Securities Regulation Daily Wrap Up, TOP STORY—S.D.N.Y.: International mining company charged with fraud by SEC; fined £27 million by U.K., (Oct. 18, 2017)
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Wednesday, October 18, 2017

Securities Regulation Daily Wrap Up, TOP STORY—S.D.N.Y.: International mining company charged with fraud by SEC; fined £27 million by U.K., (Oct. 18, 2017)

By R. Jason Howard, J.D.

Rio Tinto, an Australian-British multinational and one of the world's largest metals and mining corporations, along with its former CEO and CFO, face charges in connection with efforts to conceal billions in losses from the company’s failed coal business in Mozambique, Africa. The U.K.’s financial regulatory also announced that it has imposed a £27 million fine on the company (SEC v. Rio Tinto PLC, October 17, 2017).

RTCM. Rio Tinto Coal Mozambique (RTCM), was purchased for $3.7 billion in 2011, under the assumption that Rio Tinto could "profitably mine, transport, and sell more than 40 million tons of coal per year by barging the majority of the coal product down the Zambezi River to a port on the Indian Ocean." The assumption was false as not only was there less coal than assumed, but it was also of a lower quality than assumed. In addition, the Government of Mozambique rejected Rio Tinto’s proposal to barge coal down the Zambezi River and existing railway capacity was severely limited, making that method of transport uneconomical.

Rio Tinto came to the realization that it could only transport and sell around 5 percent of the coal it originally presumed and according to the SEC’s complaint, both the CEO and CFO took steps to conceal the adverse developments by allowing Rio Tinto to release misleading financial statements days before a series of U.S. debt offerings.

The debt offering raised $5.5 billion from U.S. investors, approximately $3 billion of which was raised after May 2012, when executives at RTCM had already told Rio Tinto’s former CEO and CFO that RTCM was likely worth negative $680 million.

The complaint alleges that the deceit 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." After an internal review, the value of the coal assets was reduced by more than $3 billion, and the Mozambique subsidiary was sold for $50 million.

Stephanie Avakian, co-director of the SEC’s Enforcement Division said, "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, also co-director of the SEC’s Enforcement Division said, "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."

Charges and relief sought. The company and the former top executives are charged with violating the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws.

The SEC is seeking permanent injunctions, return of allegedly ill-gotten gains plus interest, and civil penalties from all the defendants, as well as a bar against the two former executives from serving as public company officers or directors.

U.K. fine. The Financial Conduct Authority (FCA), the United Kingdom’s top financial watchdog, also announced that it has fined Rio Tinto more than £27 million for breaching its transparency and disclosure rules. According to the FCA, Rio Tinto failed to carry out an impairment test and failed to recognize an impairment loss on the value of its mining assets in Mozambique. The company had determined that there was lack of clarity around how it would develop the mines and it would be premature to revalue these assets; the company, therefore, decided it was appropriate to continue to value the mining assets at the acquisition price, which demonstrated a "serious lack of judgement," the FCA stated. Rio Tinto should have carried out an impairment test given that there were indicators of impairment of the company’s Mozambique assets, according to the FCA.

Rio Tinto’s potential penalty was reduced by 30 percent because it settled the FCA’s charges at an early stage in the investigation, the FCA explained.

Companies: Rio Tinto plc; Rio Tinto Limited

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