The report titled “Red Flags for Emerging-Market Companies: a Focus on China,” was only a primer on possible credit rating reviews and not an actual one, Moody’s lawyer Adrian Huggins said at a tribunal hearing in Hong Kong on Thursday. As such, the document shouldn’t be considered part of licensed activity, he said. The regulator’s lawyer Benjamin Yu disagreed.

Moody’s is challenging the HK$23 million ($3 million) penalty and public rebuke imposed by the regulator last year over the alleged misconduct. The case is the first disciplinary action by the Securities and Futures Commission since it started regulating credit rating in 2011 and could have ramifications on the activities of rating companies.

"The SFC made it clear that we are concerned about the report being misleading,” Yu said at the hearing. “Of course one can be misleading without intention."

The case centers on whether the report is considered a rating and if it falls under SFC’s code of conduct. The July 2011 report had looked at 61 companies, highlighting concerns over weak corporate governance, opaque business models, and unclear financial reporting. Scrutiny over Chinese companies have intensified in the past few years as short-sellers released a series of reports questioning the accounting and business models of the firms.

‘Thin Line’

“You may stray across a thin line,” the tribunal’s chairman Michael Hartmann said, referring to Moody’s. “How close does it come to actually being a credit rating exercise?”

Borrowing costs soared and shares plunged for some of the Chinese companies including Winsway Coking Coal Holdings Ltd. and West China Cement Ltd. that were named in Moody’s report. The rating company didn’t change its debt ratings on any of the companies in the report. Moody’s wasn’t looking at new information or flagging that these companies look more or less risky, its analyst said in July 2011.

The regulator’s executive director of enforcement Mark Steward said in March that Moody’s report wasn’t an attempt to manipulate the market.

“Moody’s had been looking at a way of identifying possible indications of accounting” and corporate governance issues for further possible investigation, said Huggins. “That might include a need for a review of credit ratings that had been already made,” he said.

Moody’s failed in an earlier request to keep the hearings private, citing concern that public proceedings could hurt its reputation for “skilled and balanced analysis.”