U.S. SEC charges Rio Tinto, former top executives with fraud

By James Regan and Brendan Pierson

SYDNEY/NEW YORK (Reuters) - The U.S. Securities and Exchange Commission (SEC) on Tuesday charged mining company Rio Tinto Plc and two of its former top executives with fraud, saying they inflated the value of coal assets in Mozambique and concealed critical information while tapping the market for billions of dollars.

The U.K.'s Financial Conduct Authority (FCA) also said on Tuesday it had reached a settlement with Rio Tinto under which the company would pay a fine of £27 million ($35.6 million) to settle claims that it breached accounting rules in connection with the Mozambique assets.

The Mozambican coal business, which relied on barging the product down the Zambezi River to export via a planned port on the coast, was acquired for $3.7 billion in 2011 from Riversdale Mining and sold a few years later for $50 million.

In a lawsuit filed in U.S. federal court in Manhattan, the SEC said Rio Tinto, former Chief Executive Officer Thomas Albanese, and former Chief Financial Officer Guy Elliott failed to follow accounting standards and company policies to accurately value and record the assets.

The SEC said that soon after the deal was completed, Rio Tinto learned that the acquisition would yield less coal, and of a lower quality, than expected. The global miner could only transport and sell a fraction of the coal it had originally assumed, the SEC said.

By making misleading public statements, Rio Tinto and the executives were able to raise $5.5 billion from U.S. investors, the SEC said. They continued to solicit the investments even after executives of the Mozambique subsidiary told Albanese and Elliott that the unit was likely worth negative $680 million, according to the SEC.

"There is no truth in any of these charges," Albanese said in a statement.

Christina Mills, a spokeswoman for Elliott, said Elliott would vigorously contest the charges.

On Wednesday, Royal Dutch Shell said Elliott had stood down as a non-executive director of the company over the matter.

Rio Tinto said it would defend itself vigorously against the SEC's allegations. The company said the U.K. FCA had "made no findings of fraud, or of any systemic or widespread failure by Rio Tinto".

Although Rio Tinto's primary listing is in London, the company's shares are traded by U.S. investors on the New York Stock Exchange and registered with the SEC, giving the U.S. regulator jurisdiction to pursue the case.

The SEC, which said it received assistance from the Australian and UK securities regulators, has greater powers to prosecute fraud with respect to violations of securities law than its overseas counterparts.

The SEC claims U.S. investors were harmed by Rio's alleged accounting fraud through public bond offerings, violating federal securities law. About $1.9 billion of that debt remains outstanding with U.S. insurers, pension funds and mutual funds making up the bulk of the bonds' owners.

HOW IT UNFOLDED

The SEC allegations are contained in court documents that also request a jury trial. The SEC said the rapid and dramatic decline in value of the coal business was concealed, in part because Rio Tinto had already disclosed losses in connection with 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," the SEC said.

In 2011, demand for coking coal, a type used in furnaces for steel making, was high after flooding at Australian coal mines had limited the supply. Riversdale's Zambezi deposit was believed to contain large supplies of the material.

Rio told investors that the Riversdale purchase was the "greatest undeveloped seaborne coking coal region in the world", according to a published presentation.

The SEC said the company knew its barging assumptions were unrealistic and railway capacity severely limited by the end of 2011, just months after securing the Riversdale assets.

"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.

NEGATIVE VALUATION

By May 2012, Albanese and Elliott were informed of the negative valuation, although the company carried the assets on its books at more than $3 billion while also promoting it to the market.

Rio then issued a $3 billion bond and an around 1.8 billion euro bond with a 500 million British pound tranche in 2012. Some 95 percent of the sterling bonds went to U.K. investors including fund managers, insurers and pension funds, according to Thomson Reuters data.

The SEC said the fraud continued until January 2013, when another executive discovered accounting irregularities. Albanese subsequently resigned and the value of the Mozambique assets were lowered by more than $3 billion.

Rio said at the time that the development of infrastructure to support coal mining was more challenging than anticipated and lowered the recoverable coal estimates.

The SEC is seeking to have Albanese and Elliott barred from acting as officers or directors of any public company.

Albanese joined Indian resources conglomerate Vedanta Resources as chief executive in 2014 but left the firm in August.

The SEC also disclosed that the Australian Securities and Investments Commission was looking into Rio's accounting of the Mozambique assets.

(Additional reporting by Jane Wardell and John Weavers in SYDNEY, Eric Walsh in WASHINGTON and Henning Gloystein in SINGAPORE. Writing by Jonathan Barrett.; Editing by David Gregorio and Christian Schmollinger)