Steps taken by Austal Ltd to conceal the consequences of contractual non-performance have led to multi-jurisdictional prosecution. The number of companies experiencing financial difficulties is on the rise, and the Austal case demonstrates the very serious risks of multi-jurisdictional prosecution for failing to keep proper and accurate records of a company, and to make accurate disclosures regarding a company’s financial position.
The United States regulator, the Securities and Exchange Commission (‘SEC’), and the District Court of the Southern District of Alabama have each filed cases against three former executives of Austal USA LLC alleging they orchestrated a fraudulent accounting scheme and thereby falsely inflated the company’s reported earnings. It is alleged that the scheme was undertaken to give the impression that the shipbuilder was meeting its targets under a construction contract. In particular, the SEC alleges that the three men:
- Artificially reduced cost estimates required to complete certain shipbuilding projects for the US Navy by tens of millions of dollars to meet Austal USA’s revenue budget and revenue projections; and
- Knew that shipbuilding costs were rising, and by more than was planned, but directed others to arbitrarily lower them.
It further alleges that the Australia-based parent company prematurely recognised revenue which resulted in it meeting or exceeding analyst estimates for earnings. The complaint alleges that ‘if the defendants had not fraudulently manipulated the cost estimates, Austal... would have missed, by wide margins, analyst consensus estimates for EBIT’.
Austal USA LLC is a subsidiary of Austal Ltd, the parent company based in Australia. In 2022 the Federal Court of Australia found that one of the U.S. executives and Austal Ltd had contravened the continuous disclosure obligations under the Corporations Act 2001 (Cth). In the course of the Federal Court proceedings, Austal admitted that in June and July 2016 it ‘failed to disclose a likely profit write-back – which meant profit guidance was no longer reliable’.
The formal charges in the District Court of the Southern District of Alabama are for Conspiracy to Commit Wire Fraud and Wire Fraud Affecting a Financial Institution in violation of sections 1343 and 1349 of the US Code, Title 18.
The SEC claim is for violation of section 10(b) of the Securities Exchange Act of 1934 and rule 10b-5 of the Securities Exchange Act Rules. The provisions make it an offence to manipulate or deceive in connection with the purchase or sale of a security.
The wire fraud provisions make it an offence for a person to voluntarily and intentionally devise or participate in a scheme to defraud another out of money, and to use interstate telephone or electronic communications (i.e. ‘wires’) in that scheme. Wire fraud and the conspiracy to commit offence are punishable by fines or up to 20 years imprisonment.1
The only connection required with the United States for the offences is a communication regarding the fraud or conspiracy taking place over US wires.2
Section 674 and 674A of the Corporations Act 2001 (Cth) (‘Corporations Act’) places continuous disclosure obligations on listed disclosing entities bound by disclosure requirements in market listing rules. In the Austal case, the Corporations Act provisions were found to have been contravened because Austal failed to notify the ASX of information it was aware of, which was not publicly available, and would be reasonably expected to adversely affect the price or value of Austal’s securities. Austal’s U.S. executive (Perciavalle) contravened the provisions by his participation in Austal’s contravention. These offence provisions are punishable by imprisonment.3
Prior to the trial, the parties reached agreement on declaratory relief and pecuniary penalties that would be sought in the proceeding. The Court was therefore only required to determine the amount of pecuniary penalties. In doing so, the Court ordered Austal to pay a pecuniary penalty of $650,000, and Perciavalle to pay $50,000. Together they were also ordered to pay a contribution to ASIC’s costs of $500,000.
A failure to prepare and keep accurate books and records for a corporation can give rise to a number of other offence provisions in the U.S. and Australia. For example:
- Section 286 of the Corporations Act requires companies, registered schemes, or disclosing entities to create and keep written financial records that correctly record and explain its transactions, financial position, and performance. These records must be sufficient for accurate financial reports to be prepared, or for an audit to be conducted. Records must be kept for 7 years after the completion of the transactions they relate to. Contravention of the section is punishable by a fine or imprisonment of up two years.
- Section 1307 of the Corporations Act makes it an offence for an officer or employee of a company to conceal, destroy, manipulate or falsify any books relating to the affairs of a company. ‘Books' is defined by s9 as: a register, any other record of information, financial reports or financial records however compiled or recorded, and a document. The offence is punishable by up to 5 years imprisonment.4
- The Criminal Code Act 1995 (Cth) makes it an offence to intentionally or recklessly alter, destroy or conceal an accounting document (or fail to alter when under an obligation to do so) to facilitate, conceal or disguise the occurrence of the person, or another, receiving a benefit not legitimately due to the recipient, or loss to another person not legitimately incurred.5 The intentional offence is punishable by imprisonment of up to 10 years or fines for corporate offenders.
- Section 83 of the Crimes Act 1958 (Vic) makes it an offence punishable by up to 10 years imprisonment for a person to dishonestly, with a view to gain for themselves or another, or with intent to cause loss to another, destroy or otherwise falsify any account or record made for an accounting purpose.
- The recent indictment of Donald Trump for falsifying business records in breach of the New York State Penal Law section 175.10 is an example of the application of the ‘books and records’ offences in the U.S. In that case, Mr Trump is accused of falsifying records with the intent to defraud and intent to commit another crime, which could bear criminal consequences. Mr Trump falsely recorded payments made to his lawyer Michael Cohen, which were reimbursements for payments made to Daniels (real name McDougal) in the lead up to the 2016 Federal election. In August 2018 Michael Cohen, pleaded guilty to Federal criminal charges. Those charges included violations of campaign finance laws which were connected to the hush money payments, as well as tax evasion and making false statements to a bank. Cohen was sentenced to three years imprisonment.6
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1 Section 474.14 of the Criminal Code Act 1995 (Cth) is similar to the US wire fraud provision.
2 The National Law Review, ‘Fourth Circuit Extends Territorial Reach of Wire Fraud Statute’, 25 October 2022.
3 Treasury Laws Amendment (2021 Measures No. 1) Bill 2021, Explanatory Memorandum: Since Judgement the provisions have been amended to include a fault element. Now, a company will only be liable for breach of the obligation in ASX Listing Rule 3.1 if the company knows or is reckless to the knowledge that a reasonable person would expect the information to have a material effect on the securities of the company.
4 Schedule 3, Corporations Act.
5 Sections 490.1 and 490.2.
6 He spent approximately 13.5 months in prison, and 1.5 years in home confinement before being released in November 2021.