By Jonathan Barrett and Brendan Pierson
SYDNEY/NEW YORK (Reuters) - The U.S. Securities and Exchange Commission (SEC) on Tuesday charged mining company Rio Tinto Plc (L:RIO) (AX:RIO) and two of its former top executives with fraud, saying they inflated the value of coal assets in Mozambique and concealed critical information while tapping the market for billions of dollars.
The U.K.'s Financial Conduct Authority (FCA) also said on Tuesday it had reached a settlement with Rio Tinto under which the company would pay a fine of £27 million ($35.6 million) to settle claims that it breached accounting rules in connection with the Mozambique assets.
The Mozambican coal business, which relied on barging the product down the Zambezi River to port, was acquired for $3.7 billion in 2011 from Riversdale Mining and sold a few years later for $50 million.
In a lawsuit filed in U.S. federal court in Manhattan, the SEC said Rio Tinto, former Chief Executive Officer Thomas Albanese, and former Chief Financial Officer Guy Elliott failed to follow accounting standards and company policies to accurately value and record the assets.
The SEC said that soon after the deal was completed, Rio Tinto learned that the acquisition would yield less coal, and of a lower quality, than expected. The global miner could only transport and sell a fraction of the coal it had originally assumed, the SEC said.
By making misleading public statements, Rio Tinto and the executives were able to raise $5.5 billion from U.S. investors, the SEC said. They continued to solicit the investments even after executives of the Mozambique subsidiary told Albanese and Elliott that the unit was likely worth negative $680 million, according to the SEC.
"There is no truth in any of these charges," Albanese said in a statement.
Christina Mills, a spokeswoman for Elliott, said Elliott would vigorously contest the charges.
Rio Tinto said it would defend itself vigorously against the SEC's allegations. The company said the U.K. FCA had "made no findings of fraud, or of any systemic or widespread failure by Rio Tinto".
HOW IT UNFOLDED
The SEC allegations are contained in court documents that also request a jury trial. The SEC said the rapid and dramatic decline in value of the coal business was concealed, in part because Rio Tinto had already disclosed huge losses in connection with its 2007 acquisition of Alcan.
"The Mozambique acquisition was expected to restore the market’s confidence in Albanese’s deal-making acumen, but on-the-ground realities in Mozambique quickly undermined that narrative," the SEC said.
The SEC said the company knew its barging assumptions were unrealistic and railway capacity severely limited by the end of 2011, just months after securing the Riversdale assets.
"Defendants concealed the nature and extent of these adverse developments from Rio Tinto’s Board of Directors, Audit Committee, independent auditors, and the market," the SEC said.
The SEC said that if it had been disclosed, the developments would have triggered an impairment analysis. An impairment analysis would measure the difference in the expected cash flow from an asset and the value the company has booked the asset at.
By May 2012, Albanese and Elliott were informed of the negative $680 million valuation, although the company carried the assets on its books at more than $3 billion while also promoting its prospects to the market.
The SEC said the fraud continued until January 2013, when another executive discovered accounting irregularities. Albanese subsequently resigned and the value of the Mozambique assets were lowered by more than $3 billion.
The SEC is seeking to have Albanese and Elliott barred from acting as officers or directors of any public company.
The SEC also disclosed that the Australian Securities and Investments Commission was looking into Rio's accounting of the Mozambique assets.
(This story corrects to 'quality', not 'quantity', in 5th paragraph.)