Navy Ship Builders Cook the Books
The Commission has long focused on financial fraud cases. The reason is obvious. The finances of an issuer are at the core of the investment process. This is reflected in case after case brought by the agency over the decades since the securities laws were enacted. It is for these reasons that the agency has a long history of initiating actions based on the falsification of financial records despite the fact that such actions are often difficult to discover, investigate and prove. Its latest case in this area involved a financial fraud that victimized the U.S. Navy, SEC v. Perciavalle, Civil Action No. 23-cv-00109 (S.D. Ala. Filed March 31, 2023).
This action revolves around events at a subsidiary of Austal Ltd, an Australian defense contractor, named Austal USA, LLC. Three former officers of the subsidiary are named as defendants: Craig Percivalle, president; Joseph Runkel, director of financial analysis; and William Adams, director of the firm’s Combat Ship program.
Over more than three years, beginning in January 2013, Defendants overstated revenues and earnings before interest and tax or EBITA at Austal USA which was building ships for the United States Navy. Specifically, Defendants used artificially low estimates at completion or EAC’s when building Navy ships. Reducing the estimates at completion permitted the firm to inflate revenue and EBIT at the firm. This resulted in overstated revenue and EBIT in the filings that were available to U.S. investors.
The scheme was implemented by instructing the responsible personnel to reduce the estimated costs. In addition, Defendants sought to conceal the fraud by lying to AUSA’s auditors. During the period the firm prematurely recognized revenue and met or exceeded analyst consensus estimates for EBIT. At the same time the share price increased significantly. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25684 (March 31, 2023).