[JURIST] The Securities and Exchange Commission (SEC) [official website] filed a federal lawsuit [complaint, PDF] on Tuesday against international mining group Rio Tinto [corporate website] and two of its chief executives alleging fraud and deception in violation of federal law.
The SEC's allegations stem from Rio Tinto's $3.7 billion acquisition of a coal mining company in Mozambique, led by defendants former Chief Executive Officer Thomas Albanese and former Chief Financial Officer Guy Elliot. According to the complaint, Rio Tinto, through Albanese and Elliot, hid negative information about the quality and productivity of it's Mozambican subsidiary, officially known as Rio Tinto Coal Mozambique (RTCM), and inflated the subsidiary's to hide its losses and avoid an impairment analysis.
Rio Tinto executives advised Albanese and Elliot in May 2012 that RTCM's best valuation was negative $680 million, yet the company "continued to carry RTCM on its books at a value of more than $3 billion and Defendants continued to promote RTCM's prospects to the market." The defendant's misconduct, which ultimately led to the subsidiary's sale for $50 million in 2013, is described further:
Rio Tinto raised a total of $5.5 billion in U.S. debt offerings that incorporated materially misleading statements and omissions concerning RTCM's valuation. Of that amount, Rio Tinto raised approximately $3 billion in an offering initiated soon after Albanese and Elliott learned of RTCM's negative $680 million valuation. Each of the debt offerings took place only days after Rio Tinto released misleading financial information to the market. Publicly, Rio Tinto continued to value RTCM at more than $3 billion for the relevant period. Privately, Defendants knew RTCM had little or no commercial value. Nevertheless, Defendants undermined the impairment process required under International Accounting Standards and Rio Tinto’s accounting policies.
The lawsuit was filed in the US District Court for the Southern District of New York [official website] accuses Albanese and Elliot of, among other misconduct, aiding and abetting Rio Tinto's federal violations of the Exchange Act [text], the Securities Act [text, PDF], and the Securities Exchange Act [text, PDF] through fraud and deception.
According to SEC, "investors were harmed [Reuters report] by Rio’s alleged accounting fraud through public bond offerings," the current outstanding value of which is about $1.9 billion.