Rio Tinto, former executives facing fraud charges in federal court

Jon Howard
October 20, 2017

Under the settlement with the FCA, Rio Tinto would pay a fine of £27m ($35.6m) to settle claims that it breached accounting rules in connection with the Mozambique assets.

In a complaint filed on Wednesday, the SEC said Rio found the quality of the coal and the quantity to be much lower than it had first thought, and that combined with Mozambique's refusal to allow Rio to transport the coal by barge, its value was "significantly eroded".

Based on the complaint's allegations, Rio Tinto plc, Rio Tinto Limited, Albanese, and Elliott are charged with violating the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. The SEC alleges that Rio executives Albanese and Elliott sought to hide the setbacks and their impact on the true value of the assets from the company's board of directors, audit committee and investors. The SEC claim that around USD3.0 billion of this money raised was done so after Albanese and Elliott had been told by RTCM's management that the subsidiary was likely worth negative USD680.0 million.

When Rio Tinto acquired the Mozambique mine, its valuation was based on a plan to move rapidly into coal production.

Rio Tinto sold its Mozambique coals operations in July 2014 to International Coal Ventures Private Ltd for USD50.0 million.

The SEC is also seeking to bar Albanese and Elliott from serving as public company officers or directors. They tried to save their own careers at the expense of investors by hiding the truth, ' said Steven Peikin, co-director of the SEC's enforcement division.

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"We sincerely hope he satisfactorily resolves those proceedings and, that in that event, he would like to be considered for rejoining the board".

The FCA said this meant its financial reporting for the 2012 interim results was "inaccurate and misleading" as it failed to comply with its obligations to carry out the impairment tests.

The SEC alleges that Rio Tinto's fraud continued until January 2013, when an executive in its Technology & Innovation Group discovered the inflated coal assets figures in financial statements. The SEC's complaint alleges that the project suffered setbacks nearly 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. For this reason, and wrongly, Rio Tinto decided it was appropriate to continue to value the mining assets at the acquisition price. Canaccord Genuity downgraded shares of Rio Tinto PLC from a buy rating to a hold rating in a research report on Tuesday, September 26th. Bank of America Corporation raised shares of Rio Tinto PLC from an "underperform" rating to a "buy" rating in a report on Friday, June 30th.

FCA Enforcement and Market Oversight executive director Mark Steward said: "Rio Tinto should have been aware of its obligation to carry out the impairment test and the resulting material impairment should have been reported to the market at its half year results in 2012".

'Reflecting the size of the company, this is the largest fine imposed to date by the FCA for a breach of rules relating to a firm's official listing and demonstrates how vitally important high standards of disclosure and transparency are to ensuring our markets function fairly and effectively, ' he added.

'Rio Tinto and its top executives allegedly failed to come clean about an unsuccessful deal that was made under their watch. "The case is now closed".

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