Jaws dropped in Australia this week when news broke that Rio Tinto was in the cross-hairs of the US Securities and Exchange Commission which, in a rollicking, 60-page complaint filed in a New York district court, used thunderous and vivid language to accuse the Anglo-Australian miner and two former top executives of fraud.
The SEC's words were pointed as it accused the company, former chief executive Tom Albanese and former chief financial officer Guy Elliott of "deceptive acts" to conceal a "devastating loss in value" of coal assets in Mozambique, and their own "terrible decision" to buy the assets for $US3.7 billion ($4.7 billion) in 2011. But it was the threatened penalties - fines, bans for the two former officials and the return of "ill-gotten" profits plus interest - that were really designed to sting.
Rio Tinto and its former executives deny any wrongdoing, and plan to "vigorously defend" the SEC's action which, one former SEC official says, is being helmed by some of the regulator's most senior and experienced people. "They are the strongest at the commission ... the A-team of investigators and trial attorneys," says Jordan Thomas, a former SEC assistant director and now partner at New York law firm Labaton Sucharow.
They include Bridget Fitzpatrick, the head of the SEC's trial unit, who has worked on some of the agency's most complex cases including its prosecution of former Goldman Sachs trader Fabrice Tourre, and enforcement division head Melissa Hodgman. "They are very experienced players who have been assigned," says Thomas, who worked on the Enron, Fannie Mae, UBS, and Citigroup cases while at the SEC.
Class action law firms are now circling Rio Tinto, which was fined ??27.4 million ($45.7 million) by Britain's Financial Conduct Authority for breaching disclosure rules over the Mozambique asset, with no findings of fraud or any systemic or widespread failure by the company. With the Australian Securities and Investments Commission in the news this week as the government unveiled former Goldman Sachs banker, academic and Hong Kong regulator James Shipton as its new chairman, pointed questions have been asked about why ASIC has not already taken its own action on Rio Tinto when, in the words of Greens senator Peter Whish-Wilson, the SEC has "been able to go so hard".
Whistleblowers rewarded
Yet it wasn't long ago that the SEC was under fire for being too soft.
Although famed for its doggedness in chasing insider trading convictions, the SEC - especially in the wake of the global financial crisis - was criticised for seeming too willing to let big companies and top executives off the hook in corporate misconduct cases; copping brickbats for striking settlements with companies that involved no admission of wrongdoing, and seemingly reluctant to identify and pursue high-ranking company officials.
Things have changed - dramatically. The SEC is now much more aggressive when it comes to cases against big companies - and prepared to name and go after individuals at the top.
What is behind this invigorated SEC? Experts in Australia and the US point to one major factor - a radical change in the way the SEC deals with and rewards whistleblowers. Since 2011, under a scheme brought in with the post-GFC Dodd-Frank reforms, whistleblowers who provide valuable information to the SEC receive "bounties" of between 10 per cent and 30 per cent of the penalties they helped secure. Dozens of SEC whistleblowers have so far shared $US162 million in bounties.
It's a scheme that has been closely examined in Australia, where the corporate whistleblower protection laws have been long derided as inadequate. SEC whistleblowers are not only protected but rewarded, with some having collected millions of dollars in bounties - as much as $US30 million in one 2014 case.
And for the SEC, it has been an absolute "game-changer" for its pursuit of corporate misconduct in the US, says Thomas, who helped set up the whistleblower program while at the SEC, and who now represents whistleblowers at Labaton Sucharow.
Previously, he says, the SEC were like beat cops "without a 9-11 system". "Now we have people who were in the room with the senior people, we have recordings of bad guys talking about the illegal scheme they are involved with, we have key documents."
John Coffee, a professor at Columbia Law School in New York, says the whistleblower program has given the SEC access to information it would "never" have otherwise been able to obtain. "It's proved very effective," he says.
A whistleblower - who, it is alleged, alerted the board to concerns about the value of Rio Tinto's Mozambique assets - is central to the Rio story, though the SEC's complaint does not state whether the whistleblower is working with the regulator.
Nonetheless, Thomas has argued that the SEC's recent experiences with whistleblowers and bounties holds great relevance for Australia, where a strengthened corporate whistleblower protection regime - including, potentially, whistleblower bounties - is being considered by a taskforce commissioned by the Turnbull government.
As far as the SEC is concerned, many Australians have already embraced the concept of bounties. Last year, 53 people in Australia reached out to the SEC with a tip-off about corporate wrongdoing; Australia has ranked in the top five countries for tip-offs every year that the scheme has been running. And last year, an Australian employee of BHP Billiton scored a bounty of $3.75 million over securities violations at that company.
This week, much has also been made of the relative size of civil penalties available in Australia versus the US, where the SEC carries a big stick; "a much bigger stick" than ASIC, says Jennifer Hill, professor of corporate law at Sydney University, "in terms of the size of the penalties it can levy against companies".
ASIC's weapons
In civil cases ASIC also lacks the power to force individuals and companies to hand back profits gained through their misconduct known as "disgorgement"; another potential new weapon for ASIC that is being examined by an expert taskforce.
With its hefty penalties and steady streams of whistleblower tips, there are now not many big public companies, in Australia, the US, or anywhere else in the world, that are willing to take on the SEC in a case like this. Major companies, staring down the barrel of big fines, bigger headlines and enormous shareholder class action claims, overwhelmingly prefer to strike a deal with the US securities regulator rather than face off with it in court.
Rio Tinto's stated determination to "vigorously defend" the SEC's claims is part of what makes the case so unusual - and explosive.
"As a regulator, the SEC has a strong focus on litigation and high penalties as a form of deterrence," Hill says. "However, large public companies almost always settle with the SEC."
