U.S. Navy Shipbuilder Pleads Guilty to Financial Accounting Fraud Scheme and Obstructing a Defense Department Audit
Austal USA LLC (Austal USA), a Mobile, Alabama-based shipbuilder that constructs vessels for the U.S. Navy and U.S. Coast Guard, pleaded guilty today and has agreed to pay $24 million to resolve an investigation by the Justice Department related to an accounting fraud scheme and efforts to obstruct the Defense Contract Audit Agency (DCAA) during a financial capability audit. Austal USA 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 via American Depositary Receipts.
The Justice Department’s criminal resolution was coordinated with the U.S. Securities and Exchange Commission (SEC). Separately, Austal USA also entered into a False Claims Act settlement with the department’s Civil Division to resolve claims that it knowingly provided non-compliant parts to the U.S. Navy.
“Austal USA, a shipbuilder for the U.S. military, engaged in a years-long scheme to illegally inflate its profits on ships the company was building for the U.S. Navy, reporting false financial results to investors, lenders, and its auditors,” said Principal Deputy Assistant Attorney General Nicole M. Argentieri, head of the Justice Department’s Criminal Division. “The investing public, the U.S. Navy, and the Defense Contract Audit Agency relied on Austal USA to tell the truth about its financial condition and its performance on U.S. Navy contracts. Today’s guilty plea underscores the Department of Justice’s commitment to holding U.S. government contractors accountable for their criminal misconduct and ensuring that they engage honestly with the U.S. government.”
“Maintaining our national security and military infrastructure cannot come at the cost of the integrity of our contracting processes,” said U.S. Attorney Sean P. Costello for the Southern District of Alabama. “Today’s actions ensure accountability and promote the rule of law in this critical arena.”
According to court documents, from at least in or around 2013 through at least in or around July 2016, 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. Austal USA and its co-conspirators manipulated the EAC figures in part by using so-called “program challenges,” which were false plug numbers to hide growing shipbuilding costs that should have been incorporated into the company’s financial statements. Austal USA did this to maintain and increase the share price of Austal Limited’s stock. When the higher costs were eventually disclosed to the market, Austal Limited wrote down over $100 million, and the stock price was significantly negatively impacted.
“Defense contractors that engage in fraud erode the public’s trust in our Armed Forces,” said Director Omar Lopez of the Naval Criminal Investigative Service (NCIS). “NCIS and our investigative partners are determined to hold those accountable whose actions erode that trust. We are committed to rooting out economic crime that negatively impacts the readiness of the Department of the Navy.”
“This case is a direct result of the superb dedication of the investigative and prosecution teams,” said Director Kelly P. Mayo of the Department of Defense (DoD) Office of Inspector General, Defense Criminal Investigative Service (DCIS). “These committed professionals’ efforts send a clear message to DoD contractors of our unwavering resolve to investigate and prosecute fraud, corruption, and efforts to circumvent compliance measures that reduce our combat effectiveness.”
The department reached this resolution with Austal USA based on a number of factors, including, among others, the nature and seriousness of the offense and the pervasiveness of the misconduct at the most senior levels of Austal USA. Austal USA received credit for affirmative acceptance of responsibility and limited credit for its cooperation with the department’s investigation, which included facilitating interviews with current and former employees, enabling the department to promptly produce records in a related court case, and making a timely disclosure of all relevant facts and documents pertaining to an unrelated matter. However, Austal USA’s cooperation was limited in a number of respects, including: Austal USA did not provide to the department any relevant facts relating to this conduct until two years after learning of the department’s investigation; Austal USA produced certain relevant documents after significant delay; Austal USA was delayed in responding to certain requests from the government, and often required follow-up requests from the government before responding; and Austal USA did not at all times demonstrate a commitment to full and timely cooperation.
Austal USA also engaged in remedial measures, but those remedial measures were untimely and incomplete, including that Austal USA did not begin disciplining employees involved in the misconduct until more than two years after Austal USA learned of the government’s investigation and did not undertake any independent steps to make restitution to the victims of its securities fraud scheme. Austal USA has begun remediating weaknesses in internal controls that allowed the company’s misconduct to occur, but Austal USA’s remediation of its controls is still ongoing and requires additional improvements and testing.
Under the terms of the plea agreement, which still must be accepted by the court, Austal USA pleaded guilty to one count of securities fraud and one count of obstruction of a federal audit. Based on application of the U.S. Sentencing Guidelines, the department determined that the appropriate criminal penalty is $73,572,680.10. However, due to Austal USA’s demonstrated inability to pay the criminal fine, Austal USA and the department agreed, consistent with the department’s inability to pay guidance, that Austal USA would pay a criminal fine of $24 million and restitution of up to $24 million for losses to Austal Limited shareholders. The department has agreed to credit all of the criminal fine and restitution against amounts Austal USA will pay to resolve an investigation by the SEC for related conduct.
Austal USA has also agreed to retain an independent compliance monitor for a period of three years, and Austal USA and Austal Limited have agreed to continue to implement a compliance and ethics program at Austal USA designed to prevent and detect fraudulent conduct throughout its operations. Austal USA and Austal Limited have also agreed to continue to cooperate with the Justice Department in any ongoing or future criminal investigations relating to this conduct. In addition, Austal USA will serve three years of probation.
A sentencing hearing is scheduled for Nov. 25.
Three former Austal USA executives, Craig Perciavalle, Williams Adams, and Joseph Runkel, were indicted on March 30, 2023 on 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. They await trial.
NCIS and DCIS are investigating the case. The Justice Department’s Office of International Affairs and authorities in Australia, as well as DCAA’s Office of Investigative Support, provided valuable assistance in the matter.
Assistant Chief Kyle Hankey and Trial Attorneys Laura Connelly and Spencer Ryan of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Christopher Bodnar for the Southern District of Alabama are prosecuting the case.
If you believe you are a victim in this case, please contact the Fraud Section’s Victim Witness Unit toll-free at (888) 549-3945 or by email at victimassistance.fraud@usdoj.gov. Victims can find case updates and additional information at www.justice.gov/criminal/criminal-vns/case/austal-usa-llc.
Under the terms of the plea agreement, the SEC would handle the distribution of funds to harmed investors. Investors harmed as a result of the misconduct of defendant should watch the SEC’s Harmed Investors page for further developments regarding the SEC’s distribution of funds to harmed investors.
An indictment is merely an allegation. All defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.
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Source: Justice.gov
