hk sfc case against moody's for red flag report

8/10/2019 HK SFC Case Against Moody's for Red Flag Report

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Application No 4 of 2014

IN HE SE URI IES ND F URES PPE S RIBUN

BET EN

THE MATTER OF a Dec s on ma e by theSecu t es an Futu es Comm ss on un e sect on19 of the Secu t es an Futu esO d nance, Cap 571

AND I THE MATTER OF sect on 17 of theSecu t es n utu es O nance, Cap. 571

MOODY'S I ESTORS SERVICE HONG KONG LIMITED Applicant

and

SECURITIES A FUTU ES C ISSI N

Tribun l: The on Justice Hartmann, NPJ Chairman

Date of Ruling: 3 1 Dec mb r 20 14

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R spondent

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R ING

. he applicant, Moody s Investo s e vice ong ong

Limited ( Moody s ), is a c edit ating age cy. uch agencies- Moody s

being o e of the la gest in the wo ld - play a pivotal ole in capital

ma kets, assessing the c editw hiness of bonds issued by gove ents,

local autho ities and co o ations toget e with othe fo ms of debtsecu ities and st uctu ed nancial inst ume ts In thei ole as a alysts,

ating t e ability of the issue s of debt secu ities to honou thei

obligations, c edit ating age cies a e elied upon by a g eat any

investo s

2. In July 20 , the applicant published a epo t titled " ed

lags o Eme ging Ma ket Companies A ocus on China the ed

Flags epo t )

3 . In a Decision Notice dated 3 ovembe 20 4, the ec ities

and Fut es Com ission t e FC ) concluded t at t e applic t, in

publishi g the Red Flags Repo , had b eached a numbe of p ovisi ns of

the Code of Conduct fo Pe so s Licensed by o Registe ed with t e C.

By way of sanction, the FC dete ined that the applica t sho ld be

subject to a public ep imand and to a pecunia y pe alty totalli g $23m i llion.

4 In a application dated 24 Novembe 20 4 made t this

ibunal pu suant to s.2 7 of the ecu ities and Futu es i ance,

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ap 571, the applicant has sought to challenge both the ndings of

culpabi ity made against it and the nature and ext nt of th p nalti s

impose .

5 . The applicant has rther sought a dir ction from the

Tribun l that all its sittings in r spect of the application b conducted in

private and that this direction be ext nd d to all orders and d cisions

arising out of th app ication ( the privacy direction ) The application

for the rivacy direction has b n oppos d by the C.

6. This ruling det rmines th issue of wh ther a p vacy

dir ction should be ordered.

7 The app ic t has founded its application for th privacy

dir cti non the basis that, as a credit rating agency, it plays a critical rol

in the smooth operation of Hong Kong s capital markets That rol ,

howev r,is found d on a r putation for skilled and balanced analysis andshould that r putation b n ermin d by publicity arisin out of

procee ings before this Tribunal it could well have a wid ranging impact

on its perations. n behalf of the applicant, it has b en contend d that

this wo ld caus it serious pr judice in circumstanc s in which it is ly

of the elief that the ndings reached by the in its ecision otice

are uns bstantiated and should be overturned.

8 As to the degr to which it is said that the disciplinary

proc e ings instituted by th are awed, in its application for r view

it has een contended by th applicant that its ed la s port was not

the res lt of its regulated activities, nam ly, the conduct of a cr dit rating

s rvic and is not therefor subject to the r gu ato control of th

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Put shortly it is contended that the C by see ing to regulate an area of

activity that is not licensed activity has acted beyond its powers

9 In determining the application I start by recognising t at t eopen administration of ustice is a ndamental principle of common law

which applies to all proceedings before the Tribunal. That ndamental

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

of ustice require it the burden being on the applicant to establish t at

re uire ent

10 It has been said on numerous occasions that the true measure

of heal h of capital mar ets is t eir transparency This means not only

that such mar ets should be regulated so that they operate in a fair and

open anner t e applicant itself aving c osen to operate in such a

regulated en ironment but that the process of regulation s ould itself be

open to scrutiny ar et regulators hold no special position of privilege

They are not deemed infallible T eir regulato actions before this

Tribunal and t e cour s are at all t mes open to scrutiny by t e public at

large and by those who par icipate in our capital mar ets Nor do ot er

individuals corporations or bodies whose activities may have a material

impact on t e day to day operation of our capital markets hold any suc

position of privilege. When they are t e sub ect of litigation t eir actions

too unless the interests of ustice in any particular case dictate ot erwise,are open to scrutiny

