NewMoody's admits research report on Chinese companies had errors

Moody's on Friday admitted its damning research report on 61 Chinese companies had errors but maintained these did not justify the securities regulator's HK$23 million fine on the ratings agency as it stood by its basic contention about corporate governance problems at these firms.

Moody's said there were input and mathematical errors in its "red flags" report, but its counsel, Adrian Huggins, told the tribunal hearing the case between Moody's and the Securities and Futures Commission that the errors "did not render the whole red flags framework fundamentally flawed". He added the errors "did not have a material impact on overall accuracy of the report".

In a case being closely watched, the SFC argued the July 2011 report flagging warning signs at the Chinese firms, was written as part of a credit ratings exercise and breached the code of conduct to which SFC-regulated firms, including credit rating agencies, are subject.

On Friday, it produced Moody's internal emails and interview transcripts with the firm's senior executives to justify the fine. "The (report) was shoddy and unprofessional," said Benjamin Yu, representing the regulator, told the Securities and Futures Appeals Tribunal.

Moody's is arguing the report was not part of a credit ratings exercise, and so the firm should not be held accountable to the SFC code of conduct. Michael West, Moody's managing director of global structured finance, and Gary Lau, managing director of corporate finance in Hong Kong, were among Moody's executives whose emails were handed over to the SFC.

The emails revealed that the report, entitled "Red Flags for Emerging Market Companies: A Focus on China" was commissioned by senior Moody's executives concerned about fraud allegations at major Chinese companies following probing articles in the US media.