An employee-turned-whistleblower testifies in a war-profiteering civil suit against Custer Battles.

01:00 AM EST on Wednesday, February 22, 2006

BY JOHN E. MULLIGAN
Journal Washington Bureau

ALEXANDRIA, Va. -- Soon after he arrived in Baghdad to work for Custer Battles LLC in the summer of 2003, a key manager of the company was told by its president of plans to use shell companies to "elevate" profits on a crucial contract, according to testimony yesterday by the employee turned whistleblower.

"I said in my opinion it was illegal," William D. "Pete" Baldwin testified as the trial of war profiteering charges against Custer Battles resumed in federal court here. But Baldwin said company president Scott Custer told him that a 25-percent profit -- as spelled out in the company's contract -- "wasn't worth it" in wartime Iraq. So they pressed ahead with the plan to realize profits of up to 50 percent through the subsidiaries based in the Cayman Islands, Baldwin said.

It was the first testimony by one of two whistleblowers who have charged in a civil suit that officials of the firm, which had offices in Rhode Island and Virginia, filed false claims for some of the millions of dollars they made from the U.S.-led Coalition Provisional Authority, which ran the first efforts to secure and rebuild Iraq after the fall of Saddam Hussein in 2003.

Company cofounders Custer, 37, of Virginia, and former Rhode Islander Michael J. Battles, 35, have denied the accusations, as has their former employee and codefendant, Joseph Morris, 43, of Connecticut. They assert that Baldwin and the other whistleblower are embittered former business associates who stand to profit from their lawsuit. If the jury believes the charges and awards damages to the government, the whistleblowers and their lawyers would take a fraction of the award.

Also yesterday, Morris was asked under oath whether he had "created and backdated leases" from the shell companies and then "forged signatures" on the documents in order to make fraudulent claims for money from the CPA.

Morris refused to answer, invoking his constitutional right not to incriminate himself.

Morris' invocation of the Fifth Amendment was potentially damning because the question from one of the whistleblowers' lawyers summed up the crux of the fraud charges. In this non-criminal proceeding, Judge T.E. Ellis III told the jury, they may conclude that Morris refused to answer because his answer "would be adverse to him."

In a third moment of drama yesterday, an official supervisor of Custer Battles contracts described how Battles walked out of a confrontational meeting in the CPA's Baghdad headquarters and apparently left behind a company document that spelled out the magnitude of the alleged scheme to inflate profits by millions of dollars.

Defense lawyers established that Jeffrey D. Ottenbreit, a civilian contract worker who helped oversee CPA accounts, was not certain that Battles or anybody else at Custer Battles had created the document.

But prompted by lawyers for the whistleblowers, Ottenbreit left the clear impression that Battles had inadvertently handed over to the CPA a document with potentially incriminating suggestions of profiteering.

Ottenbreit was the second eyewitness to describe the October 2003 meeting in a former palace of Saddam during which retired Gen. Hugh B. Tant III, the chief of a crucial reconstruction contract, confronted Custer and Battles over the fact that most of the trucks they had delivered for the job were broken down.

Ottenbreit echoed Tant's testimony last week of a threat by Custer and Battles to walk away from their job -- a contract to help replace Iraq's entire system of currency over the course of a few weeks.

After the parties calmed down and agreed to resume work on the job, Custer and Battles left CPA headquarters, said Ottenbreit. But on the chair Battles had occupied was a stapled sheaf of documents, including one that -- according to Ottenbreit -- appeared to show "very high" Custer Battles estimates of profits on certain aspects of the job.

jmulligan@belo-dc.com / (202) 661-8423