WASHINGTON — In the first action of its kind, a federal jury on Thursday found that a private security firm had bilked the U.S.-led interim government in Iraq out of millions of dollars.
Custer Battles, which is based in Virginia, was found to have used shell companies, faked invoices and even stolen forklifts in a scheme to defraud the now-defunct Coalition Provisional Authority, which ruled Iraq after Saddam Hussein's regime fell.
Although a handful of other contractors involved in the reconstruction of Iraq face criminal charges, Thursday's ruling is the first time that a federal jury has ordered a contractor in Iraq to pay back purloined funds to the government.
After a contentious three-week trial, the jury found Custer Battles responsible for 37 separate fraudulent acts; the firm could face payments and penalties totaling more than $10 million.
"There is an orgy of greed among contractors in Iraq, and the Bush administration is for all practical purposes participating in it," said Alan Grayson, lawyer for the whistle-blowers who filed the case. "They have done nothing to get the taxpayers' money back. They've done nothing to punish the wrongdoers."
Lawyers for Custer Battles said legal issues that remained could affect the case's final disposition. Chief among them is whether the provisional authority was a U.S. government agency subject to U.S. law.
"We're disappointed with the jury's verdict," said David Douglass, who represented Custer Battles. "We still believe that when the legal issues are sorted out, it will be clear that Custer Battles did not knowingly submit false claims."
Company owners Scott Custer and Mike Battles were former Army Rangers who were short of weapons, experience and money when they arrived in Iraq after the March 2003 invasion.
Within a matter of months, they won two contracts with the provisional authority, which governed Iraq until June 2004. The company held one contract worth as much as $16.8 million to provide security guards at Baghdad airport and a second worth as much as $21.4 million to provide logistical support for a currency exchange in which Iraqis turned in old dinars for new bills provided by the coalition.
As outlined in a Los Angeles Times story, two whistle-blowers came forward in the fall of 2003 to accuse Custer Battles of fraud. Robert Isakson and William "Pete" Baldwin eventually filed a claim under the False Claims Act, a Civil War-era anti-fraud measure that allows private citizens to file suit on behalf of the government and to receive a portion of any money recovered. In this case, the two men stand to receive as much as $3 million, with the government recovering the rest.
The False Claims Act allows the Justice Department to join whistle-blowers in the prosecution of cases. But in this case, government attorneys did not intervene. Grayson, the lawyer for Isakson and Baldwin, attributed the decision to political considerations. Battles ran as a Republican candidate for Congress in 2002, and Custer boasted of the company's ties to the administration.
Baldwin and Isakson described a scheme in which Custer and Battles inflated invoices to recover more money than allowed under the currency exchange contract. A separate trial is expected concerning the airport contract.
Among other things, the men recounted how company officials created offshore companies in the Cayman Islands, drawing up fictitious leases and other documents to justify the high costs.
The company also inflated charges for a helicopter pad, portable housing units and forklifts, which it had taken from Baghdad airport and repainted to look like Custer Battles equipment.
Hugh Tant III, a retired Army general who oversaw the currency exchange project, testified that Custer Battles had supplied broken-down trucks to move the currency around Iraq, requiring Tant to use military vehicles. When Tant complained, he said, the company told him that the contract did not require it to supply "operational" vehicles.
"My impression of their work was, it was probably the worst I've ever seen in over 30 years of my time in the Army," Tant said on the stand. "The absolute worst."
At trial, Custer and Battles denied knowledge of the process by which invoices were submitted, blaming mistakes on subordinates. They also said that Custer Battles lost money on the contract.
One other defendant, a company official named Joe Morris, declined to testify for fear of incriminating himself.
Custer and Battles also under investigation for fraud, though no criminal charges have been filed, according to federal records.
"I wasn't involved in the invoicing process.... As the owner of the company, you hire other people to do this," Battles testified.
Patrick Burns, spokesman for the watchdog group Taxpayers Against Fraud, said at least five other fraud suits were wending through the system.
The cases remain under seal until the Justice Department makes a decision on whether to prosecute.
"We went to Iraq to show these people what the rule of law was all about," Burns said. "What we did was create an ethics-free zone where the contractors went wild and the government stood around and winked."