Australian shipbuilder Austal will come under enormous pressure today after three of its key US executives were charged by the US Securities and Exchange Commission (SEC) with a type of fraud claimed to have been running since at least 2013.
Shares in Perth-based Austal closed Friday closed at $1.72, steady on the day but down more than 15% in the first quarter. That is a long way from the all-time high of $4.20 back in late 2019.
The SEC and the US Justice Department both issued statements late Friday, US time, revealing the charges which followed a Grand Jury hearing that wrapped up on Thursday.
The SEC said it had charged three executives at shipbuilder Austal USA LLC with running a fraudulent revenue recognition scheme that allowed its parent company to meet or surpass analysts’ expectations.
Austal USA is a unit of Austal Ltd, a major defence contractor building aluminium construction warships for the US Navy and for the Australian and other navies.
“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 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 Justice Department explained that the submitted Estimates at Completion (EACs) allegedly overstated Austal Limited’s reported earnings in its public financial statements.
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.
In early June, 2016, Austal announced a $115 million write-off due to higher-than-expected costs on its Littoral Combat Ship (LCS) program.
Austal claimed the write-off was due to “a significantly higher level of modifications to the ship design and cost than previously estimated.”
The changes, Austal said, are driven by a “contractual requirement to meet the military shock standard and US Naval Vessel Rules,” a set of building standards imposed by the US Naval Sea Systems Command.
But after a lengthy investigation, the SEC has a very different take, according to Friday’s statement.
The Justice Department said “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.”
Two big questions here in Australia remain to be answered: the first, will ASIC do any more follow up of the SEC and Justice Department allegations and prosecutions apart from the action against the company and former CEO David Singleton in October, 2022?
ASIC said in a statement in October, 2022 that the Federal Court had ordered Austal Limited to pay a penalty of $650,000 after finding the company contravened continuous disclosure laws.
The Court also found Austal’s former CEO David Singleton was knowingly involved in the disclosure failures. Mr Singleton has been ordered to pay a penalty of $50,000.
ASIC said in the statement that Austal and Mr Singleton admitted, and the Court found, that between 16 June 2016 to 4 July 2016, Austal failed to disclose a likely profit writeback of at least US$90 million for its FY2016.
“The writeback would generate a loss of at least US$40 million for the company. The writeback also meant previous profit guidance from Austal (EBIT margin) was no longer reliable and should have been withdrawn,” ASIC said in its release.
But the SEC and Justice Department statements indicate US regulators see the allegations as being far more serious and are seeking harsher penalties for the individuals involved (but not Austal).
The second question: will the US legal action have any impact on Australian government decisions on which companies will play a role in the building of the AUKUS nuclear submarines in future years?
