The Securities and Exchange Commission (SEC) has charged Austal USA, LLC, a Mobile, Ala.-based shipbuilder, and its Australia-based parent company, Austal Limited, with a fraudulent revenue recognition scheme. Both companies have agreed to settle the charges, including paying a $24 million civil penalty.
In its complaint, the SEC stated that from at least January 2013 through at least July 2016 “the defendants, acting through their executives, engaged in a deceptive scheme to fraudulently overstate revenues and earnings before interest and tax (EBIT). Through the actions of certain personnel [of the companies, they] orchestrated the fraud in order to meet or exceed analyst consensus estimates for Austal’s EBIT, a key financial metric used by analysts and investors.”
According to the SEC complaint, the defendants’ misconduct involved Austal USA using artificially low estimates at completion (EAC) for certain Littoral Combat Ships (LCS) that Austal USA built for the U.S. Navy. This misconduct allowed the company to reduce the EACs by tens of millions dollars for certain ships that it built for the Navy. The artificially low EACs caused Austal USA to report inflated revenue and EBIT to Austal Limited. In turn, Austal Limited publicly reported overstated revenue and EBIT in its filings that were available to United States investors.
Specifically, the complaint charged that these defendants, “through the actions of AUSA’s former president, Craig Perciavalle, AUSA’s former director of financial analysis, Jospeh Runkel, and AUSA’s former director of AUSA’s two shipbuilding programs, William Adams, instructed AUSA personnel to arbitrarily lower EACS for the LCS program to meet AUSA’s budgets (and, in turn, increase revenue from period to period).”
In March 2023, the SEC charged all three of these executives with accounting fraud. That litigation is ongoing.
“Transparency is a hallmark of financial reporting, and investors rely on companies to accurately and fairly represent their financial condition so that they can make informed decisions,” said Jason Burt, director of the SEC’s Denver Regional Office. “The terms of this settlement make it clear that when companies manipulate their financial results to avoid falling short of analyst expectations—and those actions harm U.S. investors—the SEC will hold those companies accountable, wherever they are located.”
The SEC’s complaint, filed in the U.S. District Court for the Southern District of Alabama, charges Austal Limited and Austal USA with violations of the antifraud provisions of the Securities Exchange Act of 1934. Austal Limited and Austal USA each consented to permanent injunctions, and Austal USA agreed to pay the $24 million penalty. The settlements are subject to court approval. The SEC plans to seek the creation of a Fair Fund for distribution of the penalty to harmed investors.
In a parallel matter, the U.S. Department of Justice, Fraud Section, announced settled charges against Austal USA.