The conflict centers on a report Moody’s Investors Service Hong Kong issued in July 2011 titled “Red Flags For Emerging-Market Companies: A Focus on China“.
The report highlighted company issues “meriting scrutiny to identify possible governance or accounting risks”.
Moody’s assessed companies using criteria such as weaknesses in corporate governance, risky or opaque business models, fast-growing business strategies and quality of financial statements.
The report put warning flags on 61 Chinese companies.
The day after the report was issued, the Hang Seng Index fell 689 points while borrowing costs of the firms named in the report rose, according to the South China Morning Post.
Subsequently, the SFC fined Moody’s HK$23 million ($3m) and publicly reprimanded the agency because it believed the report had breached the code of conduct. The SFC did not publicly disclose specifics about those allegations.
Moody’s disputed the disciplinary action, and the hearing, set for September 10 and 11, will address the ratings agency’s case. A privacy order will not be in effect, and therefore more details should be made public.
The Red Flag report was issued shortly after short seller Carson Block, head of research house Muddy Waters, issued a damning report on China’s Sino Forest with details of what it said was massive fraud.
The allegations were denied by Sino Forest management. Nonetheless, the report sent valuations of all overseas-listed Chinese companies tumbling as investors ran for the exits over concerns about mainland accounting practices.
