Update | Moody’s argues against fine by Hong Kong regulators over ‘red flag’ report

Hong Kong's financial services regulator overstepped its mandate and challenged freedom of speech by fining Moody's Investors Service HK$23 million for publishing a report critical of listed mainland Chinese firms, an appeals tribunal heard on Thursday in a case that is being closely watched for its wider implications for critical market commentary.

"The report is plainly not a prepared credit rating service," and should fall outside the regulatory code of conduct Moody's is accused of breaching, Adrian Huggins QC, acting for the US-based firm which is appealing against the fine, told a hearing of the Securities and Futures Appeals Tribunal (SAFT).

The Securities and Futures Commission argues the July 2011 report, which flagged warning signs at 61 major mainland Chinese firms, breached the code of conduct to which SFC-regulated firms, including credit rating agencies, are subject.

"The SFC is concerned the report has to achieve a certain standard. They have fallen short of that standard. In short, it is shoddy work," said Benjamin Yu QC, representing the regulator.

"The SFC is not alleging anyone is dishonest." 

Entitled "Red Flags for Emerging Market Companies: A Focus On China", the report listed potential problems at prominent companies including developers Evergrande Real Estate Group and Kaisa Group Holdings. These included a sudden change of auditor, or related party transactions between listed companies and other firms controlled by major shareholders. Share prices at several firms mentioned in the report fell in the days following its publication while borrowing costs rose.