Moody's denied private hearing on appeal against Hong Kong fine

A Hong Kong tribunal rejected a private proceeding request by Moody's Investors Service for its appeal against a HK$23 million ($3 million) penalty and public reprimand imposed by the city's securities regulator.

The rating company didn't build a sufficient case for keeping the hearings and orders private, Justice Michael John Hartmann said in a written decision posted on the Securities and Futures Appeals Tribunal's website. The original case hasn't been publicly disclosed.

"The open administration of justice is a fundamental principle of common law that applies to all proceedings before the tribunal," Hartmann said in the ruling dated Dec. 31. "Nothing has been put before me which convinces me of the necessity in this case to depart from the principle of open justice."

Moody's published a report in July 2011 titled "Red Flags for EmergingMarket Companies: a Focus on China," identifying issues including weak corporate governance, opaque business models, and unclear financial reporting at 61 companies. Hong Kong's Securities and Futures Commission said on Nov. 3 that the report breached provisions under the code of conduct for people under its jurisdiction, according to Hartmann's decision.

"The Moody's appeal has yet to be heard, and the SFC's decision notice is not yet a public document, so we don't know what the precise allegations are," David Webb, founder of Webbsite.com, wrote in a commentary on his Hong Kong-based corporate governance website. The regulator would need to show good grounds for its action or risk having a "chilling effect on critical research" as markets need an open exchange of opinions and analysis, Webb wrote.

Borrowing costs rose to record levels and shares plunged for some of Chinese companies that were named in Moody's report. West China Cement Ltd., which called Moody's claim misleading, plunged 14 percent the day after publication.

Moody's filed a challenge to the tribunal on Nov. 24 to the SFC's reprimand as well as the nature and size of the fine, wrote Hartmann. The ratings agency asked that all the hearings and orders be kept private, because public proceedings could harm its reputation for "skilled and balanced analysis."

Regulators and others playing a material role in the capital markets should be open to public scrutiny in tribunals and courts, Hartmann wrote. Unwanted publicity and possible embarrassment are normal incidences of litigation, he wrote.

"It has been said on numerous occasions that the true measure of health of capital markets is their transparency," he added. "On their own, professional embarrassment and possible damage to professional reputation do not justify a restriction on the open administration of justice."

Jonathan Li, a spokesman for the SFC, declined to comment on the details of the Nov. 3 action against Moody's. A hearing is scheduled on Jan. 8, according to the tribunal website.

"Moody's looks forward to presenting its case to the Hong Kong Securities and Futures Appeals Tribunal," Senior Vice President Donough Foley said in an emailed reply to queries.

"It would not be appropriate to comment further while the tribunal's review is in progress."

In another recent case, SFC filed proceedings in the city's Market Misconduct Tribunal against Andrew Left of Citron Research for a June 2012 report on real estate developer Evergrande Real Estate Group Ltd. The regulator alleged the head of the U.S.-based firm used false and misleading information in the report which described Evergrande as insolvent.

Left short-sold Evergrande's stock before publishing the report and made a realized profit of HK$1.7 million, SFC said in a statement on its website on Dec. 22. Shorting involves selling borrowed shares in anticipation of buying them back later at a lower price for a profit.