The SEC filed the complaint in federal court in Manhattan, alleging that Rio Tinto inflated the value of the Mozambique-based coal assets it acquired from Riversdale Mining in 2011. It paid $3.7 billion for them at the time and sold them a few years later for $50 million.
According to the SEC, former company CEO Tom Albanese and former CFO Guy Elliott failed to follow accounting standards and company policies to “accurately value and record [Rio Tinto’s] assets.” It says that soon after acquiring the coal assets from Riversdale, Albanese and Elliott learned they included “less coal and of lower quality than expected,” making them significantly less valuable.
The company’s coal business in Mozambique relied on transporting coal via barge down the Zambezi River to port, and the SEC also alleges that after the acquisition Albanese and Elliott learned that Mozambique had rejected its barge application.
Albanese and Elliott reportedly concealed these adverse developments, allowing Rio Tinto to release misleading financial statements days before a series of US debt offerings that raised $5.5 billion. About $3 billion of the total amount was raised after May 2012, when executives at Rio Tinto Coal Mozambique had already told Albanese and Elliott that the subsidiary was likely worth negative $680 million.
The SEC says the alleged fraud went on until January 2013, when an executive in Rio Tinto’s Technology & Innovation Group discovered that the coal assets were being carried at an inflated value on Rio Tinto’s financial statements. After an internal review supposedly triggered by a report from the executive to Rio Tinto’s chairman, Rio Tinto announced that Albanese had resigned, and the company reduced the value of the coal assets by over $3 billion, or more than 80 percent.
After a second reduction in value, Rio Tinto sold its Mozambique subsidiary for $50 million, billions of dollars below the acquisition price.
“Rio Tinto’s top executives allegedly breached their disclosure obligations and corporate duties by hiding from their board, auditor, and investors the crucial fact that a multi-billion dollar transaction was a failure,” said Stephanie Avakian, co-director of the SEC’s Enforcement Division. The SEC said it is also seeking to bar Albanese and Elliott from serving as public company officers or directors.
Steven Peikin, co-director of the SEC’s Enforcement Division, added, “Rio Tinto and its top executives allegedly failed to come clean about an unsuccessful deal that was made under their watch. They tried to save their own careers at the expense of investors by hiding the truth.”
Also on Tuesday, the UK’s Financial Conduct Authority said it had reached a settlement with Rio Tinto. The firm will pay a $35.6-million fine to settle claims that it breached accounting rules in connection with the Mozambique coal assets.
“Reflecting the size of the company, this is the largest fine imposed to date by the FCA for a breach of rules relating to a firm’s official listing and demonstrates how vitally important high standards of disclosure and transparency are to ensuring our markets function fairly and effectively,” said Mark Steward, the UK Financial Conduct Authority’s executive director of enforcement and market oversight.
“There is no truth in any of these charges,” said Albanese in a statement quoted by Reuters. A spokeswoman for Elliott said he would vigorously contest the charges. For its part, Rio Tinto said it plans to “vigorously defend itself against these allegations.”
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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.