Hong Kong Regulator Alleges Misleading Research on Accounting Fraud of HK-Listed Chinese Companies; SFC Pursues Actions Against Moody’s, Citron


Hong Kong Regulator Alleges Misleading Research

SFC Pursues Actions Against Moody’s, Citron


Updated Jan. 18, 2015 4:34 p.m. ET

Hong Kong’s securities regulator is turning up the heat on what it considers to be misleading stock research. In recent months, the Securities and Futures Commission has pursued separate actions against U.S. ratings firm Moody’s Investors Service Inc. and a California-based short seller for releasing what it claims were misleading reports on Hong Kong-listed companies that sent their stock and bond prices tumbling.

The regulator’s actions against Moody’s and the head of Citron Research are rare instances of a developed-market regulator taking on a ratings firm or a research analyst for the content of their reports. In short selling, which is legal in Hong Kong and some other countries such as the U.S., an investor sells borrowed shares in hopes of buying them back later at a lower price, pocketing the difference.In his first public remarks since the regulator initiated its action, Andrew Left, who founded Citron, disputed the agency’s charge that he intentionally released false and misleading information in a 2012 report in an effort to manipulate a Chinese property company’s share price.

“I would never put out knowingly wrong information. I have been publishing for over 14 years and that is because of my focus on accuracy. If I did, in fact, publish one thing that could have been left for interpretation, I wish the company would have contacted me for a correction,” Mr. Left recently said in an interview.

“Just like someone who owns the stock and writes why they believe the stock is undervalued, I might short a stock and say why I believe the stock is overvalued. At the end of the day, it is the market that decides the price of equity,” Mr. Left said.


In the action against Moody’s Investors Service, a unit of U.S.-based Moody’s Corp., the regulator hasn’t publicly detailed its case beyond saying that a 2011 report by the company was a breach of the regulator’s code of conduct. In November, the agency fined Moody’s $3 million for the report on 61 listed Chinese companies that highlighted areas such as weak corporate governance and accounting practices. The report—Red Flags For Emerging Market Companies: A Focus on China—sent shares and bond prices at some of these companies tumbling, even as some of them disputed the allegations.

Moody’s said it plans to appeal the fine in hearings scheduled to start in September, and a spokesman said in an emailed response to questions that the firm “looks forward to presenting its case” but declined to offer further detail.

The regulator appears to be applying extra scrutiny on “analysts in terms of factual statements that they are publishing in their report,” said William Hallatt, a lawyer at Herbert Smith Freehills.

The SFC hasn’t publicly indicated that it is paying any greater attention to analyst reports and it routinely scrutinizes what it considers market misconduct. But cases based on allegedly inaccurate research are rare.

In Mr. Left’s case, the regulator alleges he sold short stock of Evergrande Real Estate Group Ltd. when a 2012 report he wrote on the Chinese property firm hammered its shares.

The report alleged that Evergrande was insolvent and had presented fraudulent financial results to investors. Evergrande at the time rebutted the allegations. The company declined to comment for this article.

The regulator said Mr. Left made a profit of 1.7 million Hong Kong dollars ($219,300) because he shorted 4.1 million shares of Evergrande before publishing the report. Mr. Left confirmed the figures.

After the release of Mr. Left’s report on June 21, 2012, Evergrande’s shares slumped as much as 20% before closing down 11%, at HK$3.97.

Hong Kong-based shareholder activist David Webb said the regulator’s moves are worrying for free speech in Hong Kong, if it results in a clampdown on research.

“Free markets depend on free speech and the open exchange of opinions and analysis, whether it turns out to be right or wrong. The SFC will need to tread very carefully in this area and show good grounds for their actions…otherwise they are likely to have a chilling effect on critical research,” said Mr. Webb on his website.


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