U.S. Navy Shipbuilder Austal USA Pleads Guilty to Fraud

Austal USA LLC, a prominent shipbuilder based in Mobile, Alabama, has pleaded guilty to fraud charges and agreed to multiple settlements with federal agencies. The company, known for constructing vessels for the U.S. Navy and Coast Guard, faces penalties totaling over $48 million for various violations including accounting fraud, obstruction of a Defense Department audit, False Claims Act violations, and resitition.

According to court documents and the SEC's complaint, from at least January 2013 through July 2016, Austal USA and its Australia-based parent company, Austal Limited, engaged in a scheme to artificially reduce the estimated cost to complete certain shipbuilding projects for the U.S. Navy by tens of millions of dollars. The companies allegedly knew that shipbuilding costs were rising but arbitrarily lowered cost estimates to meet revenue projections.

This manipulation involved suppressing an accounting metric known as "estimate at completion" (EAC) for multiple Littoral Combat Ships. As a result, Austal Limited prematurely recognized revenue and met or exceeded analyst consensus estimates for earnings before interest and tax (EBIT).

Penalties and Settlements

The resolution of these cases involves multiple components:

1. Austal USA pleaded guilty to one count of securities fraud and one count of obstruction of a federal audit.
2. Austal USA consented to pay a $24 million civil penalty to settle the SEC's charges.
3. Restitution of up to $24 million for losses to Austal Limited shareholders
4. Austal USA will serve three years of probation and retain an independent compliance monitor for three years.
5. Both Austal USA and Austal Limited consented to permanent injunctions as part of the SEC settlement.

In a separate but related matter, Austal USA has agreed to pay $811,259 to resolve allegations that it violated the False Claims Act. The settlement alleges that under a 2011 Navy contract, Austal invoiced for military-grade high-performance butterfly valves and triple offset butterfly valves it installed on five Littoral Combat Ship hulls when it knew the valves had not met the testing requirements to be deemed military grade.

Principal Deputy Assistant Attorney General Brian M. Boynton emphasized, "It is essential to the safety and operational readiness of our Navy fleet that contractors comply with applicable military specifications."

Ongoing Investigations and Litigation

Three former Austal USA executives - Craig D. Perciavalle (former president), Joseph A. Runkel (former director of financial analysis), and William O. Adams (former director of the Littoral Combat Ships program) - were charged by the SEC with accounting fraud in March 2023. They also face criminal charges including conspiracy to commit wire fraud and wire fraud affecting a financial institution. These cases are ongoing.

This multi-faceted case underscores the commitment of U.S. regulatory and law enforcement agencies to maintain the integrity of financial markets, government contracting processes, and military procurement.

Special Agent in Charge Greg Gross of the Navy Criminal Investigative Service (NCIS) Economic Crimes Field Office stated, "Product substitution risks degrading warfighter capability and wastes U.S. taxpayer dollars."

The SEC plans to seek the creation of a Fair Fund for distribution of the penalty to harmed investors. As these cases progress, they will likely have far-reaching implications for the defense industry and corporate financial reporting practices, potentially leading to increased scrutiny and stricter compliance measures in the future.

It's important to note that while Austal USA has agreed to these settlements, the claims resolved by the False Claims Act settlement are allegations only, and there has been no determination of liability in that specific matter.

The GRC Report is your premier destination for the latest in governance, risk, and compliance news. As your reliable source for comprehensive coverage, we ensure you stay informed and ready to navigate the dynamic landscape of GRC. Beyond being a news source, the GRC Report represents a thriving community of professionals who, like you, are dedicated to GRC excellence. Explore our insightful articles and breaking news, and actively participate in the conversation to enhance your GRC journey.