The SEC charged a mining company and two former executives with several Exchange Act and Securities Act violations in relation to allegations that the executives committed fraud by significantly inflating the value of certain African coal assets.
In a Complaint filed in the U.S. District Court for the Southern District of New York, the SEC claimed that international mining company Rio Tinto, former CEO Thomas Albanese, and former CFO Guy Elliott (collectively, the "Defendants") failed to follow accounting standards and company policies to accurately value certain African mining assets. The charges relate to a coal business that Rio Tinto acquired in Mozambique for $3.7 billion in 2011. The project quickly faltered, as Rio Tinto learned that there was both lesser quantity and poorer quality coal available to mine at the acquired properties. Further, transportation channels were limited and the government rejected Rio Tinto's barge application.
According to the SEC, the Defendants feared that these unfavorable developments would result in an impairment of the acquired business and chose to conceal the plummeting value from Rio Tinto's board of directors and audit committee, independent auditors, investors, and potential investors. Despite receiving reports that the property was valued at approximately negative $680 million, the Defendants allegedly failed to disclose the economic realities of the Mozambique assets and took various measures to conceal the valuation. The SEC said that the Defendants' "misconduct paid off," as Rio Tinto was able to raise several billion dollars in debt offerings premised upon fraudulent representations. Ultimately, the assets were sold for just $50 million.
As a result of the misconduct, the SEC charged the Defendants with various antifraud, reporting, books and records, and internal controls violations. The SEC is seeking redress in the form of injunctive relief, disgorgement of ill-gotten gains, prejudgment interest and civil penalties.
In an action filed on the same day, Rio Tinto agreed to settle charges from the UK's Financial Conduct Authority ("FCA") relating to the same misconduct for £27,385,400. The amount of the fine reflects a 30% discount for settling at an early stage of the investigation under the FCA's executive settlement procedures.
Commentary / Kyle DeYoung
This enforcement action is significant because of the size of the alleged fraud and because it shows the SEC's continued focus on accounting fraud and financial disclosures under the new leadership. The action is also noteworthy because it highlights the increasing trend of the SEC toward working with international regulators. The SEC worked closely with the FCA and the Australian Securities & Investment Commission, leading to the SEC action and the company reaching a settlement with the FCA that included a record fine. The company's willingness to settle with the FCA for a significant fine but without any admissions of wrongdoing suggests that the SEC has taken an aggressive position in its settlement negotiations with the company and its former officers.
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