Michael J. Battles of Custer Battles spends five hours answering charges in the whistleblower lawsuit being tried in Virginia.

01:16 AM EST on Saturday, February 25, 2006

BY JOHN E. MULLIGAN
Journal Washington Bureau

ALEXANDRIA, Va. -- Former Rhode Islander Michael J. Battles testified yesterday that he had "zero contact" with the multimillion-dollar currency project in Iraq that has given rise to accusations of war-profiteering against him and his company.

Battles disavowed any knowledge of the "fake invoices" and "sham companies" that he and his co-defendants are charged with creating to jack up profits by millions of dollars on such work as a contract to replace Iraq's currency system in late 2003.

Instead, Battles sought to pin much of the blame for the troubles with the Iraqi Currency Exchange project on William D. "Pete" Baldwin, a former employee who helped to craft the charges in the whistleblowers lawsuit now on trial in federal court here.

Battles repeated several times that he became "furious" in October 2003 when he learned that Baldwin had permitted the unauthorized expansion of the currency project, which began as a "finite" job to build and equip three camps for several hundred currency-distribution workers.

Battles said the "mission creep" resulted in Custer Battles' expenditure of "millions of dollars" for which the company then had to account to the U.S.-led Coalition Provisional Authority, the entity in charge of reconstructing war-torn Iraq. Battles has asserted that Baldwin and a second whistleblower are embittered former associates who stand to profit from their lawsuit.

Battles' explanation differed sharply from the basic charge of the whistleblowers that Custer Battles created subsidiaries -- "bill mills" -- to manufacture phony invoices that the company presented to claim inflated profits.

Battles, 35, a West Point graduate who was raised partly in Barrington, acknowledged that in January 2004 he enjoyed a $3-million payday from Custer Battles LLC, the company he co-founded with another former Army officer, Scott Custer, 37, with offices in Virginia, Rhode Island and eventually Baghdad.

Battles said he and Custer "drew," or paid themselves, about $4 million apiece from Custer Battles in 2004, the year after they launched a series of ambitious ventures tied to the reconstruction of Iraq after the fall of Saddam Hussein.

But Battles said the Iraqi currency contract -- the Custer Battles job at issue in the civil lawsuit on trial here since Feb. 14 -- "has nearly destroyed my life."

Far from earning any money for his company, the currency-exchange job "has cost us millions of dollars in legal expenses," Battles testified.

Battles' five-hour appearance on the witness stand was his side's first sustained effort to answer the damaging testimony that lawyers for the two whistleblowers, Baldwin and Robert J. Isakson, have elicited from about a dozen witnesses.

Sparks flew all day between Battles and Alan M. Grayson, the lawyer for the whistleblowers.

At one point, Grayson appeared to make fun of Battles' detailed memory of a stormy October 2003 meeting in Baghdad with Coalition Provisional Authority officials -- detailed to the point of remembering what color pants he had worn and what sort of furniture filled the conference room.

Battles sought to discredit a key piece of testimony about that meeting. One former Provisional Authority employee who helped supervise the currency job had testified that after Battles left the gathering, an apparently incriminating document was left on the chair where Battles had been sitting.

Not so, Battles testified. He had sat on a tabletop during that meeting, not on a chair, and he had brought no files into the room.

On some matters, Battles appeared intent on demonstrating a grasp of business detail. For example, he gave an intricate account of why Custer Battles created wholly owned subsidiaries in the Cayman Islands. First, he intended "to create something in the chaotic aftermath" of the invasion of Iraq, such as a unit to deliver goods in relative safely -- and then be spun off or sold at a profit. Second, a subsidiary would protect the parent firm from liability "if something happened" to the unit. Third, a specialized subsidiary would not "dilute the brand" of the parent company, Battles testified.

But when it came to the details of the many allegedly phony invoices submitted in the name of these subsidiaries, Battles repeatedly disavowed any recollection. He explained that his job was business development, not the finances of individual contracts, such as the currency job.

At one point, Battles explained the lack of receipts and accounting for work billed by saying that "there were probably seven or eight layers of subordinates" for every invoice, including "nine guys named Achmed" who would arrive at a job "with their relatives to come and do stuff."

But Battles did acknowledge that he had been "alarmed" by one specific document, a November 2003 e-mail from Derek Fox, an Air Force veteran with extensive government employment experience who was a newly hired Custer Battles employee.

After issuing sharp warnings about Custer Battles record-keeping, Fox told Battles that he didn't want to "end up in some country-club prison" for Custer Battles. "Failure to disclose certain things can get you there," he warned.

Grayson asked pointedly whether Battles had become so alarmed by the Fox note that he then reviewed the $30 million worth of Custer Battles invoices.

"No, I did not," Battles answered. But he went on to emphasize that he had not made any secret of his company's relationship with its Cayman subsidiaries.

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