HK tribunal upholds action against Moody's for report on China companies

Thu Mar 31, 2016 9:39am EDT
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HONG KONG (Reuters) - A Hong Kong tribunal upheld on Thursday disciplinary action against Moody's Investor Services for a report it published on Chinese companies, in a landmark decision that could curtail the services rating agencies can offer in the financial center.

The Hong Kong Securities and Futures Appeals Tribunal (SFAT) said Moody's did breach the Securities and Futures Commission (SFC) code of conduct through the publication of a July 2011 report that raised corporate governance concerns over 49 Chinese companies, contributing to a fall in their share prices.

Lawyers said the decision, which marks the first disciplinary action against a credit rating agency since the activities of such firms became directly regulated by the SFC in June 2011, would act as a roadmap for future regulatory action.

"Given this decision, credit rating agencies will generally have to exercise more caution, as it seems the court agrees with the SFC that these type of research activities are within its remit," said Michael Cheng, a consultant solicitor at law firm Andrew W Y Ng & Co in Hong Kong.

The tribunal did not uphold all of the SFC's claims against Moody's, more than halving the regulator's proposed HK$23 million ($2.97 million) fine to HK$11 million and directing the SFC to re-draft its public reprimand against the agency.

Moody's will also be required to pay 60 percent of the SFC's legal costs.

"As one of the three largest credit rating agencies in the world, Moody’s must have appreciated that the report would carry considerable weight in the market," the tribunal noted in its ruling.

"Yet, despite internal concerns as to the accuracy of the red flag framework, Moody’s persisted in the publication."

Moody's so-called Red Flag report devised a framework for identifying governance and accounting risks when investing in emerging market fixed income securities.   Continued...

A Moody's sign on the 7 World Trade Center tower is photographed in New York August 2, 2011. REUTERS/Mike Segar