Austal USA, an Alabama-based subsidiary of Australian shipbuilding company Austal Limited, pleaded guilty to criminal criminal securities fraud and obstruction of a federal audit for its role in artificially inflating its stock price between 2013 and 2016. Austal Limited was also charged for its role in the fraud.

The company agreed to pay a total penalty of $24m in parallel SEC and DOJ actions.

Austal is notable for the Littoral Combat Ships (LCSs) that it produces for the US Navy, which are designed to operate in shallow coastal waters.

The ships (pictured) have been controversially received and mired in logistical issues. Detractors criticize a flawed design that favors speed at the expense of survivability and ultimate strategic usefulness. Several LCSs have been retired after only a few years into their 25-year lifespan. Aside from LCSs, the company also produces ferries and other transportation vessels under US contracts.

Artificially lowering cost estimates

Austal was accused by the DOJ and SEC of deceiving investors, lenders and auditors by artificially lowering cost estimates to falsify the company’s overall profits on its Navy contracts. In two years, the company’s stock price nearly tripled, according to the SEC’s complaint.

According to a press release, the DOJ contended that “Austal USA artificially suppressed an accounting metric known as an “estimate at completion” (EAC) in relation to multiple Littoral Combat Ships that Austal USA was building for the U.S. Navy.” It stated that the EACs were falsified by hiding the costs of shipbuilding. When the information was ultimately disclosed, the company’s stock price fell precipitously.

“Today’s guilty plea underscores the Department of Justice’s commitment to holding U.S. government contractors accountable for their criminal misconduct and ensuring that they engage honestly with the U.S. government,” said Principal Deputy Assistant Attorney General Nicole M Argentieri, head of the DOJ’s Criminal Division.

The final penalty was reduced from $74m after a determination that the company was unable to sustain the higher cost. The total sum is likely to be distributed by the SEC to shareholders as restitution, and will be credited against any further penalties issued by the SEC.

The company has also agreed to create an ethics and compliance program and be reviewed by an independent compliance monitor.

This settlement comes after three Austal USA executives were indicted by the DOJ on several criminal charges of wire fraud for their roles in falsifying the EACs in March of last year.

Rules violations

The SEC accused Austal USA and its parent company Austal Limited of violating:

• Section 10(b) of the Exchange Act;
• Exchange Act Rules 10b-5(a) and (c) thereunder;
• 15 U.S.C. § 78j(b);        
• 17 C.F.R. § 240.10b-5(a) and (c).