ALEXANDRIA, Va. — Attorneys for a U.S.-based security company accused of setting up sham companies in a multimillion-dollar fraud scheme in Iraq are contending in court that the firm cannot be sued under a key federal anti-corruption law because the allegedly stolen money belonged to Iraqis, not Americans.
The potentially precedent-setting case could undercut fraud claims involving billions of dollars in reconstruction contracts that were issued by the U.S.-led Coalition Provisional Authority and paid for with money belonging to the Iraqi people.
For The Record
Los Angeles Times Monday December 20, 2004 Home Edition Main News Part A Page 2 National Desk 1 inches; 69 words Type of Material: Correction
Custer Battles -- An article in Sunday's Section A about Custer Battles, a U.S. security contractor in Iraq, quoted an attorney involved in a lawsuit against the company as saying that the Department of Justice had declined to participate in the suit after determining that no U.S. taxpayer money was involved. The lawyer, Alan Grayson, actually said the department stated that it had declined as a matter of policy.
Arguments broke out in federal court Friday over two fundamental questions: whether the CPA, which had ruled occupied Iraq, can be considered a U.S. agency, and whether fraud involving Iraqi money can be subject to suits under the False Claims Act, considered one of the federal government's most important tools against fraud.
John Boese, an attorney for the security firm, Custer Battles, asked a judge to dismiss the case as "fatally defective."
Boese argued that the act did not apply to his clients because the CPA, not the U.S. government, was the alleged victim.
"The funds that were used were Iraqi funds, not U.S. funds," said Boese, adding later, "If there was any false claims here, the entity that was cheated was the Coalition Provisional Authority."
Custer Battles has denied any fraud, attributing the allegations to disgruntled former employees who have since emerged as competitors to the firm.
Those employees are now suing Custer Battles under the False Claims Act, which allows citizens to sue U.S. contractors on behalf of the federal government to seek damages for fraud.
If successful, the citizens get a share of the money that the contractor is forced to pay back to the U.S. government. In effect, the act creates a potential army of informants among contractor employees with the incentive to report fraud.
In 2003, the act led to $2.1 billion in fraud recovery -- with $319 million going to the whistle-blowers, according to Department of Justice statistics.
Custer Battles was one of the first U.S. contractors on the ground in the chaotic days after the fall of President Saddam Hussein last year.
The company's two founders, Scott Custer and Mike Battles, are former special operations forces soldiers who opened for business with almost no money and little experience.
