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HONG KONG (Reuters) - Hong Kong's Court of Appeal found credit rating agency Moody's broke the rules when it published a report on Chinese companies in 2011, rejecting the company's attempt to appeal a tribunal ruling on the matter, Moody's said in a statement on Thursday.
The case has been closely watched by the financial industry and corporate governance activists as it is likely to redefine the limits on what can be written in research reports on public companies, potentially curtailing the activities of research firms in the financial center.
The Hong Kong court ruled in favor of a March 2016 ruling by the Securities and Futures Appeal Tribunal (SFAT) that partly upheld regulatory action imposed on the Hong Kong unit of Moody's Investors Service in relation to the publication of the so-called "red flags" report.
The SFAT had determined that Moody's breached the Securities and Futures Commission (SFC) code of conduct through the publication of the July 2011 report that raised corporate governance concerns over 49 Chinese companies, contributing to a fall in their Hong Kong share prices.
“Moody's is disappointed by the Hong Kong Court of Appeal's decision. Moody's did not engage in misleading conduct and disagrees that the Securities and Futures Commission should be able to regulate the content of research publications," Donough Foley, Senior Vice President, Government & Public Affairs, Moody's Investors Service, said in the statement.
"Moody's is reviewing the Court's opinion and is considering its options."
The SFC had said that Moody's failed to ensure the accuracy of the report and that the report painted a misleading picture of the companies. It was the first time the SFC had taken action against a credit-rating firm since it started regulating rating activities in June 2011.
A key argument Moody's made in its defense was that the report did not constitute a credit rating and was therefore not subject to the SFC's jurisdiction, but the SFAT did not accept this.
The Moody's case has fueled concerns that governments in the region are increasingly trying to muffle negative research, with the Indonesian Finance Ministry in November penalizing JP Morgan following its issuance of a negative report on Indonesia.
The court's finding also comes amid renewed focus on negative research in Hong Kong, following a flurry of short-sell reports on companies in the city.
A representative of the SFC could not provide immediate comment.
Reporting by Michelle Price; Editing by Muralikumar Anantharaman