In pa ag aph 4.2 1 of the notice of application fo e iew, the following has been asse te on behalf of the appl cant: "As a pe son l cense w th the SFC to un e take Type 10 egulate act v ty Moo y's s equ e to co ply w th t e Co e of Con uct only in so fa as it elates to Moo y s ca ying on the egulate acti ities fo which it is license , na ely c e t at ng se vices, an the Co e of Con uct oesnot apply to any othe act vit es such as publ sh ng co menta es on a ket elate ssues

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11. It must o ow th r or , in my vi w, that, whi I do not

disput th cont ntion that cr dit rating ag nci s such as oody s p ay an

impor ant ro in th robust and h a thy op ration o our capita mark ts, that act a on cannot b stow on th m as a c ass o mark t par icipants a

sp cia ntit m nt to th x rcis o ustic hind c os d doors.

12 Th app icant, o cours , do s not s k sp cia pr vi g by

r r n on y to th natur o its ic nc d activiti s. Th argum nt that

is advanc d s rath r to th o owing ct, nam y, that- in th pr s nt

cas - th app icant must su r th r a risk o wid rang ng pr judic to

its busin ss r putation ( nd th r or its usin ss op rations) arising out

o adv rs pub icity g n rat d by itigat on that is said to b

ndam nta y m sg d d. That p j d , so I ad th su ss on,

mad a th mor damaging b caus , as a cr dit rating ag ncy, th

app cant s r s on its putation or ba anc d and a curat ana ys s and

it is that r putation which is b ing dir ct y und rmin d, not by a na

d cisionr ach d in th itigation proc ss, ut y a gations that hav not

b n na y adjudicat d upon

13 Th su mission is not n w and I do not doubt that th r is

som s bstan in it. But, that b ng sa d, th prin ip is now w s t

that in th common aw unwant d pub ic ty and possib mbarrassm ntar norma incid nc s o itigation and, on th ir own, ar not a asis or

s king to hav itigation conduct d in privat . E ua y, on th ir own,

pro ssiona m arrassm nt and possib damag to pro ssiona

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putation do not usti a st i tion on t op n administ ion of

usti

14 T appli ant s putation no doubt is found d on ta u a y of its analysis of t matt s in sp t of w i it sp ialis s

and t wisdom of its insig t in su matt s. But so t putations

of all t os w o mak a living by advising ot s among t m do to s

la y a ountants ngin s manag m nt onsultants and xp rts of

all kin s. ould t is appli ation b g ant d on t g ounds a v n d

and no mo ) it s ts a p d nt fo an x is in a tion in t s ofw i n in asingly la g numb of p of ssionals will b abl to laim

t p ivil g of ondu ting litigation in p ivat

15 In t p s nt a of ou s t appli ation is un s o d

by t ont ntion t at t as against t ppli ant is dam ntally

aw d and it is t at so it app a s to b a gu d w i at s t t u

in usti to t appli ant.

16 I am unabl to a pt a submission to t at ff t. I av two

p in ipal asons. Fi st if t all g d w akn ss of t as b oug t by

t g lato aut o iti s was in all inst s a basis fo o d ing t a

p o ings b ld in p ivat it would inva iably m an t at a p limina y

d isionwould av to b mad in sp t of t disput w i fo s tv b sis of t p o dings t ms lv s. ond in an op n mo ati

so i ty op n usti w i a i s wit it t f dom of t publi to

att nd o dings and t f dom of t m dia to po t on t m a ts

Ths emerges from the dicta of Che g JHC n Asia Televisio Ltd ersus

Com u ic tio s Authori [ 01 3] HK 354, at 3 6 1 , commenc ng at par graph17.

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o pro c r pu a ions wh n ri d jus as i ac s o r d c r pu a i

wh n ri d

17 By way o su a , h r or , on h i i d basis

ad anc d on b ha o h app ican , h app ica ion or a dir c ion

h proc dings b h d in pri a us b r s d No hing has b n pu

b or which con inc s o n c ssi y in his cas o d par ro

h princip o op n jus ic

.

Th onM l NJ

Chairman, curi i s and u ur s App a s Tribuna

M. in ng o ink a rs,

o ici ors or h App icans onica To, Associa Dir c or En orc n ) o C,

h spond n

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hk sfc case against moody's for red flag report

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