On Tuesday, the U.S. Securities and Exchange Commission (SEC) charged the mining company Rio Tinto Plc with fraud along with two of its former top executives. The SEC is stating that they overestimated the value of coal assets in Mozambique and hid critical information while milking the market for billions.
The U.K.’s Financial Conduct Authority (FCA) also said that a settlement has been reached with Rio Tinto in which the company will pay a fine of £27 million ($35.6 million) to settle the violations regarding the Mozambique assets.
The SEC said in a lawsuit filed in U.S. federal court that the company’s former Chief Executive Officer Thomas Albanese and former Chief Financial Officer Guy Elliott both failed to adhere to accounting regulations and company policies to truthfully value and record assets of Rio Tinto.
The Mozambican coal business was acquired in 2011 for $3.7 billion from Riversdale Mining and then sold a few years after for $50 million. The business depends on pushing the coal down the Zambezi River to port. Shortly after the deal was made, Rio Tinto discovered that the acquisition would yield less coal than expected. The global miner could only transport and sell a portion of the coal than originally believed, the SEC said.
Rio Tino execs raised $5.5 billion from U.S. investors by making deceiving public statements. According to the SEC, the company continued to seek investments even after the executives of the Mozambique division communicated to Albanese and Elliott the division was worth negative $680 million.
“Defendants concealed the nature and extent of these adverse developments from Rio Tinto’s Board of Directors, Audit Committee, independent auditors, and the market,” the SEC said.
Rio Tinto said it shall defend itself actively against these allegations from the SEC. The company added that the U.K. FCA has “made no findings of fraud, or of any systemic or widespread failure by Rio Tinto”.
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The SEC stated that the swift decline in value of the coal business was hidden because Rio Tinto had already revealed large losses regarding its 2007 acquisition of Alcan. “The Mozambique acquisition was expected to restore the market’s confidence in Albanese’s deal-making acumen, but on-the-ground realities in Mozambique quickly undermined that narrative,” according to the SEC.
The SEC said that if the finding had been exposed, it would have sparked an impairment analysis. An impairment analysis would have measured the variance in expected cash flow from assets and the value. The company had conveyed the assets on its books at $3 billion while also promoting to the market.
The SEC is pursuing banning both Albanese and Elliott from acting as officers or directors of any public company.