If the fraud allegations made by the US regulator against Rio Tinto, its former chief executive Tom Albanese and finance director Guy Elliott prove correct, serious questions should be asked of those directors in the January 2013 line-up.
Those questions should go not just to their competence but also to their public characterisation of what went on during a troubled time for the mining giant.
In announcements at the time heralding the departure of Albanese and Elliott after the $US3 billion writedown of its Mozambique coal assets and up to $US11 billion on its aluminium assets, there was no mention by the board of it being misled, no allegations of fraud, no suggestion the pair had inflated asset values.
Indeed Rio said Albanese’s departure was based on mutual consent. Chairman Jan du Plessis even thanked him for his contribution, integrity and dedication.
The US Securities and Exchange Commission paints a very detailed, and different, picture of what was going on inside Rio Tinto from the time it outlaid $US3.7 billion for coal assets in Mozambique in 2011 to the time it admitted the assets were virtually worthless less than two years later. Mounting problem with coal assets
The allegations outlined in a court writ released on Wednesday describe an elaborate deceit employed by Albanese and Elliott to hide the huge and mounting problems with those coal assets, one of which began only months after they were purchased.
In a nutshell the coal reserves were smaller than anticipated at the time Rio acquired them but, more significantly, Rio’s plans to transport the coal to port collapsed because the Mozambique government refused to allow coal to be barged down the river. Meanwhile, rail capacity was very limited and building a new railway was ruled out because the $US16 billion cost made it financially unviable.
So for more than a year the true value of the coal assets was allegedly hidden by Albanese and Elliott from others in the organisation, including the wider board, its audit committee, the executive in charge of asset impairments and Rio’s independent auditors.
Thus the SEC alleges a series of financial documents, including half yearly and annual statements and others supporting two separate bond issues totalling $US5 billion, were based on misleading statements.
This explains why the SEC is calling fraud on Albanese and Elliott.
But it’s the events of December 2012 and early 2013, once the board apparently became aware of the alleged deception, that call for more scrutiny.
The SEC investigations reveal that overvaluation of the Mozambique project only came to the attention of the chairman thanks to a whistleblower who was part of a technology and innovation team that did a valuation in August 2012. They concluded project was worth between negative $US4.9 billion and positive $US300 million, a far cry from Rio’s $US3.7 billion book value. Red flags
The head of the technology and innovation team had previously raised a red flag, having discussed with Elliott the valuation problem in November 2012 on the eve of a board audit meeting.
He was assured Elliott would raise the “significant valuation issues” confronting the coal business in Mozambique (Riversdale) at the upcoming audit committee meeting.
Instead, and bizarrely, Albanese and Elliott said nothing when a different executive – the controller who was in charge of internal valuations – submitted to the audit committee an upgrade to the value of the assets of between $US4 billion and $US5 billion.
According to the SEC: “Contrary to his promise, Elliott did not disclose the significant valuation challenges that T&I (Technology & Innovation) had flagged for him in their previous call”. Rather, Elliott merely alluded to the information he had received from T&I as “late-breaking” news of a “technical nature”.
Having heard nothing further from Elliott, the tenacious whistleblower made his concerns known to Albanese who sought and later received verification of the inflated value of the Mozambique project.
The whistleblower wasn’t satisfied so went over the heads of Albanese and Elliott and approached the chairman. Things then started to move. A fresh investigation was activated by chairman Du Plessis and, weeks later, at the January 2013 board meeting, the assets were formally written down by 80 per cent.
The SEC’s complaint against Rio does not mention if the board had pieced together the alleged fraud and cover-up at the time it announced Albanese and Elliott’s departures.
It is hard to believe that the chairman’s investigation in the December 2012-January 2013 period did not uncover, for example, that Albanese and Elliott had allegedly been told by the Mozambique subsidiary’s management in early 2012 that the assets were worth negative $US680 million.
If the board found out it was misled by these executives, then it should have told investors. If they were the victims of deceit, this should have been disclosed to the market.
Meanwhile, Rio has also been charged by the SEC with fraud and inflating the value of assets. It told the market on Wednesday it would vigorously defend the charges.
“Based on the complaint’s allegations, Rio Tinto plc, Rio Tinto Limited, Albanese, and Elliott are charged with violating the anti-fraud, reporting, books and records and internal controls provisions of the federal securities laws,” the SEC’s legal filing said.
“The SEC seeks permanent injunctions, return of allegedly ill-gotten gains plus interest, and civil penalties from all the defendants, and seeks to bar Albanese and Elliott from serving as public company officers or directors.”
The SEC is taking a tougher stance than Britain’s Financial Conduct Authority, which determined the company breached its disclosure and transparency rules and hit it with a $36.4 million penalty but made no findings of fraud.