HONG KONG (AP) — Moody's Investors Service is challenging a $3 million fine by Hong Kong's securities regulator over a 2011 report that flagged potential problems at Chinese companies.
Lawyers for Moody's Hong Kong unit and the Securities and Futures Commission outlined their arguments at a two-day appeals tribunal hearing that began Thursday.
The case is the first of its kind and has raised fears about the chilling effect it may have on critical financial research in the semiautonomous Chinese city.
A former British colony, Hong Kong is an Asian financial center that retains civil liberties such as free speech not seen on the mainland.
The regulator's complaint last year accused Moody's of breaching its code of conduct when it issued a report that found "red flags" at 49 of 61 Chinese companies.
Moody's argued that the report did not fall under its primary business of preparing and issuing credit ratings, an activity it is licensed to carry out in Hong Kong by the SFC.
Instead, Moody's said, the report was supplemental to its main business because it used the unconventional "red flags" methodology to rate companies.
"Our argument is we are not providing credit ratings" with the report, said Adrian Huggins, a lawyer representing Moody's.
In its 25-page report, Moody's screened Chinese companies, many of them listed on Hong Kong's stock exchange, for 20 "red flags" to sniff out weak corporate governance, opaque business models, too-fast growth and poor quality earnings or financial statements.
Some of the companies have since run into trouble, notably Kaisa Group Holdings, a fast-growing property developer that defaulted on its U.S. dollar debt earlier this year as China's hot property market slowed.