U.S. Short Seller Says Freedom of Speech Hurt in Hong Kong Case

(Bloomberg) -- A Hong Kong tribunal restricted freedom of expression when it penalized U.S.-based short seller Citron Research for publishing a negative report on a Chinese firm, a Court of Appeal in the city was told on Wednesday.

The hearing is part of a landmark case that could determine how analysts publish market research in Hong Kong. It’s the latest attempt to push back against the Securities and Futures Commission’s efforts to more tightly regulate reports.

Citron and its founder Andrew Left are trying to overturn a fine and five-year trading ban imposed by Hong Kong’s Market Misconduct Tribunal in 2016. That hearing sided with the SFC in finding Left “reckless” and culpable of market misconduct for a 2012 report critical of Evergrande Real Estate Group Ltd., now called China Evergrande Group, which sent the company’s shares down 20 percent on the day. Witness testimony at the time had said the Citron report was incorrect about Hong Kong accounting rules.

Citron’s lawyer said in court on Wednesday Left hadn’t done a report on a Hong Kong company before and was inexperienced in local accounting standards and Chinese land-banking. “There is a right to get things wrong,” said Gerald McCoy. “That is inherent in the freedom of expression.”

The SFC previously issued a HK$11 million ($1.4 million) fine against Moody’s Investors Service for not ensuring the accuracy of a 2011 report on public companies. The credit rating company unsuccessfully appealed the decision. Ashley Alder, head of the agency, has said it doesn’t want to suppress legitimate commentaries on public companies.

The SFC first brought charges against Left and his firm in December 2014, accusing him of making about HK$1.7 million profit after shorting Evergrande shares just before publishing the report. Short sellers operate by borrowing shares, selling them, and then buying them back at a lower price to profit from the difference.

At Wednesday’s hearing, Citron’s lawyers argued that the SFC had not disproved Left’s views. These included allegations that Evergrande used accounting tricks to hide insolvency. The appeal court judges gave no indication when a judgement would be due.

Evergrande, based in Guangzhou, China, denied the claims in the 2012 Citron report and later filed a police report.

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