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Austal USA LLC, a major shipbuilder for the U.S. Navy, pled guilty Tuesday to charges of accounting fraud and obstruction of a federal audit. The company’s actions were part of a settlement resolving both criminal and civil investigations. As a subsidiary of Australian company Austal Limited, Austal USA admitted to inflating profits and submitting false financial statements regarding the construction of Navy ships.

Austal USA Pleads Guilty to Fraud : Fraud Charges and Penalties

Austal USA pled guilty to one count of securities fraud and one count of obstruction. The company will pay a $24 million civil penalty to settle related claims brought by the U.S. Securities and Exchange Commission (SEC) and has agreed to an additional $811,259 settlement with the Department of Justice (DOJ) to address violations of the False Claims Act. These violations stemmed from the company knowingly providing faulty valves that did not meet military specifications.

The DOJ initially sought a $73.6 million criminal fine, but Austal USA demonstrated that it was unable to pay the full amount. Consequently, the company will pay $24 million in criminal fines and up to $24 million in restitution to shareholders, which will also cover the SEC penalty.

DOJ and SEC Allegations

The DOJ and SEC accused Austal USA of engaging in a multi-year scheme to fraudulently inflate its profits on littoral combat ships it was building for the Navy. These fast, mission-focused ships are designed to operate in near-shore environments. Austal manipulated its financial reporting by suppressing a key accounting metric called "estimate at completion," which caused the company’s profitability to be overstated.

In a statement, Nicole Argentieri, head of the DOJ’s Criminal Division, condemned Austal's actions. "Austal USA engaged in a years-long scheme to illegally inflate its profits on ships the company was building for the U.S. Navy," she said, adding that the company misled investors, the Navy, and auditors about its financial condition and performance.

Austal USA Pleads Guilty to Fraud : Executive Involvement

Three former Austal USA executives — Craig Perciavalle, Joseph Runkel, and William Adams — were charged in March 2023 for their involvement in the scheme. The executives are awaiting trial after pleading not guilty. The SEC complaint revealed that these individuals instructed employees to manipulate the company's financial metrics to meet budgets and boost revenue.

According to the SEC, Austal’s stock price soared from 0.88 Australian dollars in early 2014 to 2.40 Australian dollars by November 2015 as a result of these inflated financial reports.

Faulty Valves and False Claims Act Violations

In addition to accounting fraud, Austal USA violated the False Claims Act by invoicing the Navy for valves that did not meet military specifications. These valves were installed on five littoral combat ships, even though the company knew they had failed to meet required testing standards.

Austal USA Pleads Guilty to Fraud : Legal Representation and Case Details

Austal USA LLC is represented by Ike Adams of Sidley Austin LLP. The DOJ's team includes Kyle Hankey, Laura Connelly, Spencer Ryan, and Art Coulter. The SEC’s legal team comprises Sharan Lieberman, Christopher Martin, and others.