Austal USA pleads guilty to fraud scheme

Austal USA LLC has pleaded guilty and agreed to pay $24 million to settle a U.S. Department of Justice investigation related to an accounting fraud scheme and attempts to obstruct the Defense Contract Audit Agency (DCAA) in an audit of financial performance.

The Justice Department's criminal resolution was coordinated with the U.S. Securities and Exchange Commission (SEC). Separately, Austal USA entered into a False Claims Act settlement with the department's civil division to resolve allegations that the company knowingly supplied noncompliant parts to the U.S. Navy.

“Austal USA, a shipbuilder for the U.S. military, engaged in a scheme for years to illegally inflate its profits on the ships the company built for the U.S. Navy by reporting false financial results to investors, lenders and its auditors,” said Assistant Attorney General Nicole M. Argentieri, chief of the Justice Department's Criminal Division.

“Investors, the U.S. Navy, and the Defense Contract Audit Agency have 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 deal honestly with the U.S. government.”

According to court documents, from at least 2013 until approximately July 2016, Austal USA and its co-conspirators worked together to mislead Austal Limited shareholders, independent auditors, and investors about Austal USA's financial condition. Specifically, Austal USA artificially suppressed an accounting measure called the “Estimate at Completion” (EAC) with respect to several Littoral Combat Ships that Austal USA was building for the U.S. Navy. The suppression of the EACs resulted in the profitability of these shipbuilding projects and Austal USA's reported profits in Austal Limited's public financial reports being falsely overstated.

Austal USA and its accomplices manipulated the EAC figures in part by using so-called “program challenges,” false figures to conceal the rising shipbuilding costs that should have been reflected in the company's financial statements. Austal USA did this to maintain and increase Austal Limited's share price. When the higher costs finally became known to the market, Austal Limited wrote off over $100 million, which had a significant negative impact on its share price.

Under the terms of the settlement, which still must be accepted by the court, Austal USA pleaded guilty to one count of securities fraud and one count of obstructing a federal audit. Based on the application of the U.S. Sentencing Guidelines, the Department determined that the appropriate penalty is $73,572,680.10. However, because Austal USA demonstrated an inability to pay the penalty, consistent with the Department's inability to pay guidelines, Austal USA and the Department agreed that Austal USA would pay a penalty of $24 million and restitution of up to $24 million for losses to Austal Limited shareholders. The Department has agreed to credit the entire penalty and restitution against amounts Austal USA will pay to settle an SEC investigation into related conduct.

Austal USA has agreed to employ 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 aimed at preventing and detecting fraudulent conduct throughout the company.

Austal USA and Austal Limited have also agreed to continue to cooperate with the Department of Justice in any ongoing or future criminal investigation related to this conduct. In addition, Austal USA will serve three years' probation.

The verdict is scheduled for November 25.

Three former Austal USA executives, Craig Perciavalle, Williams Adams and Joseph Runkel, were charged on March 30, 2023, with conspiracy to commit wire fraud and wire fraud against a financial institution, five counts of wire fraud and two counts of wire fraud against a financial institution. They are awaiting trial.