The U.S. Securities and Exchange Commission (SEC) has charged Rio Tinto and two of its former top executives with fraud for inflating the value of Mozambique coal assets that it acquired in 2011 for $US3.7 billion and sold a few years later for $US50 million.
The complaint by the SEC, filed in federal court in Manhattan on October 17, alleges that Rio Tinto, its former chief executive Thomas Albanese, and its former chief financial officer Guy Elliott failed to follow accounting standards and company policies to accurately value and record its assets.
The SEC contends that shortly after acquiring Mozambique coal explorer Riversdale Mining for $3.7 billion Rio Tinto learned that the acquisition would yield less coal and coal of a lower quality than expected. The SEC said that Rio Tinto concealed these findings.
In the complaint, the SEC writes, “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, audit committee, independent auditors and investors, the SEC.
“Rio Tinto and its top executives allegedly failed to come clean about an unsuccessful deal that was made under their watch,” said Steven Pelkin, co-director of the watchdog's enforcement division, in a statement. “They tried to save their own careers at the expense of investors by hiding the truth.”
The Sydney Morning Herald reported the SEC is seeking permanent injunctions, returns of "allegedly ill-gotten gains plus interest" and civil penalties from all defendants, and wants to bar Albanese and Elliott from serving as public company officers or directors.
The SEC 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 alleges 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," the SEC stated.
It also said that the purchase of the Mozambique coal assets was based on an incorrect assumption that the miner “could inexpensively mine, transport, and sell large quantities of high-quality coal, chiefly using barges for shipping.”
Rio said in an emailed statement that it "intends to vigorously defend itself against these allegations.”
The miner also said it believed that the SEC’s case was “unwarranted and that, when all the facts are considered by the court, or if necessary by a jury, the SEC’s claims will be rejected.”
Rio explained that the timing of the impairment of Rio Tinto Coal Mozambique had been reflected in the company’s 2012 end-of-year accounts.
The miner added it had reached a settlement in relation to the timing of the impairment of its Mozambique coal investment with the United Kingdom's Financial Conduct Authority (FCA).
The British corporate watchdog determined that Rio Tinto had breached disclosure and transparency rules and hit the miner with a £27,385,400 ($36.4 million) penalty.
In Australia, the Australian Securities and Investments Commission is also conducting a review of the impairment of Rio's Mozambique coal assets. Rio said it would update the market, as required, in due course.