Austal USA LLC, Mobile, Ala., pleaded guilty and agreed to pay $24 million to settle with the U.S. Department of Justice over charges that the company engaged for years in an accounting fraud, illegally inflating profits on ships it built for the U.S. Navy.
Austal also tried to obstruct the Defense Contract Audit Agency during a financial capability audit, according to DoJ officials. “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,” according to a statement by the department.
Austal “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.”
“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 Justice officials, the fraud charges stem from around 2013 to July 2016, when “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.”
Prosecutors say 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.”
That had the effect of overstating the company’s profitability on the LCS program and earnings reported in its public financial statements, prosecutors say. Conspirators in that effort manipulated the EAC figures partly by using “false plug numbers to hide growing shipbuilding costs that should have been incorporated into the company’s financial statements,” they say.
The company did it to keep up and boost share prices 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,” prosecutors say.
“Defense contractors that engage in fraud erode the public’s trust in our Armed Forces,” said Omar Lopez, director 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.”
Even considering “the nature and seriousness of the offense and the pervasiveness of the misconduct at the most senior levels of Austal USA,” prosecutors say they gave the company some credit for accepting responsibility and cooperating with the investigation.
“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.”
The company undertook “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,” according to prosecutors. Nor did the company take independent steps to reimburse victims for the securities fraud.
Under the terms of the plea, Austal USA pleaded guilty to one count of securities fraud and one count of obstruction of a federal audit. The agreement still must be accepted by the court, and a sentencing hearing is scheduled for Nov. 25.
Based on application of the U.S. Sentencing Guidelines, the Justice Department determined that the appropriate criminal penalty would be $73.57 million. But the department found that Austal had “demonstrated inability to pay the criminal fine” and agreed with the company to settle for a criminal fine of $24 million and restitution of up to $24 million for losses to Austal Limited shareholders.
Austal USA also agreed to retain an independent compliance monitor for a period of three years, and Austal USA and Austal Limited agreed to continue to implement a compliance and ethics program at Austal USA designed to prevent and detect fraudulent conduct throughout its operations. In addition, Austal USA will serve three years of probation.
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. Those cases still 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.
