Custer Battles LLC, already liable for $10 million worth of war profiteering, now has to defend itself against charges its security work in Iraq was a sham.

01:00 AM EST on Sunday, March 19, 2006

BY JOHN E. MULLIGAN
Journal Washington Bureau

WASHINGTON -- There may be more trouble ahead for Custer Battles LLC, a defense contractor with Rhode Island roots that was found liable this month for more than $10 million in damages and penalties for war profiteering in Iraq.

Company cofounders Scott Custer and Michael J. Battles face another federal trial on separate charges that they defrauded the government on a $16.5-million contract for security at Baghdad International Airport.

The company's accusers have foreshadowed a second trial that would again depict former Army officers Custer and Battles in scenes from a modern-day Wild West -- an Iraq fraught with opportunities for fast money and sudden death in the months after the fall of Saddam Hussein in 2003.

Baghdad Airport is where Custer Battles took an advance payment in the summer of 2003 -- a gunnysack stuffed with $2 million in freshly shrink-wrapped "bricks" of U.S. bills that workers briefly tossed, football-style, around the tarmac.

But Robert T. Rhoad, a Custer Battles lawyer, said the company did nothing wrong on the airport contract and in fact won high praise for its performance from the U.S.-led Coalition Provisional Authority in Iraq. Rhoad also held out hope that the judge in the case may yet throw out at least a portion of the March 9 verdict against Custer Battles.

Last year a special inspector general for Iraqi reconstruction reported that the Coalition Provisional Authority had done a poor job of contracting in the chaos of wartime Iraq, losing track of $9 billion in Iraqi funds. A lawyer for the Custer Battles accusers has asserted that the Bush administration has failed to police war-profiteering in Iraq, leaving the burden on a few outnumbered whistleblowers.

But the Pentagon's special inspector general, Stuart W. Bowen Jr., has launched a number of investigations and audits, some of which have turned up potential criminal fraud cases. One U.S. government employee pleaded guilty late last year to offenses related to work in Iraq.

THE EXTENT of profiteering and fraud in Iraq is unclear, however, and difficult -- from the public record available so far -- to compare with the history of thievery in other wars.

The Custer Battles lawsuit concluded this month was the first case of profiteering in this war to go to trial and thus the first to show in any detail how one fraud -- at least in the eyes of one federal jury -- was carried out in Iraq.

In that verdict, the jury accepted the accusers' charge that Custer Battles presented more than 35 separate bills or statements to the Coalition Provisional Authority that were false -- including a number of backdated and forged invoices or leases for goods and services. Each violation was punishable by an $11,000 penalty.

The jury assessed damages for the false claims at $3 million -- the maximum allowed by the rules that U.S. District Court Judge T.S. Ellis III set for the trial. That award was automatically tripled to $9 million under the terms of such lawsuits under the Civil War-vintage False Claims Act.

In addition, the jury awarded $230,000 in back pay and other damages to accuser William D. "Pete" Baldwin, accepting his claim that he had been driven out of his job at Custer Battles because he assisted in investigations of the company that began in Baghdad in October, 2003, only about four months after the company began its contract at the airport.

The judge has yet to determine how much he will award to the whistleblowers in legal fees.

Rhoad, the Custer Battles lawyer, said Judge Ellis has signaled that he has doubts about a key issue for the accusers -- whether the Coalition Provisional Authority, which represented allied nations as well as this country -- was legally an entity of the U.S. government. If the judge finds that it was not, Rhoads said, the basis for the whistleblowers claims on behalf of the U.S. government will be weakened.

Rhoad said the judge's rulings over the next few weeks "could potentially change the verdict."

Rhoad also argued, as the defense team did during the three-week trial, that much of the accusers' evidence included leases and other papers given to the Coalition Provisional Authority after Custer Battles finished work on the contract at issue. That job was to build and equip three camps in Iraq as staging areas for the rapid replacement of Iraq's currency system during the winter of 2003-2004.

Rhoad argued that most of that evidence should have been discounted, "regardless of the underlying allegations about false claims or documents used to support false claims."

ALAN M. GRAYSON, the lawyer for two whistleblowers who sued Custer Battles under the federal False Claims Act, explained their accusations in the airport case this way:

The expected work of screening civilian passengers and freight never materialized in the year after the U.S. invasion because the civilian side of the airport became too dangerous for extensive use.

Custer Battles "exploited" that situation by diverting some of its 138 security workers to its other jobs "yet continuing to submit monthly invoices" for the airport work, according to the complaint by Baldwin, a former Custer Battles manager, and William J. Isakson, a former subcontractor to the company. They sued the company and several subsidiaries, as well as former Rhode Islander Battles, a 35-year-old West Point graduate, New Hampshire native Custer, 37, and one of its officers, Joseph Morris, 45, of Connecticut.

"They were paid for this work guarding civilian flights, but there were no civilian flights," Grayson said. "So they used the airport staff as a sort of slush fund for labor" on other jobs, double- and sometimes triple-billing for the work of the Custer Battles security force, Grayson said.

Rhoad, who has been a friend of Custer's since their undergraduate days at the University of Vermont, said the company did a good job on the work contracted by the Coalition Provisional Authority. When Custer Battles moved employees over the course of the contract, they did so at the request of their customer, the provisional authority, to adapt to the changing conditions in the war zone, according to Rhoad.

JUDGE ELLIS BROKE the Custer Battles Iraqi currency contract and its Baghdad airport contract, both contained in the whistleblowers' initial complaint, into separate cases for trial under the False Claims Act.

According to Taxpayers Against Fraud, a Washington-based advocacy group, the statute dates to President Abraham Lincoln's struggle against profiteers who sold the Union Army "shoddy supplies at inflated prices" during the Civil War.

"Lincoln's Law" let private citizens sue alleged defrauders of the government and keep 50 percent of any recovery from the defendant. That provision was weakened by Congress during World War II. Private false-claims suits under the act were rare until the mid-1980s when a fresh round of defense-spending scandals -- symbolized by notorious reports of a toilet seat billed to the Pentagon at $600 -- spurred fresh amendments to the law.

Sen. Charles Grassley, R-Iowa, led the campaign for stronger incentives for "citizens to uncover and fight fraud" as litigants, according to the anti-fraud group. The amendments signed into law by then-President Ronald Reagan have given rise to lawsuits that have recovered billions since then -- especially in the field of Medicare and other subsidized health-care fraud.

In the Custer Battles cases, whistleblowers Isakson and Baldwin filed their civil suit on behalf of the federal government, accusing the company and its owners of fraudulent schemes to inflate the profits of their work in Iraq by millions.

Grayson said he expects the airport case to go to trial later this year, before Ellis, who sits on the U.S. District Court for the Eastern District of Virginia. The courthouse in Alexandria, across the Potomac from Washington, is where admitted al-Qaida conspirator Zacarias Moussaoui faces a jury's decision about whether to sentence him to death.

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