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US: Judge rules in Iraq Whistle-Blower Case

A U.S. judge ruled on Monday that a whistle-blower case alleging fraud against Custer Battles, a U.S. security contractor employed in Iraq could go ahead, but excluded any work paid for with Iraqi oil money.

by Sue PlemingReuters
July 11th, 2005

WASHINGTON -- A U.S. judge ruled on Monday that a whistle-blower case alleging fraud against a U.S. security contractor employed in Iraq could go ahead, but excluded any work paid for with Iraqi oil money.

In what is seen as a test case for U.S. companies working in Iraq, the judge left open a key question over the legal status of the U.S.-led occupation authority that paid the contractor and whether it was subject to U.S. law.

The case involves Custer Battles, an upstart security firm based in Rhode Island that had a contract with the U.S.-led Coalition Provisional Authority in 2003 to guard Baghdad Airport and a later logistical deal.

Former associates of the company sued under the False Claims Act that it defrauded the U.S. government of millions, a claim Custer Battles strongly denies.

In issuing his opinion, Judge T.S. Ellis from U.S. District Court in Alexandria, Virginia, denied a motion by Custer Battles to dismiss the case on the grounds that the money involved was not drawn from U.S. funds.

The case could set an important precedent as it may mean companies doing business in Iraq can be charged with contracting fraud under U.S. law -- even though it was during the occupation. If successful, the suit could recover triple damages for the government and rewards for whistle-blowers.

A spokesman for Custer Battles said the company disagreed with the ruling but looked forward to clearing up the issue.

"The company enthusiastically welcomes the opportunity to finally have a forum to prove the company did nothing wrong and show that the relators, disgruntled former employees, conspired against Custer Battles," spokesman Jake Dye said.

The company, named after its founders, military veterans Scott Custer and Michael Battles, was barred by the Pentagon from future contracts last year because of evidence of fraud.

Alan Grayson, a lawyer for the whistle-blowers, said he was confident their case would succeed.

"For us, this ruling is good news. It is clear that we will be able to establish these claims were fraudulent and these people will be held accountable," he added.

IRAQI OIL MONEY

Judge Ellis said it appeared Custer Battles liability would be limited to work paid for from "seized and vested Iraqi funds" and would not be extended to money paid out of the Development Fund for Iraq.

The Development Fund for Iraq, or DFI, succeeded the U.N.'s oil-for-food program and is made up of Iraqi oil sales, frozen assets from foreign governments and surplus from the U.N. oil-for-food plan.

More than $1.7 billion in these Iraqi funds were, for example, paid to U.S. company Halliburton to bring fuel to Iraq. An unclear number of other U.S. companies were also paid from these funds.

The CPA also disbursed more than a billion dollars in funds seized by the U.S. military, as well as "vested" funds, drawn, for example, from bank accounts held by Iraqis abroad.

Procurement expert Prof. Steven Schooner said any U.S. company paid solely with DFI funds should feel confident they would be excluded from future False Claims Act cases, but those paid for by appropriated U.S. funds were not.

"The only group of firms who can breathe a sigh of relief based on this opinion are those who are confident that their work has been funded through the DFI," he said, adding that he was surprised the judge left open the CPA's legal status.

Discerning the status of the CPA was not an easy task, the judge said, even though it was "tempting to conclude that the CPA was merely an alter-ego, a tool, or an instrumentality of the United States."

The Justice Department has not joined the Custer Battles suit and the judge said it was reluctant to respond to requests over whether the CPA was a U.S. instrument.

"The government's reluctance in this regard is reminiscent of the guest invited to dinner who gladly accepts the invitation, but once she arrives and sits down to eat, proceeds to complain about the menu," a footnote in the ruling said.

The Justice Department declined comment on the ruling until it had time to review it.





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