The Securities and Exchange Commission (SEC) has announced it has charged Rio Tinto and two former Rio Tinto executives, former CEO Thomas Albanese and former CFO Guy Elliott, with fraud for allegedly knowingly inflating the value of coal assets acquired in Mozambique bought for $3.7bn and sold at a substantial loss a few years later for $50m. SEC alleges that the Rio failed to follow accounting standards and company policies to accurately value and record its assets and that allegedly, the executives hid the nature and extent of adverse developments which eroded the value of the assets from Rio Tinto's Board of Directors, Audit Committee, Independent audits and investors.

Separately, the UK Financial Conduct Authority (FCA) has announced it has fined the company £27,385,400 for breaching Disclosure and Transparency Rules.

Rio Tinto has confirmed in a statement that it will 'vigorously defend' the SEC allegations and comments in relation to the FCA investigation and settlement, that the 'FCA made no findings of fraud, or of any systemic or widespread failure by Rio Tinto and the case is now closed that no finding of fraud was made'.

Both Mr Albanese and Mr Elliott have also reportedly refuted the SEC allegations.

Though the SEC acknowledged in its statement that the Australian Securities and Investments Commission (ASIC) assisted in the investigation, as did the FCA, no action against the company appears to have been sought by ASIC.

A brief outline of the SEC allegations; the statement from the FCA announcement the settlement of its investigation and Rio Tinto's response is below.

SEC allegations

According to a statement issued by SEC, Rio Tinto plc, Rio Tinto Limited, former Rio Tinto CEO Mr Albanese, and former Rio Tinto CFO Mr Elliott are charged with violating the antifraud, reporting, books and records and internal controls provisions of the federal securities laws.

SEC alleges that Rio Tinto and its former CEO Thomas Albanese and its former CFO Guy Elliott failed to follow accounting standards and company policies to accurately value and record its assets . More particularly, SEC states that as a deal (the acquisition of coal assets in Mozambique) began to suffer, resulting in the rapid decline of the value of the coal assets, Mr Albanese and Mr Elliott allegedly sought to hide or delay disclosure of the nature and extent of the adverse developments from Rio Tinto's Board of Directors, Audit Committee, Independent audits and investors.

SEC is seeking penalties

SEC writes that it is seeking permanent injunctions, return of allegedly ill-gotten gains plus interest, and civil penalties from all the defendants. In addition, SEC seeks to bar Mr Albanese and Mr Elliott from serving as public company officers or directors.

The SEC statement outlines the circumstances from which the allegations arise. A brief outline is below.

• In 2011, Rio Tinto acquired coal assets in Mozambique shortly after disclosing huge losses associated with its previous large-scale acquisition of Alcan. Both acquisitions, the SEC statement notes, took place under former CEO, Mr Albanese’s leadership.
• According to the SEC statement, the second acquisition like the Alcan acquisition, was unsuccessful as it was based on incorrect assumptions about the amount and quality of the coal and the costs and other difficulties associated with of mining, transporting and selling it.
• The SEC’s complaint alleges that the project began to fail almost immediately, as Rio Tinto, Mr Albanese, and Mr Elliott learned that there was less coal and of lower quality than expected, and the fact that Mozambique had rejected its barge application (which they had assumed would be forthcoming and which was key to shipping/transporting the coal). The complaint also alleges the 'drop in quantity and quality of coal, coupled with the lack of infrastructure to transport it, significantly eroded the value of the acquisition'.
• SEC argues that 'after already impairing Alan twice' Rio Tinto, Mr Albanese, and Mr Elliott knew that publicly disclosing the failure of the project 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'. SEC alleges that it was for this reason that they elected to conceal the declining value of the project and allowed Rio Tinto to release misleading financial statements days before a series of US debt offerings.
• More particularly, SEC alleges that Rio Tinto raised $5.5bn from US investors, approximately $3bn of which was raised after May 2012, when executives at Rio Tinto Coal Mozambique (RTCM) had already told Mr Albanese and Mr Elliott 'that the subsidiary was likely worthnegative$680m'. SEC maintains that Mr Albanese then repeated and reinforced 'the false positive outlook for the project in public statements'.
• SEC maintains that the alleged 'fraud continued until January 2013', when a Rio Tinto executive discovered that coal assets were over-valued on the company's financial statement and alerted the Chairman. Following an internal review, Rio Tinto then announced that Mr Albanese had resigned and the company reduced the value of the coal assets by 80% (more than $3bn) and after a second reduction, sold the Mozambique subsidiary for $50m (substantially below the acquisition price).

