The US Securities and Exchange Commission has filed fraud charges against Rio Tinto and its ex-CFO Guy Robert Elliot and former CEO Thomas Albanese. The defendants are accused of hiding the Mozambique coal business’ swift and steep drop in value soon after they acquired it for $3.7B. The mining company later would go on to sell Rio Tinto Coal Mozambique for $50M—a much lower figure than the buying price.
The SEC contends that following the acquisition of the coal assets in 2011, the project experienced problems right away because there was “less coal and of lower quality” than what Rio Tinto, Elliot, and Albanese had anticipated. Also, the country of Mozambique, which is where the acquisition occurred, had turned down the barge application. This means that there was no infrastructure to transport the assets. All of this “significantly eroded” the acquisition’s value.
Rio Tinto and the two ex-executives purportedly knew that publicly disclosing the acquisition as a failure, after a previous acquisition of Canadian company Alcan had rendered big losses, would create doubts over their ability to identify and develop mining assets that were “long-term, low cost, and highly profitable.” This purportedly compelled them to hide the problems that arose with the Mozambique acquisition and issue misleading financial statements prior to a number of US debt offerings.
They also raised $5.5B from US investors. $3B of that was allegedly brought in after Elliot and Albanese were told by Rio Tinto Coal Mozambique executives that the subsidiary’s value was a negative $680M. Albanese is accused of continuing to project a “false positive outlook” in public statements. The SEC said that the misleading statements made to the public are what allowed the mining company to raise all that money from investors.
Albanese denies the regulator’s charges. Elliot’s spokesperson said he planned to fight the charges.
It was in January 2013 that one of the company’s executives noticed that the coal assets’ value was inflated on financial statements. Following an internal probe, the mining company announced Albanese’s resignation and the coal assets value was lowered by more than $3B—an over 80 percent decline. Rio Tinto sold the subsidiary in Mozambique for $50M, which is way below the acquisition price.
Rio Tinto Plc, Rio Tinto Ltd., Elliot and Albanese are charged with violating federal securities laws as they pertain to books and records, internal controls, reporting, and anti-fraud provisions. The Commission wants permanent injunctions, ill-gotten gains and interest, and civil penalties. It also wants to bar Elliot and Albanese.
Meantime, the company has arrived at a $35.6M settlement with UK’s Financial Conduct Authority to resolve claims that it breached accounting rules over the Mozambique assets. The FCA found that the mining company breached transparency and disclosure rules. It also accused Rio Tinto of not executing an “impairment test” and submitting an “inaccurate and misleading” financial report in August 2012. The company finally disclosed the impairment in 2013 when it wrote off approximately 80% of the Mozambique acquisition’s value.
The SSEK Partners Group is a securities fraud law firm. Contact us today.
Read the SEC’s Complaint (PDF)
Rio Tinto plc fined £27m for breaching Disclosure and Transparency Rules, FCA, October 17, 2017
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