Markets tribunal overturns ratings agency Moody’s request for privacy in appeal against a fine imposed for issuing a ‘red flags’ report on Chinese companies in July 2011

Moody’s denied privacy in appeal against SFC

Friday, 02 January, 2015, 3:50am

Enoch Yiu

Markets tribunal overturns ratings agency’s request for privacy in appeal against a fine imposed for issuing a ‘red flags’ report

A markets tribunal has overturned a request by Moody’s Investors Service for privacy in its appeal against the Securities and Futures Commission’s decision to fine the ratings agency HK$23 million.

The commission had fined Moody’s HK$23 million and publicly reprimanded the agency for breaching the code of conduct by issuing a “red flags” report on Chinese companies in July 2011.Moody’s had appealed against the decision and sought that the proceedings be held in private but the Securities and Futures Appeals Tribunal chairman Michael Hartmann rejected the request and unveiled the case on the tribunal website yesterday.

Tribunal documents show that on November 24, Moody’s appealed to the tribunal against an SFC decision on November 3 to fine it HK$23 million and publicly reprimand it for breaching the code of conduct by publishing a report titled “Red Flags for Emerging Market Companies: A Focus on China”.

The Moody’s report warned of red flags at 61 companies it examined, highlighting risky or opaque business models, poor quality of earnings and cash flow, and concerns over the quality of financial statements.

The Hang Seng Index fell 689 points the day after the report was published while borrowing costs of the firms named in the report rose.

The tribunal document did not give details about the instances of Moody’s supposed misconduct but only said that Moody’s sought to challenge both the SFC findings and penalties, and sought to keep the appeal hearing and any order private.

Moody’s believed it played a “critical role” in the local capital market that is founded on a reputation of skilled and balanced analysis. Such reputation might be hurt by the publicity of the legal proceedings and affect its operations, its submission said.

Mr Justice Hartmann rejected the privacy request on December 31 saying “the true measure of health of capital markets is their transparency” so that “the process of regulation should itself be open to scrutiny”.

The judge said all credit rating agencies “cannot bestow on them as a class of market participants a special entitlement to the exercise of justice behind closed doors” and said “in an open democratic society, open justice, which carries with it the freedom of the public to attend proceedings and the freedom of the media to report on them”.

Its tussle with Moody’s marked another instance of the SFC’s efforts to check what it sees as misconduct pertaining to analysis reports.

The regulator last week said it had asked the Market Misconduct Tribunal to take legal action against Andrew Left, head of US research firm Citron Research, for allegedly short selling 4.1 million Hong Kong-listed shares of mainland property company Evergrande Real Estate Group shorty before he issued a scathing report on the company on June 21, 2012.

Evergrande’s shares dropped by nearly a fifth the same day the report was issued and Left bought back the shares at a lower price, pocketing a notional profit of HK$2.8 million and a realised profit of HK$1.7 million, the SFC said.

The SFC alleges the Citron report contained false and misleading information about Evergrande that indicated the developer was insolvent and had consistently presented fraudulent information to the investing public.


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