HK SFC Case Against Moody's For Red Flag Report

A
Application No. 4 of 20 14
B
IN THE SECURITIES AND FUTURES APPEALS TRIBUNAL
D
IN THE MATTER OF a Decision made by the
Securities
s ection 194
and
of
Futures
the
Commission
Securities
and
under
Futures
Ordinance, Cap. 571

AND IN THE MATTER OF s ection 217 of the
Securities and Futures Ordinance, Cap. 571
BETWEEN
MOODY'S INVESTORS SERVICE HONG KONG LIMITED

and
L
M
SECURITIES AND FUTURES C OMMISSION
Respondent
N
0
Applicant
Tribunal:
The Hon Mr. Justice Hartmann, NPJ, Chairman
Date of Ruling: 3 1 December 20 14

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RULING
c
1.
The applicant,
Moody's Investors Service Hong Kong
Limited ('Moody's'), is a credit rating agency. Such agencies- Moody's

being one of the largest in the world - play a pivotal role in capital
markets, assessing the creditwm1hiness of bonds issued by governments,
local authorities and corporations together with other forms of debt
securities and structured financial instruments.
In their role as analysts,
rating the ability of the issuers of debt securities to honour their
obligations, credit rating agencies are relied upon by a great many

J
investors.
2.
L
M
In July 2011, the applicant published a report titled "Red
Flags For Emerging-Market Companies: A Focus on China" (the 'Red

Flags Report').
3.
L
M
In a Decision Notice dated 3 November 2014, the Securities
and Futures Commission ('the SFC') concluded that the applicant, in
publishing the Red Flags Report, had breached a number of provisions of

p
the Code of Conduct for Persons Licensed by or Registered with the SFC.
By way of sanction, the SFC determined that the applicant should be
subject to a public reprimand and to a pecuniary penalty totalling $23

R
million.
4.
T
In
an
application dated 24 November 2014 made to this
Tribunal pursuant to s. 217 of the Securities and Futures Ordinance,
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-
Cap 571, the applicant has sought to challenge both the findings of
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culpability made against it and the nature and extent of the penalties
imposed.
5.
The applicant has further sought a direction from the
Tribunal that all its sittings in respect of the application be conducted in

private and that this direction be extended to all orders and decisions
arising out of the application ('the privacy direction').
The application
for the privacy direction has been opposed by the SFC.

6.
This ruling determines the issue of whether a pnvacy
direction should be ordered.

I
7.
J
L
M
The applicant has founded its application for the privacy
direction on the basis that, as a credit rating agency, it plays a critical role
in the smooth operation of Hong Kong's capital markets.
That role,
however, is founded on a reputation for skilled and balanced analysis and

should that reputation be undermined by publicity arising out of
proceedings before this Tribunal it could well have a wide-ranging impact
on its operations. On behalf of the applicant, it has been contended that
this would cause it serious prejudice in circumstances in which it is finnly
of the belief that the findings reached by the SFC in its Decision Notice
are unsubstantiated and should be overturned.
8.
As to the degree to which it is said that the disciplinary
L
M
N
0
proceedings instituted by the SFC are flawed, in its application for review
R
it has been contended by the applicant that its Red Flags Report was not
the result of its regulated activities, namely, the conduct of a credit rating
service, and is not therefore subject to the regulatory control of the SFC.
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Put shortly, it is contended that the SFC, by seeking to regulate an area of

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1
activity that is not licensed activity, has acted beyond its powers
In determining the application, I start by recognising that the
9.
open administration of justice is a fundamental principle of common law

which applies to all proceedings before the Tribunal.
of justice require it, the burden being on the applicant to establish that
requirement.
It has been said on numerous occasions that the true measure
of health of capital markets is their transparency.

I
That fundamental
principle is only to be set aside in any particular instance if the interests
10.
This means not only
that such markets should be regulated so that they operate in a fair and
open manner - the applicant itself having chosen to operate in such a
regulated environment - but that the process of regulation should itself be

K
open to scrutiny. Market regulators hold no special position of privilege.

They are not deemed infallible.
Their regulatory actions before this
Tribunal and the courts are at all times open to scrutiny by the public at
M
large and by those who participate in our capital markets.
Nor do other
individuals, corporations or bodies whose activities may have a material
impact on the day-to-day operation of our capital markets hold any such
0
position of privilege. When they are the subject of litigation, their actions
too, unless the interests of justice in any particular case dictate otherwise,
are open to scrutiny.

Q
Q
In paragraph 4.2.1 of the notice of application for review, the following has been
as s erted on behalf of the applicant: "As a person licensed with the SFC to
undertake Type 10 regulated activity , Moody's is required to comply with the
Code of Conduct only in so far as it relates to Moody's carrying on the regulated
activities for which it is licensed, namely credit rating s ervices, and the Code of
Conduct does not apply to any other activities s uch as publishing commentaries
on market-related is s ues."
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1 1.
It must follow therefore, in m y view, that, while I do not
dispute the contention that credit rating agencies such as Moody's play an
c
important role in the robust and healthy operation of our capital markets,
that fact alone cannot bestow on them as a class of market participants a
special entitlement to the exercise of justice behind closed doors.

