Rio Tinto Group (RIO) - Get Report , its former CEO Tom Albanese and former CFO Guy Elliott have been accused of fraud by U.S. authorities, and the miner hit with a fine by British regulators, relating to alleged attempts to hide billions of dollars of losses on an investment in a Mozambique coal mine.
Rio Tinto's shares were down 0.74% on Wednesday at 10:24 am in London, changing hands at 3,624.5 pence.
The U.S.'s Securities and Exchange Commission filed a civil complaint in a New York Federal Court on Tuesday, Oct. 17, alleging the company and the executives "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."
Rio Tinto denied the claim labeling the case "unwarranted" adding that "when all the facts are considered by the court, or if necessary by a jury, the SEC's claim will be rejected."
The credibility of that statement suffered a setback almost as soon as it was made, when, on Wednesday, Britain's Financial Conduct Authority said it had fined Rio Tinto £27.4 million ($36 million) for failing to "recognize an impairment loss on the value" of the investment.
The SEC accusation, and the FCA fine, relate to Rio Tinto's disastrous acquisition, in 2011, of coal assets in Mozambique for $3.7 billion and their subsequent sale three years later for just $50 million. The assets, called Rio Tinto Coal Mozambique, were meant to pave the way for a major expansion of Rio's coal production but turned out to be unworkable as the coal was lower in quality and quantity than originally thought, while a plan to ship the coal by barge to an export port was blocked by the Mozambique government.
The SEC claimed that problems at the project were almost immediately apparent to Rio Tinto but that the company's executives chose not to relay the bad news to investors. The reason for that, according to the filing, was that Rio Tinto had already had to twice write down the value of another disastrous investment, this time in Alcan and could ill afford further bad news as it sort to raise $5.5 billion of debt from U.S. investors. Alcan was bought for $38.1 billion in 2007, and subsequently suffered about $29 billion of write downs.
The mounting losses cost both Albanese and Elliott their jobs in 2013. Elliott went on to join the board of Royal Dutch Shell Plc as a non-executive director but stood down from that position on Wednesday following the filing of the fraud charges in the U.S.
"Rio Tinto, Albanese, and Elliott knew that publicly disclosing its second failure and rapidly declining value would call into question their ability to pursue the core of Rio Tinto's business model to identify and develop long-term, low-cost, and highly-profitable mining assets," according to the SEC. "Instead, they concealed the adverse developments, allowing Rio Tinto to release misleading financial statements days before a series of U.S. debt offerings."
The allegation is similar in substance, if not detail, to the charges levied by Britian's FCA, which found that Rio Tinto was aware prior to its half-year 2012 results that it couldn't ship coal by barge from the proposed mine. That left it having to look at more expensive shipping options, such as rail or truck.
"Rio Tinto began to carry out financial modelling of its mining business which indicated that the value of the Mozambique assets, based on the best information available at that time, was negative," noted the FCA. "Despite the modelling results, Rio Tinto decided that it would not carry out an impairment test, as required by international accounting standards, to assess whether an impairment was required to be recorded in its financial reporting of its 2012 half year interim results."
The FCA stopped short of alleging fraud, describing the decision not to write down the Mozambique asset as "a serious lack of judgement."
The British regulator imposed a fine of £39 million on Rio Tinto but reduced the penalty by 30% as "Rio Tinto agreed to settle at an early stage in the investigation."
Such settlements are not an admission of guilt under U.K. law and, as Rio Tinto pointed out, the FCA "made no finding of fraud, or of any systematic or widespread failure by Rio Tinto."
The SEC's case against Rio Tinto will be conducted by Mark Cave, Dean Conway and Gregory Miller.
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