MANHATTAN (CN) – The Securities and Exchange Commission claims in a federal securities-fraud lawsuit that worldwide mining company Rio Tinto and former executives concealed billions of dollars lost in a bungled African coal-mine deal.
The SEC complaint filed Tuesday in Manhattan federal court stems from allegedly false representations made by Rio Tinto about coal assets in Mozambique that the company acquired for $3.7 billion in 2011, which were sold a few years later for just $50 million.
The lawsuit accuses the Australian-British multinational corporation and former company executives of 12 counts of federal securities violations.
The SEC demands that Rio Tinto, former CEO Thomas Albanese and former CFO Guy Elliott disgorge all ill-gotten gains, in addition to paying prejudgment interest and civil penalties.
The agency also seeks an order barring Albanese and Elliot from acting as officers or directors of any public company. The 60-page complaint was filed by SEC attorney David Cave.
The African coal-assets acquisition turned out to be less valuable than anticipated, according to the lawsuit, as it was based on the incorrect assumption that Rio Tinto could inexpensively mine, transport and sell large quantities of high-quality coal, primarily using barges for shipping.
The company allegedly anticipated exporting 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, but the Mozambique government rejected Rio Tinto’s proposal to barge coal down the river.
“Rio Tinto also learned that existing railway capacity was severely limited,” the complaint states. “As a result, by the end of 2011, Rio Tinto knew that it could transport and sell only about 5 percent of the amount of coal it had originally assumed. Rio Tinto also learned that there was significantly less and lower quality coal than it had assumed at acquisition.”
The SEC 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 Rio Tinto Coal Mozambique project.
“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,” the lawsuit alleges. “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.”
The SEC alleges that Rio Tinto’s fraud continued until January 2013, when an executive in its Technology & Innovation Group discovered the inflated coal assets figures in financial statements.
Following an internal review allegedly triggered by the executive’s report to Rio Tinto’s chairman, the company announced Albanese’s resignation and the reduction of the value of the African coal assets by more than 80 percent, or $3 billion.
After a second reduction, Rio Tinto sold its Mozambique subsidiary for $50 million, far below the $3.7 billion acquisition price.
In an SEC press release, Steven Peikin, co-director of the SEC’s Enforcement Division, said in a statement, “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.”
But Rio Tinto fired back in its own statement, calling the SEC case “unwarranted” and saying the company “intends to vigorously defend itself against these allegations.”
The company’s statement cited a settlement it reached with British authorities over the Mozambique project. Rio Tinto said it paid a $36 million penalty even though the United Kingdom’s Financial Conduct Authority “made no findings of fraud, or of any systemic or widespread failure by Rio Tinto.”
“When all the facts are considered by the court, or if necessary by a jury, the SEC’s claims will be rejected,” the company’s statement reads.