Massive Fraud Allegations At Austal Roil U.S. Naval Shipbuilding Community

Days before maritime tastemakers are set to gather in Washington, DC for the annual Sea-Air-Space Convention, the Department of Justice and the Securities and Exchange Commission (SEC) leveled accounting fraud charges at three maritime executives, roiling two important U.S. Navy shipbuilders, Austal USA and Fincantieri Marine Group.

The charges, coming after a long investigation, allege years of systemic accounting fraud at Austal, the builder of the Independence Class Littoral Combat Ship (LCS). Both the Justice Department indictment and a twin SEC Complaint claim that two former and one current Austal executive, including Austal USA’s former Chief Executive, Craig Perciavalle, “conspired to mislead Austal Limited’s shareholders and the investing public about Austal USA’s financial condition,” artificially boosting the stock price and leading to a write-down of “over $100 million in previously wrongly booked profits.”

Perciavalle is currently an executive at Fincantieri Marine Group, which was not accused of any wrongdoing.

Austal Dodged A Bullet, But Concerns Persist:

Things could have been much worse for Austal. The Mobile Alabama shipyard has been on tenterhooks since early 2019, when federal agents first stormed the shipyard. With several key employees in legal jeopardy, and a huge book of new business in hand, the fact that only a single current, non-shipyard employee was targeted for prosecution is undoubtably a huge relief.

However, the legal proceedings may, again, lead to some uncomfortable questions about Austal’s fitness for future contract awards, particularly as Eastern Shipbuilding Group contests Austal’s relatively recent win of Offshore Patrol Cutter work from the U.S. Coast Guard in the U.S. Court of Federal Claims. While these complaints do not appear to impact Austal’s ability to bid for federal contracts, they suggest Austal still has substantive operational challenges to overcome.

In aggregate, the details included in the complaints support widespread industry concerns that Austal USA, as a relatively young shipyard, has been an unsophisticated bidder, prone to underestimating project costs. The SEC Complaint says that Austal USA’s “initial LCS bid did not sufficiently account for rising costs, change orders, or other issues that contributed to cost overruns.” The LCS “block-buy” bid was one of the first bids for Navy work the shipbuilder developed independently.

In the bid for LCS work, Austal underestimated design requirements, needing to “purchase over twice the amount of aluminum sheets for each LCS ship than initially budgeted”. Labor was low-balled, and ended up “higher than the labor bid costs”. The Government alleges that the failure to estimate project costs led Austal managers to cook the books in an effort to avoid disciplinary action from company leadership in Australia.

At Austal, Perciavalle’s legacy persists.

Austal’s current CEO, Rusty Murdaugh, was hired by Perciavalle in 2017, assuming the Austal CEO role in 2021, after the scandal-tainted Perciavalle abruptly resigned. Both Murdaugh and the rest of Austal USA had little time to adjust any ingrained habits, personnel, or processes that, under Perciavalle, may have been prone to support unrealistic or overoptimistic bidding—a concern aired throughout the industry after a flurry of recent Austal contract wins—a book of business that includes Offshore Patrol Cutters, Salvage ships, and an Auxiliary Floating Dry Dock.

These concerns are playing out right now, as Austal, in January, restated earnings that reflect a $41 million shortfall in the Navajo Class Towing, Salvage and Rescue Ship program.

The legal actions, combined with a raw and revealing glimpse into the day-to-day life at Austal’s U.S. shipyard, may also make it more challenging to attract workers and make much-needed executive hires. Austal USA has been looking for a lead naval architect for at least six months, and is, currently seeking a new Vice President of Legal Affairs and Chief Compliance Officer—a potentially tough sell, given the looming court cases.

The Contagion Spreads To Fincantieri:

The indictment also complicates life for Fincantieri Marine Group, where Craig Perciavalle was brought aboard in November 2021 as Vice President and General Manager for Fincantieri Bay Shipbuilding.

Perciavalle, in a brash, unapologetic Fincantieri biography, trumpets his Austal record, claiming “Austal USA experienced significant growth, becoming the fifth largest shipbuilder in the United States” and that Austal was “named Forbes’ 49^th Best Midsize Employer in the Nation”.

With Fincantieri preparing to integrate all three of their U.S. shipyards into the highly anticipated ConstellationClass Frigate program, Perciavalle, with his apparent record of success, seemed to be an obvious fit. To make the program work, and fight off sophisticated competitors like Huntington Ingalls Industries, Fincantieri needed an executive capable of handling the operational side of the Frigate program, while the more politically astute Mark Vandroff, the Chief Executive of Fincantieri Marinette Marine, and retired Vice Admiral Richard Hunt delt with both Congress and the Navy.

But the details included in the SEC Complaint puts Perciavalle’s suitability as a “disagregated shipyard” leader into question. The Complaint details aspects of Perciavalle’s imperious management style, alleging that Perciavalle “used devices, schemes or artifices to defraud” and that he “committed numerous deceptive acts” to avoid management oversight, relying on pliant, hand-picked staff to pressure others into wrongdoing.

Fincantieri, like Austal, is a foreign-owned enterprise, where U.S.-based management is given a relatively free hand and is insulated from close foreign oversight.

Fincantieri, when contacted for a statement, was non-committal, saying through a spokesman, “We are aware of a Department of Justice indictment” and that it was “related to his previous employment at a different shipyard.”

Given the charges and actions detailed in both the indictment and the Complaint, Perciavalle’s continued association with Fincantieri comes with real risk. The SEC Complaint seeks to “permanently” enjoin Perciavalle “from engaging in transactions, acts, practices and courses of business” described in the case, effectively throwing him out of the shipbuilding business entirely. If Perciavalle is found guilty, the conviction would also make it very difficult, if not impossible, for Perciavalle to hold a security clearance, a credential likely required to support U.S. Navy work.

The allegations pose an unfortunate complication for two of America’s dynamic “on-the-move” shipyards, and a cautionary tale for American shipbuilding that the uneasy fusion of waterfront culture and boardroom requirements can go very badly without strong, realtime oversight.

In short, integrity may not be immediately profitable, but it sure does count.

Craig Hooper, a former Austal executive, left Austal USA in mid 2013, as the alleged scheme to conceal LCS costs started to take shape.