The U.S. Securities and Exchange Commission has filed a complaint in the Southern District of New York alleging violations of the Securities Act and the Exchange Act for an accounting fraud related to the valuation of a coal business in Mozambique, Africa. Rio Tinto settled the investigation of the UK Financial Conduct Authority for $35.6 million (USD). Australia is also reportedly investigating the allegations. Rio Tinto is one of the world’s largest metals and mining corporations with headquarters in London, England and Melbourne, Australia.
The SEC Complaint alleges that Mozambique acquired coal assets for $3.7 billion shortly after disclosing big losses from a previous large acquisition. Soon after the acquisition, Rio Tinto realized that there was less coal and the coal actually there was a lower quality than anticipated. They also faced challenges due to the lack of infrastructure to transport it. This significantly impaired the acquisition’s value and by May 2012, executives at Rio Tinto suggested that the subsidiary was worth negative $680 million.
The Complaint further alleges that Rio Tinto released misleading financial statements before a series of U.S. debt offerings. It ultimately raised $5.5 billion from U.S. investors, including $3 billion after May 2012 when it had been informed of its negative valuation.
The inflated valuation of the coal assets were discovered in January 2013 by an executive at Rio Tinto and reported to Rio Tinto’s Chairman. After a subsequent internal investigation, Albanese resigned and the company marked down the assets on their books more than 80 percent. It ultimately sold the Mozambique subsidiary for $50 million.
The complaint alleges that Rio Tinto’s leadership was familiar with the company’s accounting processes because of the previous valuation impairment and did not take steps to initiate the process or otherwise disclose the asset’s outlook. Instead, the leadership team concealed the loss internally and allowed public financial statements to be released without impairment of the asset.
For potential whistleblowers wondering what types of enforcement actions the SEC will bring under President Trump, this is probably a good example. If the facts are true as alleged, the company released misleading financial statements and raised billions of dollars from investors shortly thereafter. Given the previous failed acquisition, there is reason to believe this information would have been material to investors. And despite Rio Tinto’s large size (revenue of $33 billion (USD) in 2016), it is still a substantial amount for the company.
This is not the only accounting fraud case brought by the SEC recently. Last month, the SEC also settled an accounting fraud investigation involving Alere, a medical diagnostics firm bought by Abbott Labs earlier this year. According to the SEC order, Alere’s South Korean subsidiary Standard Diagnostics, artificially inflated revenues by recording sales before they were delivered to customers. Alere subsidiaries in other countries also engaged in improper revenue recognition practices regarding the timing of its reporting. As a result, Alere revised and restated revenue over a five year period to shift more than $260 million in revenue to a later quarter than the one in which it was originally recognized. The financial statements also included $3.3 million in profits from improper offers and payments to foreign government officials indirectly made by Alere’s subsidiaries in Columbia and India.
Prior to the Government’s investigations of investment banks for mortgage fraud, accounting fraud was a major area of focus for the SEC. In the past few years, some have assumed that the SEC would increase its resources in this area. Although cybersecurity still looms as a major issue, accounting fraud could be set for a comeback.