Austal USA Pleads Guilty To Fraud
The United States Department of Justice and the Securities and Exchange Commission (SEC) both announced that shipbuilder Austal USA LLC has agreed to pay a $24 million civil penalty and has pleaded guilty to charges of defrauding investors and shareholders, thus avoiding trial. A sentencing hearing for Austal has been scheduled for November 25 before U.S. District Judge Jeffrey U. Beaverstock, chief of the U.S. District Court, Southern District of Alabama. However, three former Austal executives alleged to be responsible for the fraud will be tried September 29 before the same judge in a related case.
Austal USA LLC, a shipbuilder based in Mobile, Ala., that constructs vessels for the U.S. Navy and U.S. Coast Guard, is a wholly owned subsidiary of Austal Limited, an Australian company that is publicly traded on the Australian Securities Exchange and was traded over-the-counter in the United States.
Littoral Combat Ship Program
The case involved the chronically troubled 22-year-old Littoral Combat Ship Program. Initially touted as the spearhead of a renaissance in 21st-century Navy tactics, the program has been beset by cost overruns, scale-backs of targets and operational failures. An originally planned fleet of 55 LCS vessels has been cut back to 35, and the entire program, which has cost $3.3 billion to date, has inspired much debate and criticism in the defense press.
A 2022 report by the Government Accountability Office, titled “Littoral Combat Ship: Actions Needed to Address Significant Operational Challenges and Implement Planned Sustainment Approach,” said the ship was intended to bring increased warfighting flexibility and close critical warfighting gaps, “but over the years, the Navy has experienced challenges in demonstrating these capabilities.” The report continued, “However, we reported in 2017 that costs to construct the ships have more than doubled from initial expectations, and promised levels of capability have been unfulfilled.” In December 2023, a retired Navy lieutenant commander who had formerly written in support of the LCS wrote a glum assessment for the influential Proceedings of the U.S. Naval Institute, saying, “The engineering was immature, and the concept of operations too foreign to the existing surface Navy to succeed. The bottom line, however, is grim. The LCS program objective to field a modular mission small combatant that could be deployed and operated overseas at lower cost than conventional warships did not succeed as desired and should be studied to prevent similar errors in ship design, construction, fielding and operations in the future.”
Fraud Scheme
According to court documents, the Justice Department said the fraud scheme began in 2013 and lasted at least through July 2016. It said Austal USA “and its co-conspirators” conspired to mislead Austal Limited’s shareholders, independent financial statement auditors and the investing public about Austal USA’s financial condition.
Specifically, Austal USA artificially suppressed an accounting metric known as an “estimate at completion” (EAC) in relation to multiple Littoral Combat Ships that Austal USA was building for the U.S. Navy. Suppressing the EACs had the effect of falsely overstating Austal USA’s profitability on those shipbuilding efforts and Austal Limited’s earnings, reported in its public financial statements.
The SEC said investors harmed as a result of the misconduct should watch the SEC’s Harmed Investors page link for further developments regarding the SEC’s distribution of funds to harmed investors.
In the related case of United States v. Perciavalle et al., Craig Perciavalle, 52, Joseph Runkel, 54, and William Adams, 63, all former Austal executives, are alleged to have been responsible for artificially reducing and suppressing the EAC accounting metric. The defendants and their co-conspirators allegedly manipulated the EAC figures in part by using “program challenges” or cost-savings goals that, in reality, were “plug” numbers and fraudulent devices to hide growing costs that should have been incorporated into Austal USA’s financial statements.
When the higher costs were eventually disclosed to the market, Austal Limited wrote down more than $100 million, and the stock price was significantly negatively impacted.
Perciavalle, Adams and Runkel are each charged with one count of conspiracy to commit wire fraud and wire fraud affecting a financial institution, five counts of wire fraud and two counts of wire fraud affecting a financial institution. If convicted, they each face a maximum penalty of 30 years in prison for the conspiracy count and each count of wire fraud affecting a financial institution, and 20 years in prison for each count of wire fraud.
