Verdict Against Iraq Contractor Overturned

Occupation Authority's Murky Status Cited

A federal judge threw out a $10 million jury verdict against an American company accused of overcharging on an Iraq reconstruction contract after concluding that the now-defunct Coalition Provisional Authority was not a U.S. government entity.

The civil fraud suit against Custer Battles LLC, which has offices in Northern Virginia, arose out of the chaotic 14-month period during which the authority governed Iraq after the 2003 U.S.-led invasion.

Using federal whistle-blower laws, a former employee and a subcontractor claimed Custer Battles created phony Cayman Islands companies to overcharge the authority on a contract to furnish Iraq with a new currency. The firm denied the claim.

Although a jury found the company guilty, U.S. District Judge T.S. Ellis III ruled on review that the firm could not be sued under the federal False Claims Act because of the ambiguous structure of the authority, which issued the contract. The judge also concluded that the way in which the company had been paid distanced it from the U.S. government.

He said there was ample evidence that the company had submitted "false and fraudulently inflated invoices" but found that the nature of the Coalition Provisional Authority precluded a fraud claim. Ellis signed his ruling Wednesday; it was made public yesterday.

Although "the CPA was principally controlled and funded by the U.S., this degree of control did not rise to the level of exclusive control required to qualify as an instrumentality of the U.S. government," the 23-page ruling said. "In fact, the evidence clearly establishes that it was created through and governed by international consent."

The case is one of several to emerge from the $21 billion U.S. reconstruction effort as complaints emerge about sole-source contracts and allegations of fraud and corruption. The office of the special inspector general for Iraq Reconstruction has referred more than 20 criminal cases to the Justice Department for prosecution and has said that the authority's financial systems were so flimsy that billions of dollars could not be accounted for.

The Custer Battles litigation was brought under a separate anti-fraud law that allows citizens to sue on behalf of the government. It is not known whether any similar cases have been brought against contractors for the CPA. Such matters are sealed until the Justice Department decides whether to join the suit, which it did not in the Custer Battles case.

The Justice Department declined to comment on the ruling or its possible impact on other cases.

The plaintiffs in the Custer Battles suit, Robert Isakson and William Baldwin, will appeal, said their attorney, Alan M. Grayson. "If you want to make a list of all the things the Bush administration has screwed up, they created this Frankenstein entity called the Coalition Provisional Authority," Grayson said.

"CPA was created by the U.S. government, run by largely U.S. employees. This ruling could stand logic on its head," said Sen. Byron L. Dorgan (D-N.D.). "It's a setback for accountability."

Custer Battles was founded by Scott Custer, a former Army Ranger, and Michael Battles, a West Point graduate who served in the CIA. The company grew rapidly after the Iraq war as it was awarded CPA contracts.

The company's owners are "ecstatic," said their attorney, Robert Rhoad.

Staff writer Dan Eggen contributed to this report.