Sec. & Exch. Comm'n v. Rio Tinto PLC, Rio Tinto Ltd.

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. RIO TINTO PLC, RIO TINTO LIMITED,THOMAS ALBANESE, and GUY ROBERT ELLIOTT, Defendants.

17 Civ. 7994 (AT)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

March 18, 2019

ORDER

ANALISA TORRES, District Judge:

The U.S. Securities and Exchange Commission (the "SEC") brings this enforcement action against Defendants Rio Tinto plc and Rio Tinto Limited (collectively, "Rio Tinto"), Thomas Albanese, and Guy Robert Elliott (Albanese and Elliott together, the "Individual Defendants"), alleging violations of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78a et seq., and the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77a et seq., and the rules promulgated thereunder, arising out of Rio Tinto's acquisition of a coal mining project in the Republic of Mozambique. Defendants move to dismiss the complaint in its entirety. ECF No. 70. For the reasons stated below, Defendants' motion is GRANTED in part and DENIED in part.

BACKGROUND

The following facts are taken from the complaint, which the Court accepts as true for purposes of this motion. See Koch v. Christie's Int'l PLC, 699 F.3d 141, 145 (2d Cir. 2012). Rio Tinto is an international mining group that is headquartered in the United Kingdom. Compl. ¶¶ 18-20, ECF No. 1. Thomas Albanese was Rio Tinto's Chief Executive Officer from May 2007 through January 2013. Id. ¶ 21. Guy Robert Elliott was Rio Tinto's Chief Financial Officer from 2002 through April 2013. Id. ¶ 22.

Rio Tinto is obligated to comply with the accounting standards issued by the International Accounting Standards Board ("IAS" standards). Id. ¶ 31. Pursuant to one standard (IAS 34), Rio Tinto is required to recognize a loss from an impaired asset in each interim financial report. Id. ¶ 32. An asset is impaired if its value, as reported in a company's financial statements, exceeds its likely recoverable amount. Id. Pursuant to another standard (IAS 36), Rio Tinto must assess whether an asset is impaired at the end of each reporting period (i.e., at each half year and year end). Id. ¶¶ 33-34. This is done by determining whether there are any "impairment indicators," and if there are, by testing for impairment. Id. ¶ 36. Examples of impairment indicators in IAS 36 are, among others, a significant decline in the market value of an asset, significant changes in the technological, legal, or economic environments in which the entity operates, and indications that the economic performance of an asset is, or will be, significantly worse than expected. Id. Rio Tinto uses other impairment indicators as well—for example, a material change in the estimates of ore reserves and resources for a project. Id. ¶ 37. Rio Tinto's Controller's Office is responsible for coordinating the impairment review process, and at all relevant times, the Controller reported to Elliott. Id. ¶¶ 35, 39. The Controller's Office also prepared papers for Rio Tinto's Audit Committee, of which the Individual Defendants were members. Id. ¶¶ 42-43. The Individual Defendants were also members of Rio Tinto's "Investment Committee," which made investment decisions for the company. Id. ¶¶ 27, 54.

In July 2007, Rio Tinto acquired Alcan, Inc. ("Alcan"), an aluminum processing company, for approximately $38 billion. Id. ¶ 44. However, Rio Tinto "impaired" Alcan four times over the following years, eventually writing off substantially all of its value by January 2013. Id.

In 2010, Rio Tinto identified a company called Riversdale Mining Limited ("Riversdale") as a potential acquisition target. Id. ¶¶ 48-53. Riversdale's principal interests were mining projects in contiguously-located coal tenements in Mozambique. Id. ¶ 50. These coal projects were located in areas of Mozambique believed to have large amounts of "hard coking" coal, which is rarer and more valuable than "thermal" coal. Id. ¶¶ 49-50, 55.

At an August 2010 meeting of the Investment Committee, the CEO of Rio Tinto's Energy Product Group ("RTE") contended that Riversdale's coal tenements were worth approximately $3.4 billion, based in part on two assumptions. Id. ¶¶ 24, 55. First, it was assumed that the tenements had production potential of approximately 30 million tons of coal annually by 2020, and 45 million tons annually by 2030. Id. ¶ 55. Second, it was assumed that sixty percent of the coal mined would be hard coking coal. Id. Additionally, Rio Tinto's Technical Evaluation Group ("TEG") informed the Investment Committee that same month that RTE's "central case assumption" was that the majority of the coal mined from the tenements would be barged down the Zambezi River. Id. ¶¶ 29, 56. TEG explained that barging is "only a concept at this stage and a number of potentially 'showstopping' unknowns exist (such as the ability to dredge and maintain an open channel over the river mouth bar, the impact of cyclones/flooding on river navigability and the ability to obtain environmental approvals)," and described the assumptions about Rio Tinto's production capacity as "optimistic." Id. ¶ 56. The SEC also alleges that it was assumed that approximately 30 million tons of coal could be barged annually and that approximately 12 to 15 million tons of coal could be transported by existing rail lines annually, although it does not specify when these assumptions were made. Id. ¶ 67.

