The bond credit rating business of Moody's Corporation appeared before an appeals tribunal in China's leading financial centre last week to defend itself against a $3m (HK$23m) fine by China's Securities and Futures Commission (SFC).
The regulators are accusing the agency of producing 'shoddy and unprofessional' reports amounting to a failure of due diligence in preparing credit ratings.
While the firm's 2011 reports raised a number of 'red flags' about 61 mainland companies listed on the Hong Kong Stock Exchange to signal how risky these firms were, they did not include any direct comment on credit ratings.
They did contain analysis of corporate-governance and accounting concerns about the firms, including: fast-growing business strategies, possible weakness in corporate governance, poorer quality of earnings or cash flow, riskier or more opaque business models and concerns over auditors and the quality of their financial statements.
There are additional concerns over the SFC's jurisdiction regarding this case, as it is primarily a credit rating overseer in light of the reports in question providing no credit information or opinion.
Moody's has admitted some errors within the reports, but of the top five firms they provided information on; one went bankrupt last year, two have been suspended from trading pending investigations and another's share price is down by half while another is down over 90 per cent.
A spokesman from Moody's commented that if the SFC's Enforcement Division prevails, "it will chill expression of differing views in Hong Kong."
The Securities and Futures Appeals Tribunal will rule in three months.
The SFC is also gunning for US-based short-seller Citron Research for a 2012 report it published alleging Hong Kong-listed Evergrande Real Estate Group was insolvent, which amounted to market misconduct according to the regulator.
Industry watchers have reacted by accusing Hong Kong authorities of attempting to curb criticism of Chinese firms, at a time when investors are reeling over the country's recent stock-market roller coaster.
Investors in Chinese businesses have historically faced difficulties in obtaining reliable company information, however, preventing independent scrutiny of them could undermine Hong Kong's foundations as a world class financial centre, experts warn.
China is not the only country that pursues ratings agencies for criticism of its busineses and institutions... In 2013, the US Justice Department began a suit against Standard & Poor after it downgraded US Treasury debt.