Government in Iraq bilked by contractor

Jury finds Virginia firm faked invoices, used shell companies

March 10, 2006|By T. CHRISTIAN MILLER | T. CHRISTIAN MILLER,LOS ANGELES TIMES

WASHINGTON -- In the first action of its kind, a federal jury yesterday found that a private security company bilked the U.S.-led government in Iraq out of millions of dollars.

Virginia-based Custer Battles was found to have used shell companies, fake invoices and even stolen forklifts in an elaborate scheme to defraud the Coalition Provisional Authority that ruled Iraq after the invasion.

Though a handful of other contractors involved in the reconstruction of Iraq face criminal charges, yesterday's ruling marks the first time that a federal jury has ordered a contractor in Iraq to pay back purloined funds to the government. After a contentious, three-week trial, the jury found Custer Battles responsible for 37 separate fraudulent acts, meaning that the firm could face payments and penalties totaling more than $10 million.

"There is an orgy of greed among contractors in Iraq, and the Bush administration is for all practical purposes participating in it," said Alan Grayson, lawyer for the whistle-blowers who filed the case. "They have done nothing to get the taxpayers' money back. They've done nothing to punish the wrongdoers."

Lawyers for Custer Battles said legal issues remain to be resolved in the case that could affect the final disposition. Chief among them is whether the provisional authority was actually a U.S. government agency subject to U.S. law.

"We're disappointed with the jury's verdict," said David Douglass, who represented Custer Battles. "We still believe that when the legal issues are sorted out, it will be clear that Custer Battles did not knowingly submit false claims."

Company owners Scott Custer and Mike Battles, former Army Rangers, were short of weapons, experience and money when they arrived in Iraq after the March 2003 invasion.

Within a matter of months, they won two contracts with the provisional authority, which governed Iraq until June 2004. The company held one contract worth up to $16.8 million to provide security guards at Baghdad International Airport and a second worth up to $21.4 million to provide camps, trucks and other support to contractors working to swap old Saddam Hussein-era currency for new bills provided by the coalition.

As outlined in a Los Angeles Times article, two whistle-blowers came forward in the fall of 2003 to accuse Custer Battles of fraud. Robert Isakson and Pete Baldwin eventually filed a lawsuit under the False Claims Act, a Civil War-era anti-fraud measure that allows private citizens sue on behalf of the government and to receive a portion of any money recovered. In this case, the two men stand to receive as much as $3 million, with the government recovering the rest.

The False Claims Act allows the Justice Department to join whistle-blowers in the prosecution of cases. But in this case, government attorneys refused to intervene. Grayson, the lawyer for the plaintiffs, attributed the decision to political considerations. Battles ran as a Republican candidate for Congress in 2002 and Custer boasted of the company's ties to the Bush administration.

Baldwin and Isakson described a scheme in which Custer and Battles deliberately inflated invoices in order to recover more money than allowed under the currency exchange contract. A separate trial is expected concerning the airport contract.

Among other things, the men recounted how company officials created offshore companies in the Cayman Islands in order to draw up fictitious leases and other documents to justify the high costs.

The company also billed the government inflated sums for a helicopter pad, portable housing units and forklifts that they stole from the Baghdad airport and repainted to make them appear as Custer Battles equipment.

Hugh Tant III, a retired Army general who oversaw the currency exchange project, also said the men supplied broken-down trucks to move the currency around Iraq, requiring Tant to make use of military vehicles. When Tant complained, he said, the men told him that the contract did not require them to supply "operational" vehicles.

At trial, Custer and Battles denied knowledge of the process by which invoices were submitted, blaming mistakes on subordinates. They also said that Custer Battles actually lost money on the contract.

One other defendant, a company official named Joe Morris, declined to testify for fear of incriminating himself. Custer and Battles were also placed under investigation for fraud, though no criminal charges have been filed, federal records show.

T. Christian Miller writes for the Los Angeles Times.

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