Former Rio Tinto CEO Tom Albanese, ex-CFO Guy Elliott charged with fraud by SEC

Security News ThreatsCybercrime Uncategorized

The US sharemarket regulator has charged Anglo-Australian mining giant Rio Tinto and two of its former top executives with fraud for allegedly inflating the value of Mozambique coal assets acquired in 2011 for $US3.7 billion ($4.65 billion) and sold just three years later for only $US50 million.

The complaint by the Securities and Exchange Commission, filed in federal court in Manhattan on Tuesday, alleges that Rio Tinto, its former chief executive Tom Albanese, and its former chief financial officer Guy Elliott failed to follow accounting standards and company policies to accurately value and record its assets.

Up Next

Will the commodity carnage continue?


Video duration

More BusinessDay Videos

Equity bulls in firm control

With the backdrop of improving economics and earnings, low volatility and subdued inflation, can global equity markets go higher, especially with the ASX 200 breaking out of its 20-week range? This video was produced in commercial partnership between Fairfax Media and IG Markets.

“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’s board, audit committee, independent auditors and investors, the SEC complaint alleges. 

“Rio Tinto and its top executives allegedly failed to come clean about an unsuccessful deal that was made under their watch,” said Steven Pelkin, co-director of the watchdog’s enforcement division, in a statement. “They tried to save their own careers at the expense of investors by hiding the truth.”

The SEC said it seeks permanent injunctions, returns of “allegedly ill-gotten gains plus interest” and civil penalties from all defendants, and wants to bar Mr Albanese and Mr Elliott from serving as public company officers or directors.

“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,” said Stephanie Avakian, another co-director of the SEC’s enforcement division.

The SEC statement says Rio Tinto’s London-based company, Rio Tinto in Australia, Mr Albanese and Mr Elliott were all “charged with violating the anti-fraud, reporting, books and records and internal controls provisions of the federal securities laws”.

The SEC alleges that the Mozambique project “suffered setbacks almost immediately, as Rio Tinto, Albanese, and Elliott learned that there was less coal and of lower quality than expected, and that Mozambique had rejected its barge application. The complaint alleges that the drop in quantity and quality of coal, coupled with the lack of infrastructure to transport it, significantly eroded the value of the acquisition.”

"Hiding the truth": Former Rio Tinto chief Tom Albanese has been charged by the SEC. “Hiding the truth”: Former Rio Tinto chief Tom Albanese has been charged by the SEC. Photo: Glenn Hunt

The explosive SEC complaint detailing the allegations said “showstopping risks to barging” had actually emerged within months of the 2011 acquisition, “and it became clear that constraints on barging volumes would have a measurable and materially negative effect on RTCM’s valuation”.

The complaint reveals that a Rio Tinto executive became an internal whistleblower in late 2012, after he “became increasingly concerned about the extent to which the Board of Directors had been made aware of Rio Tinto Coal Mozambique’s negative valuation. As a result, he bypassed Albanese and Elliott and spoke directly with the Chairman of Rio Tinto’s Board about [the] negative valuation”.

Guy Elliott, former chief financial officer of Rio Tinto. Guy Elliott, former chief financial officer of Rio Tinto. Photo: Bloomberg

After an investigation requested by the Rio chairman, the value of the assets were revised down to $US611 million at a meeting in January 2013. “This constituted a write-down of more than 80 percent of RTCM’s value within two years of acquisition. Moreover, at the time, there was considerable discussion with Rio Tinto’s independent auditors about whether the write-down should be even larger,” the SEC’s complaint said.

Rio said in a statement that it “intends to vigorously defend itself against these allegations”.

They tried to save their own careers at the expense of investors by hiding the truth

SEC statement

Mr Albanese and Mr Elliott declared they would fight the charges levelled against them.

Mr Albanese, an American citizen, said: “There is no truth in any of these charges. I echo Rio Tinto’s confidence that these will be proved baseless in court.”

Illustration: Matt Golding. Illustration: Matt Golding. 

A spokesperson for Mr Elliott said: “Guy also fully refutes these charges and will be vigorously contesting them.”

Rio Tinto said it believed that the SEC’s 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”.

Rio explained that the timing of the impairment of Rio Tinto Coal Mozambique had been reflected in the company’s 2012 end-of-year accounts.

The miner added it had reached a settlement in relation to the timing of the impairment of its Mozambique coal investment with the United Kingdom’s Financial Conduct Authority (FCA).

“The FCA determined that Rio Tinto should have carried out an impairment review in relation to RTCM (Rio Tinto Coal Mozambique) for its 2012 interim results and, if it had done so, those results published in August 2012 would have reflected the impairment it recorded six months later,” Rio said.

The British corporate watchdog determined that Rio Tinto had breached disclosure and transparency rules and hit the miner with a £27,385,400 ($36.4 million) penalty. The miner said that case was now closed, and the FCA had made “no findings of fraud, or of any systemic or widespread failure by Rio Tinto”.

In Australia, the Australian Securities and Investments Commission is also conducting a review of the impairment of Rio’s Mozambique coal assets. Rio said it would update the market as required.

The SEC alleges that after impairing Alcan twice, Mr Albanese, Mr Elliott and Rio all knew that publicly disclosing the “rapidly declining” value of the Mozambique assets “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”.

‘Misleading financial statements’

So instead, the SEC alleges, “they concealed the adverse developments, allowing Rio Tinto to release misleading financial statements days before a series of US debt offerings.”

The SEC said the miner raised $US5.5 billion from American investors, with about $US3 billion of it being “raised after May 2012, when executives at Rio Tinto Coal Mozambique had already told Albanese and Elliott that the subsidiary was likely worth negative $US680 million”.

The complaint alleges Albanese then repeated and reinforced the false outlook for the project in public statements.

The SEC’s statement also said “the alleged fraud continued until January 2013,” when another Rio executive “discovered that the coal assets were being carried at an inflated value on Rio Tinto’s financial statements. After an internal review allegedly triggered by the executive’s report to Rio Tinto’s chairman, Rio Tinto announced that Albanese had resigned and the company reduced the value of the coal assets by more than $US3 billion, or more than 80 per cent.