The U.S. Department of Justice reports that a federal grand jury returned an indictment March 30 charging three men with orchestrating an accounting fraud scheme at Austal USA LLC,a wholly owned subsidiary of Austal Limited, an Australian company that is traded over-the-counter in the U.S. via American Depositary Receipts, as well as on the Australian Securities Exchange.
According to court documents, says the Department of Justice, from at least in or around 2013 through at least in or around July 2016, Craig Perciavalle, 52, Joseph Runkel, 54, and William Adams, 63, all of Mobile, and their co-conspirators allegedly conspired to mislead Austal Limited’s shareholders and the investing public about Austal USA’s financial condition.
Specifically, the defendants are alleged to have artificially reduced and suppressed an accounting metric known as “estimate at completion” (EAC) in relation to multiple LCS ships that Austal USA was building for the U.S. Navy. Suppressing the EACs allegedly falsely overstated Austal Limited’s reported earnings in its public financial statements.
According to the Department of Justice, the defendants and their co-conspirators allegedly manipulated the EAC figures in part by using so-called “program challenges” – ostensibly cost-savings goals – but which in reality were “plug” numbers and fraudulent devices to hide growing costs that should have been incorporated into Austal USA’s financial statements, and ultimately reflected in Austal Limited’s reported earnings. The defendants allegedly did this, among other reasons, to maintain and increase the share price of Austal Limited’s stock. When the higher costs were eventually disclosed to the market, the stock price was significantly negatively impacted and Austal Limited wrote down over $100 million.
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.
Assistant Attorney General Kenneth A. Polite, Jr. of the Justice Department’s Criminal Division, U.S. Attorney Sean Costello for the Southern District of Alabama, Special Agent in Charge Darrin K. Jones of the Defense Criminal Investigative Service (DCIS) Southeast Field Office, and Acting Special Agent in Charge Michael D. Butler II of the Naval Criminal Investigative Service (NCIS) Economic Crimes Field Office made the announcement.
DCIS and NCIS are investigating the case.
Assistant Chief Kyle Hankey, Acting Assistant Chief Christopher Jackson, and Trial Attorney Laura Connelly of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Christopher Bodnar for the Southern District of Alabama are prosecuting the case.
SEC COMPLAINT
Separately, Perciavalle, Runkel and Adams are also the subject of a civil complaint filed March 31 by
the Securities and Exchange Commission charging them with orchestrating a fraudulent revenue recognition scheme that allowed Austal USA’s parent company to meet or exceed analyst expectations.
The SEC alleges that, from at least January 2013 through July 2016, Austal USA’s former president, Craig D. Perciavalle, its current director of financial analysis, Joseph A. Runkel, and former director of the Littoral Combat Ships program, William O. Adams, engaged in a scheme to artificially reduce the cost estimates to complete certain shipbuilding projects for the U.S. Navy by tens of millions of dollars. The complaint alleges that Perciavalle, Runkel, and Adams knew that Austal USA’s shipbuilding costs were rising and higher than planned, but they directed others to arbitrarily lower the cost estimates to meet Austal USA’s revenue budget and revenue projections.
The complaint further alleges that Austal USA’s parent company, Australia-based Austal Limited, prematurely recognized revenue and, as a result, met or exceeded analyst consensus estimates for earnings before interest and tax (EBIT), a key financial metric for the company.
“We allege that Austal USA’s executives manipulated its financial results, causing harm to U.S. investors in the securities of its parent company, Austal Limited,” said Jason Burt, Regional Director of the SEC’s Denver Regional Office. “As the complaint articulates, if the defendants had not fraudulently manipulated the cost estimates, Austal Limited would have missed, by wide margins, analyst consensus estimates for EBIT.”
The SEC’s complaint, filed in the U.S. District Court for the Southern District of Alabama, alleges that Perciavalle, Runkel, and Adams violated the antifraud provisions of the Securities Exchange Act of 1934 and seeks disgorgement plus prejudgment interest, civil money penalties, and officer and director bars.
The SEC’s investigation was conducted by Kimberly Steckling, Kenneth Stalzer, and Donna Walker and supervised by Ian Karpel, Nicholas Heinke, and Jason Burt. The litigation is being led by Sharan Lieberman and Christopher Martin and supervised by Gregory Kasper.
AUSTAL LIMITED ISSUES STATEMENT
As we reported at the time, Austal USA accepted Perciavalle’s resignation as its president in February 2022, with parent Austal Limited noting that it and Austal USA had been cooperating with investigations being conducted by U.S. regulatory authorities into “historical matters concerning Austal’s Littoral Combat Ship (LCS) program before July 2016.”
In a filing with the Australian Securities Exchange today, Austal Limited said:
“Austal Limited (ASX:ASB) advises the United States Department of Justice (DOJ) has indicted three former Austal USA employees for allegedly making or causing to be made false and misleading statements about Austal USA’s performance and financial condition between 2012 and 2016, and the U.S. Securities and Exchange Commission (SEC) also announced that it has filed civil charges against the same three individuals.
“The SEC and DOJ allege the three individuals artificially reduced and suppressed an accounting metric known as “estimate at completion” (EAC) in relation to multiple LCS ships that Austal USA was building for the U.S. Navy, and in doing so caused Austal Limited to incorrectly overstate its reported earnings in its public financial statements.
“The allegations have been the subject of investigations since at least 2019. They relate to actions taken between 2013 and 2016.
“The revisions to EAC and related market disclosures were also the subject of a large profit writeback on 4 July 2016 and, consequently, an Australian Securities and Investment Commission investigation, which Austal settled in September last year … with the payment of an AUD 650,000 penalty.
“Austal USA has been cooperating fully with the DOJ, the SEC, and other agencies in their investigation into these issues, and will continue to do so if required until these matters are resolved. Austal’s update to shareholders on 23 February 2021 detailed the results of its own investigation, including the decision by then Austal USA President Craig Perciavalle to tender his resignation. Since then the Company has kept shareholders advised of the progress of the investigation through its regular annual and half-year reporting.
“Austal CEO Paddy Gregg said Austal had invested significant time and resources to strengthen its compliance program since the investigations began. Austal USA is committed to maintaining strong internal controls, financial accounting, compliance, and corporate governance practices and will continue to invest in these endeavors to ensure it maintains its significantly enhanced compliance program.
“ ‘Importantly, despite the matters relating to the individuals charged and indicted, our customers remain strong supporters of Austal USA, with several new contracts worth billions of dollars awarded to the Company since the commencement of the investigation – including one of the largest contracts in the company’s history – and a significant investment into the construction of Austal’s new steel shipbuilding facilities,’ Gregg said. ‘We are committed to serving the needs of those and all our other customers and conducting business with the highest level of ethics and integrity. We continue to fully cooperate with the government’s ongoing investigation and continue to focus on serving the needs of the U.S. Navy, the U.S. Coast Guard, and our other customers who protect and serve the USA, Australia and our allies around the world.’”
