Contractor Fraud Trial To Begin Tomorrow
Monday, February 13, 2006
The first civil fraud case against a U.S. contractor accused of war profiteering in Iraq goes to trial tomorrow in federal court in Alexandria. It pits two whistle-blowers against two former Army officers whose company, Custer Battles LLC, won multimillion-dollar contracts in the aftermath of the fall of Saddam Hussein in 2003.
Robert J. Isakson and William D. "Pete" Baldwin, who worked for the company in Iraq, accuse its founders, Scott Custer and Michael Battles, of overcharging the government millions of dollars by running inflated expense billings through a series of shell companies they created.
Custer, who served as an Army Ranger, and Battles, a West Point graduate who also served in the CIA and ran unsuccessfully for Congress in 2002, have denied the charges and counter that their accusers are disgruntled competitors.
The case has generated media coverage, including a piece on CBS's "60 Minutes" last night, because of the explosiveness of the fraud charges and because it has become the first test of whether the federal False Claims Act reaches the conduct of contractors working in Iraq.
Custer Battles, which has had offices in Northern Virginia and Rhode Island, won contracts in 2003 to provide security for the Baghdad airport and to help guard and distribute a new money supply for the country.
U.S. District Court Judge T.S. Ellis III ruled last summer that because "the essential nature" of the U.S.-led Coalition Provisional Authority was "shrouded in ambiguity," the reach of the fraud law turned on the source of the allegedly stolen funds. Since much of what the CPA spent was Iraqi money from oil sales, the trial is limited to $3 million Custer Battles received in funds controlled by the agency.
Under the Civil War-era False Claims Act, individuals can file suit secretly on behalf of the government. The case becomes public after the Justice Department has had a chance to decide whether to join the case. In this case the department declined but did not say why. The complainants, pursuing the case with their own attorney, can collect 12 percent to 15 percent of any damages.
This week's trial focuses on the contract to help distribute a new Iraqi currency in the first months after the collapse of Hussein's government. A separate trial will be held later on similar charges involving the contract to provide security for the Baghdad International Airport.
A subplot in the trial is likely to be the performance of the CPA, which has been criticized for failing to properly oversee the spending of more than $20 billion in U.S. reconstruction funds. The special inspector general examining that spending said financial systems were so shoddy that billions of dollars couldn't be accounted for.
One former CPA employee pleaded guilty recently to several felony counts for stealing cash in an unrelated case during the rebuilding effort. Several others, including a contractor, are under investigation.
Court filings in the Custer Battles case detail how CPA officials in Baghdad were ill-equipped to write, much less oversee, the processing of millions of dollars in contracts. For example, the agency couldn't wire money to Custer Battles and its other contractors, so it sometimes advanced them millions of dollars in cash, according to the records.
Custer and Battles, who are in their mid-thirties, met while in the Army and co-founded the company in the fall of 2002. By June of 2003, Battles was in Baghdad bidding on and winning a first contract, a $16.8 million deal to provide security at the airport.
The Iraqi currency exchange, or ICE, contract was awarded in August. Custer Battles was supposed to build three camps as distribution points for new Iraqi currency that didn't have Saddam's picture on the bills. The contract was originally for $9.8 million. It was later expanded to more than $20 million.
One document in the case is a spreadsheet showing the company's actual expenses and much higher figures for what it was charging the government. It was among documents provided to The Washington Post last spring by attorneys for the whistleblowers.
It showed for example, that $74,000 generators were billed at $400,000 and $240,000 trucks at $600,000. The items were listed as coming from other companies Custer and Battles set up in the Cayman Islands.
When Baldwin complained about the alleged overcharging, the company appointed an investigator, Peter Miskovich, to probe the matter. He sent Custer Battles a memo outlining what he considered "elements of criminal fraud" in the documentation. Miskovich said in another statement several months later that he didn't believe Custer or Battles was involved in the questionable conduct.
Isakson, an owner of an Alabama construction company called DRC Inc., is in a separate financial dispute with the government over federally financed work his firm did in Honduras several years ago following Hurricane Mitch.
His company has sued the government over that contract. In late 2004, the Justice Department sued DRC, claiming the company made false statements on the $12.7 million deal. DRC denies the charges.
The Custer Battles trial is expected to last about two weeks.