In advance of a November 18, 2010 Investment Committee meeting, TEG reported that many of the technical uncertainties about the project persisted, including that with respect to barging, "[c]urrent assessments are at a fairly early stage . . . and significant uncertainties remain over its practical operation, permitting, feasibility and cost." Id. ¶ 58 (alteration and ellipsis in original). Barging was discussed at that meeting, and RTE's CEO informed the Investment Committee that barging was a viable option that was supported by Mozambique's government. Id. ¶ 59.

In December 2010, the Investment Committee presented a proposal to acquire Riversdale to Rio Tinto's Board of Directors (the "Board"), which also included the Individual Defendants. Id. ¶ 60. The proposal stated that the purchase would increase Rio Tinto's production of coal to more than 30 million tons annually after 2020, that coal could be transported by barging or rail, and that the value of the acquisition was $3.6 billion. Id. However, the potentially "showstopping" risks associated with barging were not disclosed to the Board. Id. Rio Tinto acquired Riversdale in April 2011 for approximately $3.7 billion and renamed the business "Rio Tinto Coal Mozambique" ("RTCM"). Id. ¶¶ 2, 61. Rio Tinto and the Individual Defendants touted the Riversdale acquisition to its shareholders and the public over the following months. Id. ¶¶ 62-66. However, Rio Tinto soon ran into problems with the project.

First, Rio Tinto encountered problems with respect to barging. Id. ¶¶ 68-74. By October 2011, RTE's Vice President of Logistics determined that, based on the best information available, barging capacity was limited to 10 million tons annually (not 30 million) due to physical and ecological constraints. Id. ¶ 69. Thereafter, RTCM generated an updated valuation that reduced its value by approximately $2.1 billion. Id. ¶ 71. The Individual Defendants were aware of the problems, and Albanese met with RTCM's management team and Mozambique government officials in December 2011 where he learned more about the challenges, and expressed "[m]ajor disappointment on infrastructure capacity." Id. ¶¶ 72-74. Barging was contingent on government approval, and in December 2011, the Government of Mozambique rejected a barging proposal in a written letter because of environmental concerns. Id. ¶ 76. By January 2012, both Individual Defendants had learned of the rejection. Id. ¶ 77. Rio Tinto never formally submitted a revised proposal, and was warned by the Government of Mozambique in April 2012 that if it persisted in raising the subject of barging, it risked losing its mining licenses altogether. Id. Rio Tinto did not publicly disclose the rejection of the barging proposal or its effect on RTCM's valuation, nor did Albanese inform the Board about it. Id. ¶¶ 89-90. However, "press reports" in March 2012 noted that the Government of Mozambique had rejected Rio Tinto's proposal. Id. ¶ 90.

Aside from barging, another option was to transport the coal by rail, and as discussed, Rio Tinto had assumed that between 12 and 15 million tons of coal could be shipped by rail annually. Id. ¶ 80. However, a few months after acquiring Riversdale, Rio Tinto learned that the total existing shared rail capacity was limited to 6 million tons per year for all users, and further, Rio Tinto would only be able to transport about 2 million tons annually. Id. ¶ 80.¹

As for the total amount of coal resources, Riversdale had publicly declared (before acquisition) that the tenements contained approximately 13 billion tons of coal resources. Id. ¶ 83. However, Rio Tinto estimated pre-acquisition, while doing its due diligence, that they contained only about 7 billion tons. Id. And post-acquisition, in January 2012, Rio Tinto learned that it contained closer to 3 billion tons. Id. ¶ 84. Elliott sent emails to Albanese about this in January 2012, and noted that because Rio Tinto's pre-acquisition estimate of 7 billion tons was not publicly disclosed, "the market won't see" that their due diligence estimate was wrong. Id. ¶¶ 85-86.

In late 2011 and early 2012, RTCM created "ground-up" valuations that generated valuations ranging from approximately negative $3.45 billion to approximately negative $9 billion. Id. ¶ 87. These models incorporated the problems about the transportation options and the coal reserves, but were still based on "aggressive" assumptions, including that Rio Tinto would build a new railroad for coal transportation (and sell off excess capacity on it to other companies). Id. ¶ 88.

Between September and December 2011, Rio...