Securities and Exchange Commission v. Rio Tinto PLC

Background

The Securities and Exchange Commission (SEC) sued Guy Robert Elliott, alleging violations of the Securities Exchange Act of 1934 and related regulations. The claims concern Elliott’s work as chief financial officer of the Rio Tinto Group and Rio Tinto’s acquisition of Riversdale Mining Limited, a company with coal assets in Mozambique. Rio Tinto later renamed those assets Rio Tinto Coal Mozambique (RTCM).

The SEC’s remaining claims alleged violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1, which concern falsifying or causing the falsification of corporate accounting records, and Rule 13b2-2, which concerns materially false or misleading statements or omissions to accountants in connection with an audit or securities filing. Elliott moved for summary judgment, arguing that the evidence conclusively showed that the relevant accounting records were not false, that he did not cause any falsity, and that his conduct was reasonable.

The dispute arose after problems developed with the project’s coal reserves and transportation plans. The Mozambique government was not favorable to Rio Tinto’s plan to transport coal by barge, and a presentation at a May 2012 meeting stated that barging lacked political support and that a new rail and port system was the only way to provide substantially greater transportation capacity at a competitive cost. The presentation also contained a chart projecting a negative net present value, or NPV, for the project. Later in 2012, a technical group told Elliott that the project’s NPV was likely negative and that further analysis probably would not produce a positive NPV. Rio Tinto ultimately announced an impairment of about $3 billion for RTCM in early 2013.

Section 13(b)(5) and Rule 13b2-1

The SEC argued that Elliott caused three accounting papers to be false: the First Controller’s Paper, the Impairment Indicator Paper, and the Second Controller’s Paper. The court held that a reasonable jury could find that the First and Second Controller’s Papers presented a misleading picture by concluding that RTCM had no impairment indicators while omitting or minimizing information about transportation problems, reduced coal resources, and the project’s negative valuation.

The court rejected Elliott’s argument that only an affirmative act could establish that he caused the records to be false. It explained that an omission may be enough. A jury could find that Elliott caused the First and Second Controller’s Papers to be false by failing to tell the Audit Committee and PricewaterhouseCoopers what he had learned about the project’s difficulties and by not objecting to drafts stating that impairment was unnecessary. The court also held that whether Elliott acted unreasonably was a factual question for the jury. The evidence could support either Elliott’s view that he reasonably relied on the Controller’s Group and believed RTCM remained viable, or the SEC’s view that he unreasonably failed to challenge the papers despite knowing about serious problems.

The court reached a different conclusion about the Impairment Indicator Paper. There was no evidence that Elliott approved that paper or even saw it. The SEC’s proposed connection between Elliott’s review of an early draft of the Second Controller’s Paper and the later Impairment Indicator Paper was too indirect to support liability. The court therefore granted summary judgment to Elliott as to that record, while denying his motion overall.

Rule 13b2-2

For the Rule 13b2-2 claim, the court held that factual disputes also prevented summary judgment. A jury could find that Elliott, as a Rio Tinto director, directly or indirectly caused a false or misleading statement or omission to be made to accountants by failing to disclose information about RTCM’s financial condition at meetings attended by PricewaterhouseCoopers representatives.

The court also found a factual dispute about materiality. Elliott argued that the auditors and Controller’s Group already knew about RTCM’s problems and would not have recommended an impairment even if he had provided additional valuation information. The SEC argued that information about the negative $680 million valuation and the lack of a feasible large-scale transportation option could have caused PricewaterhouseCoopers to consider impairment more fully. The court left that competing evidence for the factfinder.

The court noted that the SEC had waived claims concerning allegedly false statements in Rio Tinto’s half-year 2012 financial report. The court therefore did not consider that report as a basis for Elliott’s remaining liability.

Expert testimony

Both sides moved to exclude the opposing party’s expert opinions and testimony. The court did not rely on the expert materials in deciding summary judgment and concluded that much of the proposed testimony addressed matters that were no longer relevant after Rio Tinto and Thomas Albanese settled with the SEC.

The court denied both motions to exclude as moot, without prejudice to renewal at trial if expert testimony is warranted.

Disposition

Judge Analisa Torres denied Elliott’s motion for summary judgment. The ruling leaves factual issues for further proceedings on the remaining claims involving the First and Second Controller’s Papers and the alleged omissions to accountants, while Elliott obtained summary judgment as to the Impairment Indicator Paper. The court denied both parties’ motions to exclude expert testimony without prejudice to renewal at trial.