Contractor Accused of Profiteering

By Charles R. Babcock
Washington Post Staff Writer
Thursday, February 16, 2006

The work of a contractor accused of defrauding the U.S. government in Iraq in 2003 "was probably the worst I've ever seen in my 30 years in the Army," a retired brigadier general told a federal jury yesterday.

Hugh Tant III, who went to Iraq as a civilian to oversee a project to give the country a new currency, testified on the first day of testimony in the first civil fraud trial arising out of the rebuilding effort there. He said Custer Battles LLC, which has had offices in Northern Virginia and Rhode Island, provided trucks that did not work and failed to perform adequately in supplying cabins, mattresses, generators and Internet service to troops who were distributing the new dinar in the fall of 2003.

When he confronted the principals, Scott Custer and Michael Battles, that October about 34 of 36 trucks not working, Tant testified, Battles responded: "You asked for trucks and we complied with our contract and it is immaterial whether the trucks were operational."

During his afternoon testimony, Tant also said he complained about the company's failure to furnish leases and invoices from subcontractors. The subcontractors turned out to be subsidiaries of Custer Battles, a fact the owners didn't tell him, Tant said. The initial contract was for $9.8 million and was later increased to more than $20 million.

The role of those subsidiaries is at the heart of the allegations against the company and its owners. In court papers, the pair have denied they used these offshore companies to overbill the government.

Alan M. Grayson, lead attorney for two men who filed the case on behalf of the federal government, told the jury earlier in the day that evidence would show Custer and Battles set up the subsidiaries to file fake invoices to the U.S.-led Coalition Provisional Authority, which was running the reconstruction effort.

One document will show the company spent $3 million on supplies while billing the U.S. government $10 million, Grayson said. He said Custer and Battles both took $3 million out of the company less than six months after it started work in Iraq. He called the men "war profiteers" and told the jury that "you and I as taxpayers need to be compensated for the $3 million they took from us."

U.S. District Judge T.S. Ellis III had ruled earlier that the case, a test of the reach of the federal False Claims Act, would be limited to the first $3 million paid under the contract. That's because the CPA was using a mix of U.S. and Iraqi funds to finance the rebuilding effort.

Grayson also created a stir by telling Ellis late Tuesday that Custer had offered a witness in the case $50,000, which Grayson had reported to the U.S. attorney's office. David L. Douglass, Custer's attorney, complained about what he termed a "baseless, harmful allegation." Neither side would discuss the claim further.

In his opening statement to the jury, Douglass said that the evidence would show that there was no intent to defraud and that his clients were "victims of confusion, misunderstanding and resentment" by their two accusers. He said there were "good and valid reasons" for the company to set up the offshore subsidiaries, including limiting liability, protecting the Custer Battles brand name, and preparing to sell off the spinoffs.

The company simply passed on its bills, without marking them up, Douglass told the jury. He said there was "tons of confusion" over what was required when payments on the contract were requested.

Barbara Van Gelder, attorney for Joseph Morris, a Custer Battles official who oversaw the currency exchange contract, also denied the fraud allegations. She said, "This is a simple case of payback and self protection" by the accusers, Robert Isakson and William Baldwin.

The trial, which started Tuesday, is expected to last about two weeks. Tant is scheduled to return to the witness stand today to complete his testimony and face cross examination.

A separate trial will be held later on charges involving a $16.8 million contract Custer Battles received to provide security at Baghdad International Airport.

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