The Securities and Futures Commission (SFC), the independent statutory body operating in Hong Kong, imposed a reprimand and a fine of $11 million upon Moody’s Investors Service Hong Kong Limited (Moody’s). The official press release states that the fine concerns a number of alleged shortcomings in the report published in 2011, which involved Chinese non-financial companies.
The document titled “Red Flags for Emerging-Market Companies: A focus on China” was to lead to a significant decrease in the share prices of the Hong Kong-listed entities described in the report. On its publication (July 11, 2011), they declined from 5% to as low as 16.8%.
Moody’s report evaluated 49 enterprises from the angle of 20 warning signs (described as “red flags”). Its goal was to identify the alleged accounting and corporate governance risks. The publication focused mainly on six entities in which the number of red flags was the highest – they were also identified as “negative outliers”.
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The reprimand issued by the SFC has been confirmed subsequently by the Securities and Futures Appeals Tribunal (SFAT). The institution said that the Hong Kong regulatory body had the right to issue the fine mentioned above.
The SFAT determined that at the time of preparation and publication of the report, Moody’s conducted activity related to the credit rating services. In addition, there have been breaches of a number of the Code of Conduct provisions. Moody’s did not provide sufficient explanations in terms of the red flags. In the result, it painted an unclear and dishonest picture of them.
As reported by Ashley Alder, the SFC’s Chief Executive Officer, in a recent official statement on the decision: “The Code of Conduct sets general principles and standards of conduct that all licensed or registered persons, including credit rating agencies, must follow. The purpose of the Code of Conduct is to maintain high standards of conduct by intermediaries and to ensure intermediaries remain fit and proper.”
It is worth noting that the SFC initially requested a penalty of $23 million. Ultimately however, the SFAT reduced it to $11 million, not agreeing with all the demands signaled by the local market watchdog.