Securities Industry Commentator by Bill Singer, Esq.
October 17, 2017
According to the SEC's complaint, in 2011, Rio Tinto acquired coal assets in Mozambique shortly after disclosing huge losses associated with its previous large-scale acquisition of Alcan. Both acquisitions took place under Albanese's leadership. The second acquisition was also unsuccessful as it was based on the incorrect assumption that Rio Tinto could inexpensively mine, transport, and sell large quantities of high-quality coal, chiefly using barges for shipping. The SEC's complaint alleges that the project suffered setbacks almost immediately, as Rio Tinto, Albanese, and Elliott learned that there was less coal and of lower quality than expected, and that Mozambique had rejected its barge application. The complaint alleges that the drop in quantity and quality of coal, coupled with the lack of infrastructure to transport it, significantly eroded the value of the acquisition.The complaint alleges that after already impairing Alcan twice, Rio Tinto, Albanese, and Elliott knew that publicly disclosing its second failure and rapidly declining value would call into question their ability to pursue the core of Rio Tinto's business model to identify and develop long-term, low-cost, and highly-profitable mining assets. Instead, they concealed the adverse developments, allowing Rio Tinto to release misleading financial statements days before a series of U.S. debt offerings. Rio Tinto raised $5.5 billion from U.S. investors, approximately $3 billion of which was raised after May 2012, when executives at Rio Tinto Coal Mozambique had already told Albanese and Elliott that the subsidiary was likely worth negative $680 million. The complaint alleges Albanese then repeated and reinforced the false positive outlook for the project in public statements.The alleged fraud continued until January 2013, when an executive in Rio Tinto's Technology & Innovation Group discovered that the coal assets were being carried at an inflated value on Rio Tinto's financial statements. After an internal review allegedly triggered by the executive's report to Rio Tinto's Chairman, Rio Tinto announced that Albanese had resigned and the company reduced the value of the coal assets by more than $3 billion, or more than 80 percent. After a second reduction, Rio Tinto sold the Mozambique subsidiary for $50 million, billions of dollars below the acquisition price.
Among FINRA's more lucrative fine-generating violations is FINRA Rule 3280: Private Securities Transactions of an Associated Person, or, in industry jargon, the FINRA PST Rule. Contrary to what some might believe, I fully appreciate the motivation for this rule and support some form of restriction on a registered representative's outside securities transactions. The problem for me is not the justification for a PST Rule but the fact that FINRA's version isn't particularly well written. Frankly, that definition isn't much of a definition but, at best, an example of circuitous logic.
During my 35 years on Wall Street in compliance, regulation, and as a lawyer in private practice, I have had many discussions with registered representatives about PST violations. Okay, sure, many of those folks simply didn't give a crap about the prohibition and figured that no one would find out -- and, of course, that gambit didn't play out particularly well. On the other hand, I have spoken to many -- far too many folks -- who simply misunderstood what constituted a "securities transaction" or a "private securities transaction."