Rio Tinto languished yesterday in the wake of the shock news that the company and two former senior executives (one of whom is an ex CEO) were hit with US fraud charges related to the company’s disastrous $4 billion investment in a dud Mozambique coking coal project.
In a complaint filed in New York on Tuesday, the US Securities and Exchange Commission (SEC) said that Rio, its former CEO Tom Albanese and former chief financial officer Guy Elliott, had ignored proper accounting standards and misled investors in their valuation of the coal deposits in Mozambique which the company had bought for $US3.7 billion in the takeover of the Queensland-based Riversdale Coal in 2011 and sold a couple of years later for just $US50 million.
Rio said in in yesterday’s statement that the SEC case was unwarranted and would be strongly defended. Rio said that,”when all the facts are considered by the court, or if necessary by a jury, the SEC’s claims will be rejected".
Rio shares fell as much as 1.4% in early trading on the ASX yesterday before steadying to close down 0.4% at $49.7.
On top of that action Rio was also hit by a £27.4 million ($US36.4 million) fine over the dud investment and its disclosure by the UK’s Financial Conduct Authority (FCA).
Rio said in yesterday’s statement that the FCA “determined that Rio Tinto should have carried out an impairment review in relation to RTCM for its 2012 interim results and, if it had done so, those results published in August 2012 would have reflected the impairment it recorded six months later.”
"The FCA determined that Rio Tinto breached the FCA’s Disclosure and Transparency Rules and imposed a financial penalty on Rio Tinto of £27,385,400 ($36.4 million). The size of the fine is calculated by reference to the company’s market capitalisation.
"The FCA made no findings of fraud, or of any systemic or widespread failure by Rio Tinto. The case is now closed. The Australian Securities and Investments Commission is also reviewing the RTCM impairment. The company will update the market, as required, in due course,“ Rio added.
The SEC claims Rio Tinto, its two former top executives failed to follow accounting standards and company policies to accurately value and record its assets.
"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’s board, audit committee, independent auditors and investors, the SEC complaint alleges.
“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 SEC’s enforcement division, in a statement. "They tried to save their own careers at the expense of investors by hiding the truth."
The SEC said it is seeking permanent injunctions, returns of “allegedly ill-gotten gains plus interest” and civil penalties from all defendants, and wants to bar Mr Albanese and Mr Elliott from serving as public company officers or directors.
"The complaint alleges that after already impairing Alcan twice, 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. Instead, they concealed the adverse developments, allowing Rio Tinto to release misleading financial statements days before a series of U.S. debt offerings.”
"The alleged fraud continued until January 2013, when an executive in Rio Tinto’s Technology & Innovation Group discovered that the coal assets were being carried at an inflated value on Rio Tinto’s financial statements. After an internal review allegedly triggered by the executive’s report to Rio Tinto’s Chairman, Rio Tinto announced that Albanese had resigned and the company reduced the value of the coal assets by more than $3 billion, or more than 80 percent."
And of course there is another scandal involving Rio – the so-called Guinea iron ore emails and payment. In April of this year at the London shareholders meeting Rio chair Jan Du Plessis described the Guinea payment scandal as “upsetting”.
Mr du Plessis said there was little more he could say about the scandal, which prompted the sacking of energy and minerals executive Alan Davies, legal affairs boss Debra Valentine and forced the deferral of bonuses owing to former chief executive Sam Walsh.
That AGM was the first time the Rio board has faced shareholders since leaked emails revealed three senior executives of the company discussing a $US10.5 million ($14 million) payment to a political adviser in Guinea who had been helping the company secure leases over the Simandou iron ore project.
The three executives named in the leaked emails were former chief executive Tom Albanese, former chief executive Sam Walsh (who was head of iron ore at the time) and former energy and minerals boss Alan Davies.
Rio self-reported the emails and their contents to regulators including UK Serious Fraud Squad, the Australian Federal Police, the US Department of Justice and the US Securities and Exchange Commission.
Mr du Plessis is about to step down as chair of Rio after holding down the slot for the past eight years. He remains in the position until the Rio shareholders meeting next April, unless there is a replacement named by the company before then.
