Rio Tinto settles with SEC in long-running fraud case

Company to pay $28m fine after discovery that purchased assets were overvalued by more than 80%.

Rio Tinto, a British-Australian multinational company and the world’s second-largest metals and mining corporation, has agreed to pay a $28m civil fine to settle an SEC lawsuit that accused it of fraud in its handling of a failed investment in a Mozambique coal project.

Tom Albanese, the company’s former CEO, agreed to pay a $50,000 civil fine to settle related SEC claims. Neither he nor Rio Tinto admitted wrongdoing in agreeing to settle.

Former Rio Tinto chief financial officer Guy Elliott remains a defendant, and his lawyer on Friday asked US District Court Judge Analisa Torres to dismiss the remaining SEC claims because they could not be proven.

The settlement against the business was disclosed last Friday in Manhattan federal court, and it would end a lawsuit filed by the securities regulator in October 2017.

Deceiving investors

Both Rio Tinto and Albanese were accused of deceiving investors about the value of Rio Tinto Coal Mozambique, which the company purchased in 2011 for $3.7 billion through a takeover of a rival mining company. The SEC said Rio Tinto was later able to raise more than $5.5 billion from unsuspecting US fixed-income investors by overvaluing the coal assets, despite an internal assessment in which the parties learned that the coal quality was poorer than expected and that the assets were worth negative $680m.

The SEC also alleges that Rio Tinto issued financial statements with false statements and omissions and prepared false auditing papers, including representations about transportation options and the amount and quality of coal reserves. The SEC alleges that none of the documents disclosed that the mine’s valuation was impaired.

The case against Albanese states that he intended to mislead investors in 2012 by describing the basin where the mine was located as a “world-class coal deposit and long-term growth opportunity”.

Tip to the board

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. This executive took those concerns to Rio Tinto’s Chairman of the Board, and after an internal review, Rio Tinto announced that Albanese had resigned.

The company reduced the value of the coal assets by more than $3 billion, or more than 80%. After a second reduction, Rio Tinto sold the Mozambique subsidiary for $50m, billions of dollars below the acquisition price.

GRIP comment

The case showcases a number of internal controls failures, but also a failure to supervise a CEO and CFO, which the board, given its fiduciary duty and expertise expectations, should have been doing more closely, using independent audits and internal controls testing, plus maintaining some prudent skepticism in the face of overly optimistic financial results. Luckily, the business’s internal reporting mechanisms worked enough to enable an employee’s helpful tip to trigger an internal investigation.