US regulators have charged Rio Tinto (RIO) and two of the mining giant’s former executives with fraud, alleging they tried to cover up a failed investment in Mozambique six years ago.
The company vigorously denies the allegations by the Securities and Exchange Commission (SEC) against itself and its former chief executive Tom Albanese and chief financial officer Guy Elliott but has agreed to pay a record £27 million fine to the UK’s Financial Conduct Authority.
This is the largest penalty of its kind imposed by the City watchdog and reflects the seriousness of the breach by Rio, which failed to promptly disclose to investors the fall in value of the mining operations it bought in Mozambique for $3.7 billion in August 2011 and which it later sold for $50 million.
According to both regulators, the acquisition immediately came unstuck when Rio discovered the quantity and quality of coal in the mine was less than it had thought and its application to transport the coal by barge along the Zambezi rive to the coast was blocked by the Mozambique government.
Despite internal financial modelling by Rio indicating this had destroyed the value of the acquisition, the company decided not to carry out an impairment test as it was meant to do under international accounting standards. As a result the assets were recorded at their acquisition price in the 2012 interim results published 12 months after the transaction and the losses were only brought to light in January 2013 when the company announced it had written off around 80% of its investment.
According to the FCA, at the time the company wrongly argued it would have been premature to revalue the assets until it was clear how they would be developed. ‘This demonstrated a serious lack of judgement,’ it said.
Mark Steward, FCA executive director of enforcement and market oversight, said: ‘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,’ he added.
The SEC has taken a harder line alleging Rio tried to conceal the write-off because it was damaging following the disclosure of huge losses from its $38 billion acquisition in 2007 of Canadian aluminium miner Alcan.
‘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,’ said Steven Peikin, co-director of the SEC’s enforcement division.
Based on the SEC’s civil complaint to the court for the southern district of New York, Rio Tinto plc, Rio Tinto Limited, Albanese, and Elliott are charged with violating the antifraud, reporting, books and records and internal controls provisions of federal securities laws.
The SEC is also seeking to bar Albanese and Elliott from serving as public company officers or directors.
In a statement, Rio Tinto said it believed the SEC case was ‘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.’