Hong Kong | Moody’s says it didn’t breach rules in appeal case

Moody’s Investors Service did not breach Hong Kong’s regulatory code of conduct because it never used a 2011 report on listed companies as a credit-rating tool, the city’s High Court heard yesterday during an appeal hearing.

Adrian Huggins, lawyer for the New York-based credit-rating firm, told the three 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.

Moody’s was appealing a decision by the city’s Securities and Futures Appeals Tribunal that resulted in a HKD11 million (USD1.4 million) fine. The panel in March affirmed an action against the company by the Securities and Futures Commission for breaching the regulator’s code of conduct when it published a report on dozens of Chinese companies. That ruling alarmed investors and analysts, concerned that such actions could strangle critical commentary about the city’s markets.

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

Under questioning from the judges, Huggins said though the report had been confusing, no one reading it would think credit ratings at the firms mentioned were about to be adjusted.

“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, Moody’s Investors Service, said in a statement. “Moody’s hopes the Court will overturn the decision of the Securities and Futures Appeals Tribunal and looks forward to its ruling.”

SFC spokesman Ernest Kong declined to comment.

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

“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 tribunal panel said in its March 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.”

A first of its kind in Hong Kong, the tribunal’s decision was seen as having wide-ranging implications for how ratings agencies operate in Hong Kong, 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 HKD6.9 million in penalties and costs and banned from the Hong Kong market for 5 years. Left said he plans to appeal. Benjamin Robertson, Bloomberg