Austal USA to Pay $48.8 Million in Fines and Restitution for Accounting and Securities Fraud

Austal USA, the U.S.-based subsidiary of the Australian defense contractor Austal, has agreed to pay $48.8 million in fines and restitution to settle allegations of accounting and securities fraud, misleading federal auditors, and violating the False Claims Act. The Alabama-based company, which constructs vessels for the U.S. Navy and Coast Guard, will pay a $24 million fine and $24 million in restitution, according to a press release from the Department of Justice (DOJ) on Tuesday. Additionally, Austal USA has agreed to a $24 million settlement with the Securities and Exchange Commission (SEC) to resolve claims that its actions violated antifraud provisions of the Securities Exchange Act.

In a separate agreement, Austal USA will pay more than $811,000 to settle a DOJ claim that the company invoiced the Navy for butterfly valves on five ships built in 2011 that did not meet military standards.

The DOJ settlement concludes an investigation into a long-running scheme by Austal USA to inflate profits on Navy shipbuilding contracts and to provide false financial information to investors, lenders, and Defense Contract Audit Agency auditors. According to the DOJ, the company engaged in this fraudulent activity from 2013 to 2016 by artificially lowering the accounting metric known as “estimate at completion” for Navy ships under construction. Austal USA used manipulated figures to conceal escalating shipbuilding costs, which should have been reflected in its financial statements. Ultimately, the company was forced to write down over $100 million, leading to a significant drop in its stock price.

The SEC complaint further alleged that the fraudulent manipulation of cost estimates allowed Austal Limited to prematurely recognize revenue, enabling the company to meet or exceed analyst consensus estimates for earnings before interest and tax, a critical financial metric.

Austal USA has pled guilty to one count of securities fraud and one count of obstruction of a federal audit in connection with the DOJ’s charges. The plea agreement remains subject to approval by a federal judge.

In April 2023, the SEC charged three Austal USA executives with accounting fraud; those charges are still pending, according to the DOJ.

The DOJ noted that while Austal USA did receive some credit for accepting responsibility and cooperating with the investigation, the company’s cooperation was limited by several factors. These included a two-year delay in providing relevant facts about the misconduct after learning of the DOJ’s investigation, delayed production of key documents, slow responses to government requests that often required follow-up, and a lack of timely commitment to full cooperation. Moreover, the company did not begin disciplining employees until two years after the DOJ’s investigation began and failed to independently take steps to compensate the victims of the securities fraud scheme.

Austal USA did not immediately respond to requests for comment on the settlements and charges.

By fLEXI tEAM