The Securities and Exchange Commission charged mining company Rio Tinto and two former top executives with fraud for inflating the value of coal assets acquired for $3.7 billion and sold a few years later for $50 million.
The SEC’s complaint, filed in federal court in Manhattan, alleges that Rio Tinto, its former CEO Thomas Albanese, and its former CFO Guy Elliott failed to follow accounting standards and company policies to accurately value and record its assets.
Instead, as the project began to suffer one setback after another resulting in the rapid decline of the value of the coal assets, they sought to hide or delay disclosure of the nature and extent of the adverse developments from Rio Tinto’s Board of Directors, Audit Committee, independent auditors and investors.
“As alleged in our complaint, 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 multibillion-dollar transaction was a failure,” said Stephanie Avakian, co-director of the SEC’s Enforcement Division, in a statement.
Steven Peikin, co-director of the SEC’s Enforcement Division, said that 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.”
Based on the complaint’s allegations, Rio Tinto plc, Rio Tinto Ltd., Albanese and Elliott are charged with violating the antifraud, reporting, books and records and internal controls provisions of the federal securities laws.
The SEC seeks permanent injunctions, return of allegedly ill-gotten gains plus interest, and civil penalties from all the defendants, and seeks to bar Albanese and Elliott from serving as public company officers or directors.
In 2011, Rio Tinto acquired coal assets in Mozambique shortly after disclosing huge losses associated with its previous large-scale acquisition of Alcan. Both acquisitions took place under Albanese’s leadership, according to the SEC.
The second acquisition, the complaint said, “was also unsuccessful as it was based on the incorrect assumption that Rio Tinto could inexpensively mine, transport, and sell large quantities of high-quality coal, chiefly using barges for shipping.”
The SEC’s complaint alleges that the project suffered setbacks almost immediately, as Rio Tinto, Albanese and Elliott learned that there was less coal and of lower quality than expected, and that Mozambique had rejected its barge application.
The complaint states that “the drop in quantity and quality of coal, coupled with the lack of infrastructure to transport it, significantly eroded the value of the acquisition.”
Rio Tinto raised $5.5 billion from U.S. investors, approximately $3 billion of which 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, according to the SEC.
The complaint alleges “Albanese then repeated and reinforced the false positive outlook for the project in public statements.”