Recently I read the Securities and Exchange Commission’s complaint against Rio Tinto and the company’s former CEO and CFO, accusing the defendants of serious securities fraud. The case is quite intriguing, but it is puzzling why the SEC complaint is so poorly written. I wanted to highlight the substandard writing, put forth some possible reasons as to why it ended up the way it did, and suggest a simple way for the SEC to avoid such outcomes in the future.
By way of background, on October 17th of this year, the SEC filed a civil fraud lawsuit in Manhattan against Rio Tinto and the former officers. The company, founded in 1873, is one of the world’s largest mining corporations, with operations in six continents. Rio Tinto’s stock trades on the London and Australian stock exchanges and its ADRs trade in the United States.
The SEC complaint is crudely written and makes it seem that some of the serious fraud allegations will probably be difficult to prove. It has a number of confusing passages and a lot of superfluous information. Moreover, there are some glaring errors in the SEC public documents. The SEC press release says that the fraud was discovered in January 2013, but the complaint says it was actually December 2012. Likewise, in a crucial section of the complaint, the SEC says that if Rio Tinto had “properly” valued its coal properties in mid-2012, it would have reduced Rio Tinto’s reported earnings by more than fifty percent. I’d like to see the SEC staff’s math on that suspect contention—it can’t possibly be correct.
So, the obvious question is why the complaint in this high profile matter isn’t first rate? The first possibility is that the complaint reads the way it does because the SEC is being overly aggressive with its charges and the complaint reflects the shortcomings in the underlying case. I can’t imagine that is the situation here. Cases like Rio Tinto are thoroughly vetted within the SEC, especially these days, given the agency’s string of high-profile trial losses. Moreover, the SEC trial lawyers, who are notoriously risk averse, will often argue strenuously against proceeding at all unless they believe that they can prove the case beyond nearly all doubt (even though in an SEC fraud case the standard of proof is only a preponderance of the evidence). I expect that everyone up and down the chain of command went over all of the evidence in this case with a fine-tooth comb before deciding to go forward.
A second possibility is suggested in the complaint itself: the statute of limitation on the defendants’ conduct was set to expire on October 18, 2017, just one day after the SEC filed the complaint. Perhaps the SEC staff assumed the defendants would agree to extend the statute of limitations period and when they refused, the complaint had to be hastily written. I doubt that is likely either, because a case like this one would have taken months to get through the review process at the SEC, leaving plenty of time for the complaint to be written and re-written several times.
A third possibility is that those assigned to write the complaint just weren’t up to the task. An SEC investigative attorney signed the Rio Tinto complaint but attorneys in the SEC trial unit were almost certainly involved the drafting process. For reasons that are understood by few, the D.C. office of the SEC (commonly called the Home Office) has two separate groups of enforcement attorneys. The primary role of the investigative unit is to conduct investigations while the primary role of the trial unit is to draft the complaint and related documents that will be filed in court and then litigate if the case goes to trial. Because the Home Office handled this case, attorneys from the trial unit likely became involved in the case only toward the end of the investigation, after it seemed likely that the defendants would not settle. Part of the role of the trial attorneys was to write or oversee the writing of the complaint.
I guess it is still unclear why—in a high profile matter, which was carefully vetted—the SEC complaint wasn’t as well written as it deserved to be. I don’t know the answer, but I do know that the complaint makes the case seem much more complicated than it probably is and the complaint’s poor quality could be interpreted by the defense as a signal that the SEC is not yet ready to litigate.
The complaint is not an example of the SEC’s best work. I hope that in similar cases in the future, the SEC assigns a skilled editor to polish and revise the charging document, which is often the only substantive document available to the public. Many such attorneys exist at the SEC and the benefit to the SEC enforcement program would significantly exceed the effort required.
I look forward to following the case as it moves forward. We shall see if the SEC can develop the facts in the complaint and how the defendants challenge the allegations.
The SEC in Action 