Moody’s Investors Service Hong Kong Ltd v. Securities and Futures Commission

CACV 103/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 103 OF 2016

(ON APPEAL FROM THE SECURITIES AND FUTURES APPEALS

TRIBUNAL APPLICATION NO 4 OF 2014)

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JUDGMENT

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Hon Lam VP (giving the Judgment of the Court):

1.On 8 June 2017, we dismissed the appeal by Moody’s. Though we held that the 11 July 2011 Report did not by itself constitute credit ratings within the meaning of such expression in part 2 of Schedule 5 of the Securities and Futures Ordinance [“SFO”], we agreed with the Tribunal that the Report was an act relating to the earlier credit ratings published by Moody’s. The Tribunal was therefore correct in holding that section 193 of the SFO can be relied upon to establish misconduct in the publication of the Report.

2.Moody’s now applied for leave to appeal to the Court of Final Appeal.  In the Notice of Motion of 6 July 2017, the questions of great general or public importance [“GPI”] are framed as follows:

“ Having regard to the freedom of expression and opinion constitutionally guaranteed by Article 27 of the Hong Kong Basic Law and Article 16 of the Hong Kong Bill of Rights:

1. Whether the publication of a report (“the Report”) which:

(1) Does not constitute a credit rating or purport to change an existing credit rating (“the Credit Rating”) or the rating methodology thereof; but which

(2) Comments upon certain indicators or parameters relevant to credit risk (which are not equivalent to the rating methodology used for the Credit Rating)

constitutes “provision of credit rating services” within the meaning of part 2 of Schedule 5 of the Securities and Futures Ordinance (Cap 571) (“SFO”)

2. If not, whether the publication of the Report constitutes an “act or omission relating to the carrying on of” the regulated activity of providing credit rating services, within the meaning of section 193 of the SFO.

3. Whether the answers to 1 and/or 2 above depend on whether the publisher of the Report is also the publisher of the Credit Rating.”

3.Pursuant to Practice Direction 2.1, parties lodged written submissions on the application and we have read the same.  We do not see any need for an oral hearing.  This is our determination of the application.

4.In the submission on behalf of Moody’s, Mr Shieh SC (counsel for Moody’s in this application) confirmed that Moody’s did not rely on Question 3 as a separate GPI question.  

5.Moody’s also filed a second affirmation of Fung Denise Oi Yee on 14 August 2017, exhibiting two articles attached to the submissions on behalf of Moody’s lodged on 20 July 2017.

6.Whilst we would not rule out completely the scope for evidence to be filed in support of an application for leave to appeal to the Court of Final Appeal, such occasion must by the nature of things be rare.  We do not think the two articles which Moody’s attempt to put in fall within such rare exception.  As the Court has repeatedly emphasized, normally it is not the proper function of an appeal to this Court (still less in the context of an appeal to the Court of Final Appeal) to revisit the salient findings of fact by reference to new evidence.  In the present instance, the reference to the two articles was a blatant attempt to invite this Court to revisit our assessment of the correctness of the findings by the Tribunal as to the relationship between the Report and the credit ratings published by Moody’s.  Moody’s has not even begun to satisfy us that the criteria in Ladd v Marshall [1954] 1 WLR 1489 were met and if application was made at the substantive appeal before us for such admission of evidence, they would have been admitted.   

7.With respect, we do not accept the admission of such articles can be justified on the basis that they could demonstrate the great general or public importance.  As we shall explain below, whether the publication of a particular statement or report is related to the credit ratings of Moody’s depends on the facts and circumstances of the case in question. The two new articles are wholly different in nature from the Report and have no bearing in the present context. 

8.In our judgment, the slipping in of such materials in an application for leave to appeal to the Court of Final Appeal in such manner is an abuse of process.  We have no hesitation in holding that the second affirmation and the articles are not admissible for the purpose of the present application.

9.Under Questions (1) and (2), Mr Shieh submitted in essence Moody’s arguments were as follows and they merit consideration by the Court of Final Appeal:

“ (a)  as the tribunal acknowledged, type 10 licensed businesses need and are entitled to have “bright line” certainty as to the scope of their regulated activities (§206);

(b)  only steps taken in the preparation of credit ratings could fall within the phrase “relating to” the carrying on of regulated activities;

(c)  a report which was not part of the preparation of credit ratings and a framework which was not adopted as part of any existing methodology for conducting credit ratings cannot be regarded as “part and parcel” of credit ratings;

(d)  nor does the preparation of such a report form “part and parcel” of the carrying on of business regulated activities or “relate to” the carrying on of the business of regulated activites.”

10.We have already explained in our judgment that the narrow construction given to section 193 (confining it to activities in the preparation of credit ratings) should be rejected.  In that respect, we were in agreement with the Tribunal, see [29] to [33] of the judgment and [105] to [119] in the Tribunal’s determination.

11.Mr Shieh made a valiant attempt to persuade us that due to the practical consequence of the concurrent conclusion of this Court and the Tribunal as to the scope of section 193, Moody’s is placed in a disadvantageous position as compared with other financial commentators who do not provide credit ratings.

12.With respect, we are not impressed by such argument.  As a provider of credit ratings, Moody’s is in a privileged position (in terms of its potential influence over those involved in the market) as compared with other commentators.  We cannot see anything intrinsically disproportionate in subjecting them to the disciplinary regime of the SFO for activities relating to the credit ratings published by Moody’s.

13.Mr Shieh seems to labour under the misapprehension that the effect of our judgment would preclude Moody’s from commenting on matters relevant to credit risk without being subject to regulation by the SFC.  With respect, this is not so.  It is not our holding (and nor was it the holding of the Tribunal) that every statement by Moody’s will be regarded as an activity relating to credit ratings.  It is a question of fact and much depends on the circumstances surrounding the activities in question.  In substance, Moody’s appeal was a challenge to the application of section 193 to the findings by the Tribunal in this regard, in particular at [106] of the determination made in the context of the facts and circumstances in this case.

14.As regards the construction of section 193, notwithstanding the submission of Mr Shieh, we are of the firm view that the narrow construction contended by Moody’s is plainly unarguable.  On the application of a wider construction, Mr Shieh has not placed before us any reasonable argument for reversing the concurrent conclusion of the Tribunal and this Court.

15.For these reasons, we do not find it appropriate to grant leave and the Notice of Motion is dismissed with costs accordingly. The Statement of Costs of the SFC add up to $154,940.  It is a reasonable figure and we fix the costs at $154,940.

Mr Paul Shieh SC, instructed by Linklaters, for the appellant

Mr Benjamin Yu SC and Mr Laurence Li, instructed by Securities and Futures Commission, for the respondent