considers that responsible research, including those issued by credit rating agencies and research houses, can all contribute to the overall market quality and price discovery process,” Ashley Alder, chief executive officer at the regulator, said in a statement. The agency, he said, “has no intention to suppress legitimate commentaries on listed companies, whether positive or negative.”

The 2011 Moody’s note highlighted warning signs about weak corporate governance, opaque business models and unclear financial reporting at dozens of Chinese companies. The tribunal said in March last year that the note qualified as a ratings notice, which meant it should be held to higher standards.

At a January appeal hearing, Adrian Huggins, lawyer for the New York-based credit-rating firm, told the judges that Moody’s had considered using the note’s contents as part of a credit-review report but “decided not to as it was inappropriate.” A bright line between regulated and unregulated activities had been blurred by the regulator, Huggins said at the time.

Considering Options

“Moody’s did not engage in misleading conduct and disagrees that the Securities and Futures Commission should be able to regulate the content of research publications,” Donough Foley, senior vice president for government and public affairs, said in an emailed statement. “Moody’s is reviewing the court’s opinion and is considering its options.”

Shares plunged and borrowing costs jumped for some of the companies, including Winsway Coking Coal Holdings Ltd. and West China Cement Ltd., in the days after the note was published. Moody’s said the research was a primer on possible credit-rating reviews, rather than a review itself.

A first of its kind in Hong Kong, the tribunal’s decision was seen as having wide-ranging implications for how ratings companies operate in the former British colony, especially as it came at around the same time as an SFC action against U.S. short seller Andrew Left.

In August, Left was found culpable of market misconduct for a report that his Citron Research firm published that was critical of real estate developer Evergrande Real Estate Group Ltd. He was fined HK$6.9 million and banned from the Hong Kong market for 5 years. Left lost an appeal against the ruling in January, and a second appeal hearing is still pending.

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