Posted inRegulation

Moody’s `red flag’ report appeal overruled

Hong Kong's Securities and Futures Appeals Tribunal (SFAT) has affirmed the SFC’s findings on the Moody's China “red flags” report.
Fund Selector Asia

Moody’s failed in its appeal to the SFAT and the decision by the Securities and Futures Commission to fine and reprimand the ratings agency will stand, according to a statement by the SFC.

Moody’s has been fined HK$11m ($1.4m) “for various failures relating to its preparation and publication of the special comment report entitled `Red Flags for Emerging-Market Companies: A Focus on China’ published on 11 July 2011”, the regulator said.

Last September, a hearing was set by Securities and Futures Appeals Tribunal after the credit rating agency challenged the SFC’s ruling of a HK$23m fine.

Last week, the fine was reduced to HK$11m, but a public reprimand was retained.

“In the report, Moody’s assessed 49 non-financial Chinese entities against 20 warning signs it called `red flags’ to identify possible corporate governance and accounting risks.

The share prices of more than half of the Hong Kong-listed companies covered in the report dropped substantially on the following day, ranging from 5% to as much as 16.8%, compared to their previous closing prices on 8 July 2011.”

The panel said the report “painted an unfair, unclear and misleading picture of the companies” and “failed to ensure the accuracy of the red flags assigned to the companies.”

It also showed “substantive breaches of general principles 1 and 2 of the code of conduct” under its credit rating services license,” according to the ruling.

Moody’s spokesperson said it “appreciates the reduction in the fine, however we did not engage in misleading conduct and we disagree that the SFC should be able to regulate the content of research publications.”

It is considering its options, the spokesperson noted. Moody’s can challenge the tribunal’s order within 30 days of the judgement.

Part of the Mark Allen Group.