E
12.
The applicant, of course, does not seek special privilege by
reference only to the nature of its licenced activities. The argument that
G
H
is advanced is rather to the following effect, namely, that- in the present

case- the applicant must suffer the real risk of wide ranging prejudice to
G
H
its business reputation (and therefore its business operations) arising out
I
of
adverse
publicity
generated
fundamentally misguided.
by
litigation
that
is
said
to
be
That prejudice, so I read the submission, is
made all the more damaging because, as a credit rating agency, the
K
L
applicant survives on its reputation for balanced and accurate analysis and
it is that reputation which is being directly undermined, not by a final
K
L
decision reached in the litigation process, but by allegations that have not
M
been finally adjudicated upon.

13.
The submission is not new and I do not doubt that there is
some substance in it. But, that being said, the principle is now well set
that in the common law unwanted publicity and possible embarrassment
are normal incidences of litigation and, on their own, are not a basis for
Q
R
seeking to have litigation conducted in private.

professional
embarrassment
and
possible
Equally, on their own,
damage
to
professional
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reputation do not justify a restriction on the open administration of

B
justice2
14.
The applicant's reputation no doubt is founded on the
accuracy of its analysis of the matters in respect of which it specialises
and the wisdom of its insight in such matters. But so are the reputations
of all those who make a living by advising others, among them doctors,
lawyers, accountants, engineers, management consultants and experts of
all kinds.
Should this application be granted on the grounds advanced
(and no more) it sets a precedent for an exercise in accretion in terms of

which an increasingly large number of professionals will be able to claim
the privilege of conducting litigation in private.
15.
In the present case of course the application is underscored
by the contention that the case against the applicant is fundamentally

K
flawed and it is that, so it appears to be argued, which creates the true
injustice to the applicant.
16.
Q
R
I am unable to accept a submission to that effect. I have two
principal reasons. First, if the alleged weakness of the case brought by

the regulatory authorities was in all instances a basis for ordering that
proceedings be held in private it would invariably mean that a preliminary
decision would have to be made in respect of the dispute which fonns the
very basis of the proceedings themselves. Second, in an open democratic
society, open justice, which carries with it the freedom of the public to
attend proceedings and the freedom of the media to report on them, acts
Q
R
s
2
This emerges from the dicta of Cheung CJHC in Asia Television Ltd versus
Communications Authority [201 3] 2 HKLRD 354, at 361 , commencing at

paragraph 17.
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to protect reputations when merited just as it acts to reduce reputations

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when merited.
17.
By
way
of summary,
therefore,
on the limited basis
advanced on behalf of the applicant, the application for a direction that
the proceedings be held in private must be refused. Nothing has been put
E
before me which convinces me of the necessity in this case to depart from

the principle of open justice.
NPJ)
.
(The Hon Mr.l
Chairman, Securities and Futures Appeals Tribunal
Mr. Melvin Sng ofLinklaters,

p
Solicitors for the Applicant
Ms. Monica To, Associate Director (Enforcement) of SFC,

the Respondent
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A

IN THE SECURITIES AND FUTURES APPEALS TRIBUNAL

Ordinance, Cap. 571

Securities and Futures Ordinance, Cap. 571

MOODY'S INVESTORS SERVICE HONG KONG LIMITED

SECURITIES AND FUTURES C OMMISSION

The Hon Mr. Justice Hartmann, NPJ, Chairman

Date of Ruling: 3 1 December 20 14

Moody's Investors Service Hong Kong

Limited ('Moody's'), is a credit rating agency. Such agencies- Moody's

securities and structured financial instruments.

In their role as analysts,

rating the ability of the issuers of debt securities to honour their

obligations, credit rating agencies are relied upon by a great many

In July 2011, the applicant published a report titled "Red

Flags For Emerging-Market Companies: A Focus on China" (the 'Red

In a Decision Notice dated 3 November 2014, the Securities

and Futures Commission ('the SFC') concluded that the applicant, in

publishing the Red Flags Report, had breached a number of provisions of

subject to a public reprimand and to a pecuniary penalty totalling $23

application dated 24 November 2014 made to this

Tribunal pursuant to s. 217 of the Securities and Futures Ordinance,

The applicant has further sought a direction from the

Tribunal that all its sittings in respect of the application be conducted in

for the privacy direction has been opposed by the SFC.

This ruling determines the issue of whether a pnvacy

direction should be ordered.

The applicant has founded its application for the privacy

however, is founded on a reputation for skilled and balanced analysis and

As to the degree to which it is said that the disciplinary

Put shortly, it is contended that the SFC, by seeking to regulate an area of

open administration of justice is a fundamental principle of common law

It has been said on numerous occasions that the true measure

of health of capital markets is their transparency.

principle is only to be set aside in any particular instance if the interests

This means not only

regulated environment - but that the process of regulation should itself be

open to scrutiny. Market regulators hold no special position of privilege.

Their regulatory actions before this

large and by those who participate in our capital markets.

individuals, corporations or bodies whose activities may have a material

are open to scrutiny.

undertake Type 10 regulated activity , Moody's is required to comply with the

Code of Conduct only in so far as it relates to Moody's carrying on the regulated

It must follow therefore, in m y view, that, while I do not

special entitlement to the exercise of justice behind closed doors.

The applicant, of course, does not seek special privilege by

is advanced is rather to the following effect, namely, that- in the present

That prejudice, so I read the submission, is

been finally adjudicated upon.

The submission is not new and I do not doubt that there is

seeking to have litigation conducted in private.

Equally, on their own,

reputation do not justify a restriction on the open administration of

The applicant's reputation no doubt is founded on the

accuracy of its analysis of the matters in respect of which it specialises

Should this application be granted on the grounds advanced

(and no more) it sets a precedent for an exercise in accretion in terms of