The US regulator, the Securities and Exchange Commission (SEC) has accused Rio Tinto Limited (ASX: RIO) and two former executives of fraud. The SEC alleges that:
"Rio Tinto, 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. 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 Tinto's Board of Directors, Audit Committee, independent auditors, and investors."
The complaint appears to relate to the Riversdale Mining acquisition in Mozambique, also known as 'RTCM', which Rio Tinto acquired for A$3.9 billion in 2011 and subsequently sold for just US$50 million.
The company's disastrous Alcan acquisition also occurred around this time, and it too was a disaster.
The SEC's complaint really speaks for itself however:
"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." (Emphasis added)
Rio Tinto responded to the market this morning stating that it would vigorously defend the allegations and that it believed that, when all the facts were considered by the court or jury, the SEC's claims will be rejected.
Separately, Rio noted that it has already paid a fine to the UK regulator the FCA, for breaches of disclosure and transparency rules regarding the Rio Tinto Coal Mozambique (RTCM) assets. Australian corporate regulator ASIC is also reviewing the case.
It's too early to conclude the outcome of the case, and it is important to note that these are just allegations at this point.
Even in the worst scenario, it is hard to envision a penalty that hurts Rio financially. However, this is also the first time I've seen a large company and its former executives taken to court for fraud. Given the difficulties associated in suing large companies like Rio, I would imagine the SEC feels it has a strong case. We'll keep you updated.
