A federal grand jury on Friday indicted former Austal USA executives on felony fraud charges, alleging that they intentionally manipulated costs and earnings reports and mislead company investors and shareholders about the true costs of building Littoral Combat Ships for the U.S. Navy.
A grand jury in Alabama issued the March 30 indictment against Craig Perciavalle, 52, who was president of Mobile, Ala.-based Austal USA and oversaw shipbuilding and financial operations; William Adams, 63, who was director of Austal USA’s LCS and the Spearhead-class Expeditionary Fast Transport (EPF) programs; and Joseph Runkel, 54, who formerly Austal USA’s director of financial analysis. Runkel was fired from Austal USA shortly after the indictment was announced, USNI News understands.
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. Each count carries a 20 to 30-year imprisonment and fines of $500,000 to $1 million, and each defendant faces forfeiture of property if they are convicted on any or all of the counts.
In a separate, related action, Perciavalle, Adams and Runkel also face fines and other actions in a civil complaint filed by the U.S. Securities and Exchange Commission.
Federal prosecutors announced the criminal indictment late Friday.
The charges cap a federal investigation that dates back to at least 2019, when federal agents descended on Austal USA’s main shipyard in Mobile during what the company then described as an open investigation. The case – USA v. Perciavalle et al. – has been assigned to Chief District Judge Jeffrey U. Beaverstock, according to court records.
“Austal USA relied on shipbuilding cost estimates called ‘estimates at completion’ (EACs) to calculate the profitability of each vessel, including those in the LCS program, and to prepare Austal USA’s overall financial reporting,” the grand jury wrote in a 20-page complaint, which details actions and irregularities in earnings reports intended to mislead and skew Austal USA’s costs for the LCS program and the company’s overall financial condition. From “at least in or around 2013, Perciavalle, Runkel, Adams and others knew that Austal USA’s LCS shipbuilding program was underperforming and over budget.”
In late 2012 or early 2013, an LCS program material manager had “discovered millions of dollars in non-labor cost growth on each LCS vessel,” and reported it to Runkel, Adams and others, the indictment states. However, they continued to provide financial information to Austal USA’s board of directors and others that they knew was false and fraudulent, according to the complaint.
“Instead of disclosing the true extent of the rising LCS non-labor costs, Perciavalle, Runkel, Adams and others directed Austal USA employees working on the LCS program to improperly report suppressed and fictitious non-labor EAC numbers,” the complaint stated. Those executives “used what they called a ‘program challenge’ – a figure in the accounting records disguised as a cost-savings goal – to reduce the EACs to levels that would conceal the rising costs for materials and subcontracts on the LCS program. In reality, the ‘program challenge’ was used as a plug number and a fraudulent device to hide growing costs that should have been incorporated into Austal USA’s financial statements.”
Austal USA and Austal Limited “continued to report falsely-inflated earnings from the LCS program,” the complaint noted.
Austal, an Australian shipbuilder, is a global defense prime contractor and publicly-traded company. Austal USA LLC is a wholly-owned subsidiary, and its shipbuilding contracts with the Navy generated 75 percent of Austal’s revenue during the time period investigated by U.S. officials, according to the SEC civil complaint. During the period under investigation, Austal built 11 of the 418-foot Independence-class Littoral Combat Ships, which along with the 338-foot EPFs are built at the Mobile, Ala., shipyard.
Perciavalle, who resigned from Austal USA in February 2021 amid parallel financial investigations by the U.S. and Australia, has served as vice president and general manager of Fincantieri Marinette Marine since November 2021.
“We are aware of a Department of Justice indictment filed last week against an employee, Craig Perciavalle, related to his previous employment at a different shipyard. We understand that this matter predates his employment with our company,” reads a statement from Marinette Marine provided to USNI News.
Austal Responds
Austal’s stock dropped in heavier trading Monday, the first trading day following the indictment announced by U.S. officials, Reuters reported.
Austal USA officials had no specific comment about the indictment and SEC complaint, but a company spokesperson acknowledged the complaints in a statement to USNI News.
“Austal Limited (the Company) is aware of the indictments filed on March 30th against three former Austal USA, LLC (Austal USA) employees by the United States Department of Justice (DoJ) and the civil complaint filed on March 31st against the same former employees by the United States Securities and Exchange Commission (SEC). These actions stem from investigations that have been ongoing since at least 2019 and relate to actions allegedly taken between 2013 and 2016,” the spokesperson said.
“The Company and Austal USA have been cooperating with the DoJ and SEC in their investigations and will continue to do so until these matters are fully resolved. Austal USA has invested significant time and resources to strengthen its compliance program since the investigations began. While significant changes have been implemented, a review of its current compliance programs and practices is continuing to ensure that it maintains a significantly enhanced compliance program and conducts business with the highest level of integrity.”
SEC Complaint
The SEC, in its 39-page complaint filed in the U.S. District Court for the Southern District of Alabama, alleged that Perciavalle, Adams and Runkel “engaged in a deceptive scheme to fraudulently overstate revenues and earnings before interest and tax” from about January 2013 to July 2016, and “orchestrated the fraud in order to meet or exceed analyst consensus estimates for EBIT, a key financial metric used by analysts and investors.”
The SEC, in a statement announcing the civil charges, claimed 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.”
The SEC alleges the trio intentionally understated – “by tens of millions of dollars,” according to the SEC – estimates for the cost to build the LCS, which in 2010 Austal began to build solely as the prime contractor under a Navy contract that remains in place today.
“AUSA’s initial LCS bid did not sufficiently account for rising costs, change orders, or other issues that contributed to cost overruns,” the SEC complaint states. At one point, “AUSA’s actual costs to build LCS 6 far exceeded AUSA’s budgeted costs in its Navy bid.” That included labor costs and hours that were increasing and were far more than what the company had anticipated when it bid for the Navy work. Austal struggled with hiring enough skilled workers and, at one point, spent time teaching welders how to weld aluminum rather than hiring those already experienced with that metal.
The defendants allegedly “tried to hide” their cost manipulations during audits by Austal’s global accounting firm starting in 2014, the civil complaint noted.
