Hong Kong Tribunal Suspends Investor Who Criticized Chinese Firm

Hong Kong Tribunal Suspends Investor Who Criticized Chinese Firm

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HONG KONG — In a case that has raised concerns over freedom of speech in Hong Kong’s financial markets, a securities tribunal has issued a trading ban against an American investor who criticized the accounts of a Chinese property developer.

The investor, Andrew Left, the founder of the California-based firm Citron Research, was barred on Wednesday from trading in Hong Kong for five years. He was also ordered to surrender more than $200,000 in profit from trading shares of Evergrande Real Estate Group Limited, a developer in the southern Chinese city of Guangzhou.

The case, filed in 2014 by the Hong Kong Securities and Futures Commission, has heightened fears that regulators in one of Asia’s biggest financial centers are seeking to suppress critical commentary and the free flow of financial information.

It was the second time in recent years that the commission has taken aim at a foreign financial company for criticizing the accounting, governance or other performance aspects of Chinese businesses.

In April, an appellate board in Hong Kong upheld a $1.4 million fine that the regulator won against the ratings agency Moody’s Investors Services related to a 2011 report that outlined “red flags” at several Chinese companies.

David Webb, a longtime investor in Hong Kong, characterized the decision, brought before the city’s Securities and Futures Appeals Tribunal, as “deeply disturbing.”

The Moody’s ruling “will have a chilling effect on negative criticism of companies in Hong Kong, in a market in which there is little enough of that already,” Mr. Webb wrote at the time. “This approach is part of a pattern that indicates a regulatory bias against negative criticism and short-selling.”

Andrew Left

Credit
Citron Research, via Reuters

Short-selling involves investors borrowing stock and selling it, betting that the price will fall and that the shares can be bought back at a lower price before being returned.

“Both proceedings have garnered some eccentric reactions, including claims that the S.F.C. is seeking to chill independent research into mainland companies,” Mark Steward, then executive director of enforcement at the securities and futures commission, said in March 2015, in rare public remarks on the Moody’s and Citron cases.

“There should be no chill in respect of reports that are soundly and reasonably prepared,” said Mr. Steward, who now heads enforcement at the Financial Conduct Authority in Britain. “At the same time, the investing public needs protection from the cynical use of false or misleading publications that drive down share prices for the wrong reasons, and there should be accountability for shoddy research especially when it affects stability in our markets.”

The securities appeals tribunal, in its ruling on the Moody’s case, acknowledged the right of financial market participants to freedom of expression.

“The freedom, however, is not absolute,” the tribunal said at the time, citing the Hong Kong Bill of Rights. “The exercise of the freedom carries with it ‘special duties and responsibilities’ and may therefore be ‘subject to certain restrictions.’ ” It ruled that, in the Moody’s case, the ratings agency’s criticism of the financial health of Chinese companies had overstepped those restrictions.

Mr. Left of Citron was found guilty by the tribunal in August. In the sentencing, Hong Kong’s Market Misconduct Tribunal issued the maximum possible trading suspension against Mr. Left, it said in a statement on Thursday. The punishment was for what the regulator had said was “false and misleading information” about Evergrande in a report that Citron published in June 2012.

Those allegations, denied repeatedly by Evergrande, included claims that the developer was “insolvent and had consistently presented fraudulent information to the investing public.”

China’s property market has recently rebounded from a slump, and prices have soared to the point that analysts have warned of a bubble.

But as recently as last year, many developers, including Evergrande, which has been one of China’s most indebted real estate companies, were still struggling financially after years of lackluster property sales. In March 2015, Evergrande sought a $16 billion lifeline from state-controlled banks.

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