Court of Final Appeal upholds regulatory action against Moody's

Moody’s published a 2011 report that flagged risks at certain Chinese companies.

Reuters reports that rating agency Moody’s has failed in its final attempt to overturn regulatory action taken by the Securities and Futures Commission (SFC) for a report it wrote in July 2011 alleging corporate governance failings at a number of Chinese companies. 

Following an inquiry into the report, the SFC slapped Moody’s Investors Service Hong Kong with an $11m fine for its special comment report in 2014 but Moody’s appealed against the action to the Hong Kong Securities and Futures Appeals Tribunal, which did not uphold all aspects of the SFC’s claims against Moody’s, and slashed the fine.

This prompted the credit rating agency to appeal to the Hong Kong Court of Appeal and then the Hong Kong Court of Final Appeal.

The Moody’s report entitled “Red Flags for Emerging-Market Companies: A Focus on China” identified risk factors of companies but “failed to provide sufficient explanations for the red flags” which then raised concerns about the accuracy of the assigned red flags, according to a 2016 SFC statement.

The report also “chose to list the red flags assigned to each company and to highlight six companies with the largest number of flags in the Report as “negative outliers” to make the Report “actionable” despite the assessment performed by its analysts showed that there was no significant correlation between the number of red flags and the companies’ credit risk.”

The case has been watched closely by the financial industry as it could determine the limits on what can be written on reports on public companies and potentially limit the activities of research firms as credit rating agencies are directly regulated by the SFC since June 2011.

“Moody’s is disappointed that the Court of Final Appeal has dismissed its appeal regarding the scope of the SFC’s jurisdiction but we recognise its importance for market clarity,” Moody’s said in a statement.

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