Risk & Compliance

Hong Kong Court Affirms Sanctions on Moody’s

Regulators had fined the rating agency $1.4 million for publishing a "misleading" report that flagged Chinese companies for weak corporate governance.
Matthew HellerJune 8, 2017
Hong Kong Court Affirms Sanctions on Moody’s

Moody’s Investors Service has lost its appeal of a decision in which Hong Kong financial regulators fined the credit rating agency HK$11 million ($1.4 million) for publishing a “misleading” red flags report about Chinese companies.

Hong Kong’s Securities and Futures Appeal Tribunal (SFAT) imposed the fine in March, partially upholding the findings of a Securities and Futures Commission (SFC) investigation into the 2011 report.

The document had raised corporate governance concerns over 49 Chinese companies, contributing to a fall in their Hong Kong share prices. The SFC probe found Moody’s breached the commission’s code of conduct by failing to ensure the accuracy of the report and publishing a report that was “misleading, confusing and inaccurate.”

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Moody’s said Thursday that Hong Kong’s Court of Appeal had rejected its appeal of the SFAT’s decision.

“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,” a Moody’s spokesman said, adding that the company was “considering its options.”

As Reuters reports, the case “has been closely watched by the financial industry and corporate governance activists as it is likely to redefine the limits on what can be written in research reports on public companies, potentially curtailing the activities of research firms in [Hong Kong].”

The SFC said the Moody’s report had “failed to provide sufficient explanations for the red flags assigned by it to the rated companies and to set out relevant justifications to the red flags in the report, and had, as a result, painted an unfair, unclear and misleading picture of the companies.”

The commission recommended a public reprimand and a fine of HK$23 million ($2.95 million). The SFAT rejected Moody’s argument that the report did not constitute a credit rating and was therefore not subject to the SFC’s jurisdiction, but reduced the fine to HK$11 million.

“The complaint against the credit rating agency was the first such action by the SFC and raised fears of a chilling effect on coverage of Hong Kong-listed companies,” The Financial Times said.

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