Court Revives Suit Over Iraq Work

By Ellen Nakashima
Washington Post Staff Writer
Saturday, April 11, 2009

A federal appeals court yesterday ruled that a case involving fraud claims against an American contractor in Iraq could not be blocked merely because the contract was administered by the U.S.-led Coalition Provisional Authority, a multinational governing body set up in the chaotic aftermath of the 2003 invasion.

The decision, which could open the way for other cases to be brought over claims of Iraq reconstruction fraud in the early war period, grew out of allegations by two whistleblowers who worked on contracts awarded to Custer Battles LLC, which had offices in Rhode Island and Northern Virginia. They alleged that the firm created phony Cayman Islands companies to overbill the coalition authority by millions of dollars on a contract to replace Iraqi dinars with new currency that did not bear Saddam Hussein's picture.

The whistleblowers sued the company and its founders in 2003 under the False Claims Act, which makes it illegal for anyone to knowingly make a false claim for payment to the U.S. government. The law allows citizens to sue on behalf of the government. In March 2006, a jury found the defendants liable for fraud amounting to $3 million. Under the law, a judge can assess damages of triple the amount of the fraud. Five months later, a federal judge in Alexandria threw out the award on the grounds that the CPA was not a U.S. government entity and thus not governed by U.S. laws -- a highly publicized decision that watchdog groups said probably had the effect of dissuading other Iraq contracting-fraud cases from being filed.

In yesterday's ruling, a three-judge panel of the U.S. Court of Appeals for the 4th Circuit said U.S. District Judge T.S. Ellis III erred in limiting the scope of the damages and gave the plaintiffs the option of seeking a new trial for additional damages. The panel, in an opinion written by Judge Paul V. Niemeyer, also said Ellis "erred in assuming that U.S. government personnel detailed to the Coalition Authority could not be working in their official capacities as U.S. government employees.''

The ruling is significant, said Victor A. Kubli, a lawyer for the whistleblowers. "It rejects efforts to create a free fraud zone" in overseas reconstruction efforts funded by several governments, he said.

The ruling noted that after an October 2003 meeting between Custer Battles's co-owners, Scott Custer and Michael Battles, and representatives of the CPA and the U.S. military, Battles accidentally left behind "an astonishing spreadsheet" that listed amounts invoiced and actual costs. For instance, the firm provided two flatbed trucks to carry new money that cost $18,000, while billing the authority $80,000, the ruling said.

The invoices were typically submitted to a U.S. government employee detailed to the coalition authority, who forwarded them to a U.S.-retained contractor and U.S. military personnel for approval and ultimately to the CPA for payment. The invoices were paid from the Development Fund for Iraq, which included money confiscated by the United States from Iraqi bank accounts, as well as money appropriated by Congress, the ruling noted.

"We do think the ruling may remove some potential obstacles to ongoing and future investigations" by the Office of the Special Inspector General for Iraq Reconstruction, said Ginger Cruz, the office's deputy inspector general.

The CPA was established in the aftermath of the invasion and existed for only 14 months.

Custer Battles's attorney, Robert T. Rhoad, expressed confidence that his client would ultimately prevail. He said that Custer and Battles had "no personal knowledge or intent of falsity" in submitting claims to the CPA, that the government suffered no damage and that the firm submitted no false claims. He noted that the ruling also upheld the lower court's dismissal of a fraud claim in a separate Custer Battles contract.

© 2009 The Washington Post Company