On March 31, 2016, the Securities and Futures Appeals Tribunal (“SFAT”) upheld the disciplinary action of the SFC against Moody’s. This landmark decision is the first of its kind, as a disciplinary action brought by the Securities and Futures Commission (“SFC”) against a credit ratings agency since the activities of such became regulated by the SFC on June 1, 2011.


In July 2011, Moody’s Investors Service Hong Kong Ltd (“Moody’s”) published a special comment report entitled “Red Flags for Emerging-Market Companies: A Focus on China” (the “Report”) which was distributed to subscribers and available for purchase by the general public on Moody’s website. The Report contained traditional credit ratings in respect of a number of Chinese companies accompanied by a “red flag” framework which scrutinized certain weaknesses. These included: corporate governance, business model, business strategy, quality of earnings and cash flow and quality of financial statements.1 Under the framework, companies with the greatest number of red flags were identified as "negative outliers".

The Report received extensive local and international media attention and had a material impact on the market. One day after its publication, the share prices and bond prices of more than half of the “red-flagged” Chinese companies in the Report experienced substantial falls.2

For a more detailed analysis of the report itself and the SFC’s position prior to the appeal decision, see our eUpdate entitled “Hong Kong Securities Laws Violations: SFC’s Case Against Moody’s” – Part 1.

What was the SFC’s decision?

In light of the incidents resulting from the publication of the Report, the SFC commenced a formal investigation into the matter. Having considered extensive submissions filed on behalf of Moody’s, the SFC came to its final decision in its decision notice dated November 3, 2014 (the “Decision Notice”).3 The SFC found that Moody’s had “minimal procedures and controls in place to ensure that the Report, a publication related to its credit rating business, was presented in a fair, accurate and non-misleading manner”.4 Further, these minimal procedures and controls had proved themselves to be insufficient to ensure compliance with applicable rules and regulations and to ensure the interests not only of Moody’s clients but also of the market.5

Having considered the representations made on behalf of Moody’s, the SFC determined that Moody’s should be publicly reprimanded and fined HK$23 million (approximately US$2.97 million).6  

Moody’s appealed the decision of the SFC on the ground of jurisdiction, in that the preparation and publication of the “red flag” Report was not a regulated activity as the report was not part of its credit-rating services and was therefore not an activity to which the Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code of Conduct”) applied.7

On Appeal: the SFAT Decision

On March 31, 2016, SFAT upheld the disciplinary action of the SFC against Moody’s. The SFAT decided that a public reprimand was appropriate for Moody’s in addition to a fine of HK$11 million8 (approximately US$1.42 million9 for various failures relating to the Report.

On appeal, Moody’s submission on the issue of jurisdiction was rejected by the SFAT. The SFAT determined that, “in preparation and publication of the Report, Moody’s was carrying on its regulated activity of providing credit rating services”, therefore, the Code of Conduct applied.10

The SFAT offered the following points as broad guidance in approaching the review and in considering whether the Report was unfair, unclear or misleading:

  • The SFAT “looked at the document as a whole in order to see what it means taken together.”11 Citing the case of Aaron’s Reef v Twiss12, the SFAT noted, “… If by a number of statements you intentionally give a false impression and induce a person to act upon it, it is not the less false, although if one takes each statement by itself there may be a difficulty in showing that any specific statement is untrue.”13 
  • The SFAT considered “not only what is stated within the document but what may be implied or omitted” as the “damage may lie in the impression conveyed”.14 Citing the case of R v Kylsant15, it was noted that “the falsehood in this case consisted in putting before intending investors, as material on which they could exercise their judgement as to the position of the company, figures which apparently disclosed the existing position, but in fact hid it.”16
  • To further illustrate, the SFAT cited the case of Fraser and Another v NRMA Holdings Ltd and Others17, noting that “unless the information given constitutes a full and fair disclosure of all facts which are material to enable the members to make a properly informed decision, the combination of what is said and what is left unsaid may, depending on the full circumstances, be likely to mislead or deceive the membership.”18