Stephanie Avakian, Co-Director of the SEC’s Enforcement Division is quoted in the SEC statement as commenting: 'As alleged in our complaint, Rio Tinto’s top executives allegedly breached their disclosure obligations and corporate duties by hiding from their board, auditor, and investors the crucial fact that a multi-billion dollar transaction was a failure.'

Steven Peikin, Co-Director of the SEC’s Enforcement Division added: 'Rio Tinto and its top executives allegedly failed to come clean about an unsuccessful deal that was made under their watch. They tried to save their own careers at the expense of investors by hiding the truth.'

Statement from FCA

The Financial Conduct Authority (FCA) announced in a statement issued on the same day as the SEC charges were announced that is has fined Rio Tinto plc (Rio Tinto) £27,385,400 for breaching Disclosure and Transparency Rules (Disclosure Rules).

Findings of the FCA investigation

The FCA statement briefly outlines the reasons the fine was imposed and the facts upon which the findings were based. An outline is below.

The facts appear to be substantially similar to those included in the SEC announcement (see above) the FCA acknowledges 'not only the considerable assistance but also the collaboration of the U.S. Securities and Exchange Commission and the Australian Securities & Investments Commission' in the investigation.

• According to the FCA, Rio Tinto breached the Disclosure Rules by failing to carry out an impairment test and to recognise an impairment loss on the value of mining assets based in the Republic of Mozambique which the company acquired in August 2011 for US$3.7 billion when publishing its 2012 interim results (published 8 August 2012).
• According to the FCA, Rio's valuation of the Mozambique mine at the time it was acquired was based on a flawed valuation ie the company based its valuation on a plan to move rapidly into coal production which assumed it would be able to barge coal from the mines down the Zambezi River to the coast for export.
• The FCA states that prior to half year 2012, the company knew it would not be able to barge the coal to the coast as planned and that higher cost alternatives would be needed to transport coal for export. Rio Tinto's financial modelling of the business at this time reportedly indicated that the value of the Mozambique assets was negative.
• Despite this, according to the FCA, Rio Tinto 'decided that it would not carry out an impairment test, as required by international accounting standards, to assess whether an impairment was required to be recorded in its financial reporting of its 2012 half year interim results. Instead, Rio Tinto decided there was a lack of clarity around how it would develop the mines which made it premature to revalue these assets. For this reason, and wrongly, Rio Tinto decided it was appropriate to continue to value the mining assets at the acquisition price. The FCA considers that this demonstrated a serious lack of judgement. There were indicators of impairment for the Mozambique assets which meant that Rio Tinto was required to carry out an impairment test'.
• The FCA found that if Rio Tinto had complied with its obligation to carry out the test, a material impairment would have been required to have been disclosed at the time of its 2012 half year financial reporting. According to the FCA, for this reason, 'Rio Tinto’s financial reporting was therefore inaccurate and misleading' and continued to be so until the company announced an impairment of the Mozambique assets on 17 January 2013 (the company wrote of 80% of the value).

The penalty

On this basis the FCA imposed a financial penalty on Rio Tinto in the amount of £27,385,400.As Rio Tinto agreed to settle at an early stage in the investigation and therefore qualified for a 30% reduction in penalty. Were it not for this discount the FCA would have imposed a financial penalty of £39,122,007 on Rio Tinto.

Mark Steward, Executive Director of Enforcement and Market Oversight is quoted as stating:

'The UK listing regime requires listed companies to adhere to high standards of disclosure and transparency. 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.'

Statement from Rio Tinto

In a statement issued by Rio Tinto acknowledging the SEC allegations, the company said that it 'intends to vigorously defend itself against these [SEC] allegations'.

More particularly, the statement asserts that the SEC allegation that Rio Tinto 'committed fraud by not accurately disclosing the value of RCTM [Rio Tinto Coal Mozambique] and not impairing it when Rio Tinto published its 2011 year-end accounts in February 2012 or its interim results in August 2012…is unwarranted and that, when all the facts are considered by the court, or if necessary by a jury, the SEC’s claims will be rejected.'

Commenting on the UK Financial Conduct Authority (FCA) investigation, Rio Tinto acknowledges that the company was fined for breach of disclosure and transparency rules in relation to the timing of the impairment of RTCM and that the company had reached a settlement with the FCA. Rio Tinto also states that 'The FCA made no findings of fraud, or of any systemic or widespread failure by Rio Tinto. The case is now closed'.

Rio Tinto also comments that ASIC is reviewing the RTCM impairment and that the company would 'update the market as required in due course'

Former Rio Tinto executives have reportedly denied the allegations

The FT reports that both the former Rio Tinto CEO Mr Albanese, and former CFO Mr Elliott, have denied the SEC allegations. The article quotes Mr Albanese as saying: 'There is no truth in any of these charges. I echo Rio Tinto's confidence that these will be proved baseless in Court.'

