Moody’s Investors Service must pay a penalty of HK$11 million (US$1.4 million) after a Hong Kong tribunal upheld an action against the firm by the territory’s financial regulator.
In a case that was the first of its kind in Hong Kong, the Securities and Futures Appeals Tribunal on Thursday ruled that Moody’s was acting as a regulated entity providing credit-rating services when it published a report about 61 Chinese companies in 2011.
That meant Moody’s had to abide by the Hong Kong Securities and Futures Commission’s (SFC) code of conduct, which the regulator said the report breached by failing to provide sufficient explanations for its judgements, and not ensuring the accuracy of its claims.
The decision could have wide-ranging implications for how ratings agencies operate in Hong Kong.
Moody’s said in a statement it disagreed with the notion that the SFC can regulate the content of research publications.
Timothy Loh, a lawyer who represents US short-seller Andrew Left in a separate dispute with the SFC, said the tribunal construed the scope of what constitutes credit-rating services too broadly, which could affect what researchers say in future.
“The greater issue is whether by reason of the broad interpretation given” to rating providers, “the freedom of expression of other market participants has now been impinged,” Loh said in an interview.
The report, titled Red Flags for Emerging-Market Companies: a Focus on China, used a framework of warning signs that Moody’s had about weak corporate governance, opaque business models and unclear financial reporting at the companies. The note qualified as a ratings notice, according to the adjudicating panel.
“The tribunal has been drawn to the conclusion that there was a failure in clear and unambiguous terms to set out the true nature and purpose of the red flag framework,” the panel said in its ruling. “The evidence indicates that the market understood the red flag framework as providing some form of ranking system of credit risk and acted accordingly.”
Moody’s failed to provide sufficient explanations and justification for the red flags assigned to the companies, an SFC spokesman said after the ruling was published.
As a result it “painted an unfair, unclear and misleading picture of the companies,” the spokesman said.
The regulator began supervising credit ratings in 2011, just a few months before the report was published.
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