Under General Principle 1 of the Code of Conduct, a licensed or registered person is required to “act honestly, fairly and in the best interest of its clients and the integrity of the market.”19 The SFAT upheld (for the most part) the findings of the SFC with respect to the culpability of Moody’s under the Code of Conduct finding no evidence of dishonesty on the part of Moody’s and that Moody’s had:

  • made inconsistent and misleading statements regarding the nature and purpose of the Report and had created confusion in the market;20
  • failed to provide justifications for the red flags, making it impossible for readers to accurately assess the significance of the red flags in context, and had, as a result, painted an unfair, unclear and misleading picture;21
  • labelled the six companies with the largest number of red flags as “negative outliers”, despite the fact that, by Moody’s own analysts’ assessment, there was no significant correlation between the number of red flags and the level of credit risk.22

Under General Principle 2 of the Code of Conduct, a licensed or registered person is required to “act with due skill, care and diligence, in the best interests of its clients and the integrity of the market.”23  The SFAT rejected Moody’s argument that the errors in the Report were de minimis in nature and did not render the Report misleading or inaccurate as Moody’s considered that the red flag was simply a screening indicator of a possible risk worthy of further investigation and was not itself conclusive.24

The SFAT held that these errors were not de minimis or inconsequential errors. Instead, it was noted that the errors constituted substantive and substantial breaches of General Principle 2 of the Code of Conduct because Moody’s had assigned red flags as warning signs and that, in the circumstances, erroneous red flags created a wrong and potentially harmful impression in the eyes of the market. 

It was further noted that the errors were essentially careless mistakes and should have been spotted if due skill and diligence had been applied.25 Therefore, because Moody’s failed to ensure the accuracy of the Report due to erroneous red flags in the Report, Moody’s had undermined the interests of their own clients and the market, thereby revealed a breach of General Principle 2 of the Code of Conduct.26


The decision is particularly noteworthy, as the first of its kind, where an international credit ratings agency was found to have breached the Code of Conduct. The decision emphasizes that these agencies have responsibilities and obligations to act in accordance with the Code of Conduct with respect to the data they publish. 

In addition, the ruling highlights important legal principles with respect to what constitutes unfair, unclear or misleading statements when looked at as a whole, even when each individual statement is not. The principles of the ruling in this case may also have wider application such as in circumstances where entities have a statutory obligation not to provide false or misleading statements as well as the market misconduct rules under the SFO against the dissemination of false or misleading information to induce transactions.

As at the publication of this eUpdate, it has been reported that Moody’s will appeal against the SFAT’s ruling to the Court of Appeal.​27

1.   Moody’s case, para 25.
2.   Moody’s case, para 37.
3.   Moody’s case, para 46.
4.   Moody’s case, para 30.
5.   Ibid.
6.   Moody’s case, para 62.
7.   Moody’s case, para 63.
8.   Moody’s Investors Service Hong Kong Limited v Securities and Futures Commission (31 March 2016) (“Moody’s case”), para 227.
9.   Translations from HK dollar amounts to US dollar amounts herein were made at the rate of HK$7.75 to US$1.00.
10.  Moody’s case, para 120.
11.  Moody’s case, para 135.
12.  [1896] AC 273 at 281.
13.  Moody’s case, para 135.
14.  Moody’s case, para 136.
15.  [1932] 1 KB 442 at 448.
16.  Moody’s case, para 136.
17.  (1995) 15 ACSR 590.
18.  Moody’s case, para 137.
19.  General Principle 1, Code of Conduct.
20.  Moody’s case, para 145.
21.  Ibid.
22.  Ibid.
23.  General Principle 2, Code of Conduct.
24.  Moody’s case, para 191.
25.  Moody’s case, para 193.
26.  Ibid.
27.  “Moody’s says it will appeal against HK tribunal decision on “red flags” report” dated April 28, 2016 at http://www.reuters.com/article/moodys-hongkong-idUSL3N17V1N3