A spokesperson for Mr Elliott is quoted as saying: 'Guy [Mr Elliott] also fully refutes these charges and will be vigorously contesting them'.

Media reports

The SEC allegations against Rio Tinto and the former CEO and CFO has received wide media coverage:

• SEC allegations have reportedly caused concern in C-suites generally: The Australian comments that news of 'the SEC charges will have sent shudders through executive ranks across Australia, with Rio Tinto far from the only company to have substantially overpaid for assets during the boom while also tapping US debt markets for funding…The SEC's pursuit of Rio will be of concern to directors around the country, given the abundance of other similarly trouble-plagued deals in recent years.
• Possible class action? The Australian suggests that a class action against the company is 'likely' following the SEC allegations. The AFR has also suggested that firms in Sydney and in the US are investigating a possible class action against the company. No action had been filed against Rio Tinto at the time of writing.
• Mr Elliott has resigned as Shell Director: The Australian writes that Mr Elliott has reportedly stepped down from his €164,250 ($246,348) per year directorship of Royal Dutch Shell, with immediate effect. The article quotes Shell chairman Charles Holliday as saying that the board respected Mr Elliott's decision and that 'We will miss his insightful counsel and leadership and would like to thank him for his seven years of valuable contribution to the Shell board…We sincerely hope he satisfactorily resolves these proceedings and, in that event, he would like to be considered for rejoining the board.'
• Reportedly the fine against Rio Tinto is largest fine ever levied by FCA for similar breach: CityAM comments that the fine issued by the FCA is the largest-ever fine for a breach of a similar kind of failing. The article quotes Mark Seward executive director of enforcement and market oversight as saying that the fine reflects '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'.
• No action by ASIC as yet? The AFR comments that though SEC, FCA and ASIC were involved in Mozambique investigation, 'there was no sign on Wednesday morning that ASIC had imposed a penalty or sought charges against Rio and the former executives'. In a similar vein, The Australian comments that the action against Rio Tinto by SEC demonstrates how 'seriously SEC takes its defence of the market disclosure regime', notes that the FCA have already concluded their investigation into the company and is critical of the lack of action by ASIC 'the folk at ASIC are clearly still asleep under a tree somewhere, even though it [Australia] has the same disclosure based law'. The article adds that the FCA and SEC fine and fraud charges respectively, come at the same time as the UK Serious Fraud office is investigating the 'Guinea scandal'. The AFR comments that 'surprisingly the various scandals do not seem to be harming investor appetite for Rio shares, with the miner's Australian stock rising to a 56 month high on Tuesday'.
• ASIC Commissioner has reportedly responded to criticism of ASIC's perceived lack of response: The AFR reports that in addition to criticism from the media, Greens senator Peter Whish-Wilson has been critical of ASIC stating: 'I'm genuinely puzzled how the US financial regulators have been able to go so hard on this Rio Tinto fraud investigation while here in Australia our regulators appear missing in action, and I intend to pursue this thoroughly in estimates next week…Rio Tinto is an Australian domiciled company; it is listed on the Australian Securities Exchange and has thousands of Australian investors. So how is it possible that all the charges made by the US SEC have not also been made here in Australia? It's just not good enough that it takes an overseas financial regulator to hold an Australian company and its Australian CEO [accountable] for alleged wrongdoings that for all intents and purposes may have been carried out in Australia.' According to the article, ASIC Commissioner Cathie Armour has responded to this criticism by cautioning that comparisons between regulators, working in different jurisdictions with different powers was not necessarily appropriate. Ms Amour is quoted as stating: 'Yes, regulators will work together on issues that relate to global companies. you shouldn't assume that because a particular outcome has occurred in one place that either we aren't looking at [it], or we haven't done something. The government is ... looking at our enforcement powers to improve penalties but we are not judge and jury and it's a constitutional matter and is the same for any regulator in Australia'.
• Guinea investigation reportedly ongoing: The FT comments that the FCA and SEC investigations and subsequent fine and allegations of fraud 'are another blow to Rio’s reputation'. The article, like The AFR adds that the latest allegations follow an investigation by the UK Serious Fraud Office (SFO), launched in July into a questionable payment made by Rio to a consultant working on a controversial iron ore deposit in Guinea. In a similar report, Bloomberg adds that Rio Tinto alerted the US Department of Justice and the SFO to the payment in question in April, and that Rio Tinto is reportedly in talks with both authorities on the two separate inquiries.