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Saturday, October 09, 2004 - Page updated at 12:09 A.M.

Contractor accused of fraud in Iraq

By T. Christian Miller
Los Angeles Times

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WASHINGTON — One of the U.S. security companies operating in Iraq has been suspended from doing business with the U.S. government after being accused of overbilling millions of dollars through a series of sham companies.

Security company Custer Battles sent fake bills to the U.S.-financed Coalition Provisional Authority, which ran Iraq under American occupation, according to a U.S. Air Force memo obtained by the Los Angeles Times.

The company, which provided security at the Baghdad airport, is also the target of a suit unsealed yesterday accusing it of systematically bilking U.S. taxpayers and threatening a worker and his 14-year-old son at gunpoint.

The Air Force suspension is believed to be one of the first leveled by the federal government against a company for problems with its operations in Iraq, contracting experts said.

The company is also under investigation by the FBI and the Pentagon Inspector General's Defense Criminal Investigative Services, the memo said. It could not be immediately determined yesterday whether those investigations were ongoing.

Richard Sauber, a lawyer representing Custer Battles, denied the charges. He blamed a competitor and a disgruntled former employer for making false accusations.

The company's founders are Scott Custer, a former Army Ranger and defense consultant, and former CIA officer Michael Battles, who ran for Congress in Rhode Island in 2002 and was defeated in the Republican primary. The Federal Election Commission fined Battles for misrepresenting campaign contributions.

Battles is a Fox News Channel commentator.

"We believe that the allegations are baseless," Sauber said. "We have every expectation that we can demonstrate they are meritless."

Several other former Republican officials have come under investigation in connection with other Iraq contracts. The Pentagon's inspector general has asked the FBI to look into a deputy undersecretary of defense in connection with a police radio contract. A former top Republican official in the Transportation Department was investigated in connection with an airport contract, U.S. officials have said.

Custer Battles was a newly formed company with no experience in the security industry when it landed one of the first contracts issued in Iraq in the spring of 2003 to secure the airport. The no-bid contract was worth $16 million when it was awarded in the chaos after the fall of Saddam Hussein.
 
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Using Nepalese Ghurkas hired from abroad to fill out its limited staff, the company quickly expanded its presence, winning a contract in August 2003 to supply logistical support for a massive currency exchange in which Iraqis turned in their old dinars for new currency.

That contract committed the Coalition Provisional Authority to paying for all the company's costs for setting up centers where the exchanges would take place, plus a 25 percent markup for overhead and profit, according to the Air Force memo. Custer Battles then created a series of "sham companies" registered in foreign countries, the memo said. The companies were then used to create false invoices making it appear they were leasing trucks and other equipment back to Custer Battles. The scheme had the effect of inflating the 25 percent markup allowed under the contract, the memo said.

In October, company representatives accidentally left a spreadsheet in a meeting that was later discovered by CPA employees. The spreadsheet showed that the currency-exchange operation had cost the company $3,738,592, but the CPA was billed $9,801,550, a markup of 162 percent.

In another case, a Custer Battles employee wrote a report that a $2.7 million invoice was based on "forged leases, inflated invoices and duplication," the Air Force memo said. In yet another case cited by the memo, Custer Battles billed $157,000 to build a helicopter pad that cost the company $95,000.

The suspension means that no government agency can issue further contracts to Custer Battles. However, the company can still continue to work on its existing contracts. The company recently ceased operations at the airport after deciding not to bid on a new security contract.

In the lawsuit, known as a false-claims action, former employee William Baldwin and a Custer Battles subcontractor named Robert Isakson repeated some of the accusations found in the Air Force memo. The false-claims action allows citizens to sue contractors on behalf of the federal government to seek damages for fraud.

The lawsuit says Custer Battles billed the CPA for work that was never done, employees who were never hired and equipment that never arrived. It says Custer Battles took at least one and as many as eight forklifts from Iraqi Airways at the airport, covered their former markings and billed the CPA for leasing them at thousands of dollars per month.

The suit said that after Isakson complained about Custer Battles practices, he was held at gunpoint by company employees along with his 14-year-old son. The employees then kicked Isakson and his son off the airport base.

Alan Grayman, a lawyer for the two whistle-blowers, said Justice Department officials told him that because the CPA was an international organization, the government could not join in the suit.

Justice Department spokesman Mark Corallo said the department does not comment on why it declines to join such suits.

When the government joins such suits, the whistle-blowers win or settle about 95 percent of the time, but only 25 percent of the time when the government passes. Whistle-blowers are entitled to a percentage of the money recovered or paid in fines.

Material from Knight Ridder Newspapers and The Associated Press is included in this report.

Copyright © 2004 The Seattle Times Company

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