Fri, Jun 09, 2017 - Page 10 News List

Court rules against Moody’s HK credit research appeal

Bloomberg

Moody’s Corp broke Hong Kong’s regulatory code of conduct when it issued a 2011 report on public companies, a High Court appeal hearing ruled yesterday.

Moody’s Investors Service was appealing a decision by the Hong Kong Securities and Futures Appeals Tribunal that resulted in a HK$11 million (US$1.4 million at the current exchange rate) fine.

The panel affirmed in March last year an action against the company by the Hong Kong Securities and Futures Commission (SFC) for breaching the code of conduct when it published a report on dozens of Chinese companies.

That ruling alarmed investors and analysts, concerned that it could strangle critical commentary about Hong Kong’s markets.

The report highlighted warning signs about weak corporate governance, opaque business models and unclear financial reporting at the 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.

An SFC spokesman declined to comment. A representative for Moody’s could not be reached for comment.

Shares plunged and borrowing costs jumped for some of the companies, including Winsway Coking Coal Holdings Ltd (永暉焦煤) and West China Cement Ltd (西部水泥), 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 US short-seller Andrew Left.

In August last year, 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 (恒大集團). He was fined HK$6.9 million and banned from the Hong Kong market for five years.

Left lost an appeal against the ruling in January, and a second appeal hearing is still pending.

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