David Dickson and Stuart Spence, former CEO and CFO of McDermott International respectively, have settled charges with the Securities and Exchange Commission without admitting or denying responsibility.
The charges pertain to the project cost overruns on the Cameron LNG project in 2018. In short, the SEC alleges that Dickson and Spence issued misleadingly optimistic information in its Q2 2018 earnings release regarding the project cost and schedule.
Dickson and Spence approved a $490 million loss estimate at completion to be used in its Q2 2018 financial results, even though the initial draft estimated loss was $1.1 billion.
The Cameron LNG project was actually awarded to Chicago Bridge and Iron (‘CB&I’) and Chiyoda, its joint venture partner, in 2014 as a $6 billion fixed price contract In December 2017, McDermott and CB&I agreed to combine in a $6 billion transaction. The deal closed in May 2018.
According to the SEC, in Q1 2018, prior to the merger being completed, the project cost team within CB&I initially forecast a loss of $438 million on the project. However this was challenged by CB&I management and the loss was reduced to $160 million, which was the number used in CB&I’s Q1 results, its last quarterly results as a public company.
In late June 2018, the project cost team in CB&I emailed Dickson and Spence a new forecast on the project that showed projected losses of $1.25 billion, an increase of over $1 billion in two months.
Dickson and Spence expressed skepticism with the loss forecast as they sought to use a less costly execution by reducing the number of employees and contractors on the project from 11,400 to around 9,000 or so. In addition, the JV partner also expressed doubts about the size of the forecast loss.
An executive at CB&I came up with an alternative loss forecast of $490 million that was developed outside the normal project cost controls and procedures. The company also prepared various scenarios that should losses would range from $702 million to $1.7 billion. Despite this, Dickson and Spence signed off on the $490 million loss to be used in its Q2 numbers. In the earnings release, they didn’t disclose that their revised execution plan increased the risk that the project would be delayed.
Dickson agreed to pay a penalty of $100,000 and Spence $40,000.
McDermott ended up booking losses of $1 billion on the project in 2018 and 2019. The company filed for bankruptcy in February 2020. Spence resigned as CFO in November 2019 while Dickson stepped down as CEO in June 2021.
McDermott, Dickson and Spence, along with former CB&I CEO Patrick Mullen, are still being sued in the Southern District of Texas in a class action lawsuit by investors (led by the Public Employees’ Retirement System of Mississippi). That case appears to be in the discovery stage.