Spearheaded by a former CIA agent and a retired Army Ranger, Custer Battles LLC arrived in Iraq with more moxie than money, and the young firm's success in winning millions of dollars in contracts to provide security at the Baghdad airport captivated the national press.
Now the Virginia-based international security firm that has claimed to have employed more than 1,300 people in Iraq finds itself in a public relations meltdown.
Accusations contained in a pair of lawsuits by Mobile-based disaster services firm DRC Inc., and its manager and co-owner, Bob Isakson, have put Custer Battles in the crosshairs of a federal investigation into its billings to the Coalition Provisional Authority, and in the pages of some of the country's leading newspapers.
Those lawsuits, as well as company memos made public by DRC's attorneys, describe a host of schemes said to have been employed by Custer Battles to defraud the coalition authority.
Among other activities, the company forged invoices and used offshore companies to create sham transactions, according to the court filings. Custer Battles did so to create records showing its costs were far higher than they actually were, then using those records to justify its bills to the coalition authority, DRC contends.
On Sept. 30, the company formed by Mike Battles and Scott Custer suffered the ignominious distinction of being blacklisted by the federal government.
In placing Custer Battles on the list of contractors forbidden to receive federal contracts, the U.S. Air Force cited evidence of "fraud, antitrust violations, embezzlement, theft, forgery, bribery, false statements or any other offenses indicating a lack of business integrity."
In a posting on the company Web site last month, Custer Battles pledged that it would be cleared of the charges that the company blamed on "baseless allegations" brought by DRC.
As recently as August, Custer Battles was the subject of a largely positive front page article in the Wall Street Journal.
Previous stories, in Fortune and other national publications, told of the firm's seat-of-the-pants quest to compete against much larger, more established companies to win the Baghdad airport contract.
These days, the news hasn't been good for Custer Battles.
Isakson said Thursday night that he and others whom he declined to identify were interviewed by the FBI in Mobile as recently as this week.
"I talked to them yesterday," he said. "They're hard at it -- the FBI and the Department of Defense."
The FBI has a policy of not commenting on its investigations. A recent court filing by Custer Battles in U.S. District Court in Mobile, however, refers to an earlier FBI report of an interview with Isakson.
Two weeks ago, the New York Times published a front-page story detailing findings from internal Custer Battles memos written by a company manager, Peter Miskovich. The memos were provided to the Times by lawyers for DRC, the paper reported.
The memos described a host of improprieties in the company's charges to the American-led coalition that governed Iraq until the United States turned that role over to the Iraqis in June.
Among the findings presented in the memos:
That Custer Battles billed the coalition authority for the use of equipment that it had stolen, painted over and claimed to be leasing.
That the company substantially padded its bills, in part by using "sham" offshore companies. In one case, the firm charged the coalition $250,000 for a helicopter pad that cost it $95,000.
That the firm submitted a substantial number of forged invoices, including some related to the helicopter pad.
In his summary, Miskovich wrote that there were "enormous discrepancies and irregularities that lend themselves to criminal fraud."
The Times quoted company officials stating that Miskovich -- who remains with the company -- now feels that he overstated the seriousness of the issues.
Most of the problems cited in his memos were an understandable result of the confusion of being in a war zone, not fraud, and the coalition authority was not overcharged, said John T. Boese, a Washington, D.C., attorney who represents Custer Battles.
"This was a war situation. We're sitting in Virginia or Mobile, and we're making judgments here. If we need something, we go down the street and buy it," Boese said Friday in a telephone interview.
"(Baghdad) was an impossible situation, and they did a remarkable job just getting it done," Boese said.
"The company believes very strongly that they did not over-bill anyone," he said.
The internal memos -- also provided to the Mobile Register by a lawyer for DRC -- were based to a considerable degree on e-mails from former Point Clear resident Pete Baldwin, an associate of Isakson's who worked with DRC and Custer Battles in Iraq.
In those e-mails to Custer Battles officials, which were attached to the memos, Baldwin described in detail the activities he believed involved criminal acts.
Firms part ways
DRC, which focuses on post-storm cleanup contracts and security work in war zones, is largely run by Isakson, a former FBI agent. His partner is Mobile lawyer and businessman Tommy Marr.
In 2003, DRC became a subcontractor of sorts on a Custer Battles contract to provide security and other services at the Baghdad airport seized after American troops invaded Iraq.
By all accounts, DRC and Custer Battles suffered a nasty parting of ways early this year.
In a posting on its Web site last month that was intended to deflect growing criticism of its business practices, Custer Battles stated that its business relationship with DRC "soured because of DRC's poor contract performance."
Isakson, Baldwin and DRC have made their accusations "solely as a last-ditch effort to win a competitive advantage" over Custer Battles in winning contracts in Iraq, the company asserted.
In September, an attorney for Custer Battles, Ann Marie Carney, told the Mobile Register that the accusations in a DRC lawsuit brought in Baldwin County were "ridiculous."
Her comment was included in a September story about that lawsuit, which has since been moved to federal court in Mobile.
In that lawsuit, Isakson claims that he and his 14-year-old son were kidnapped at gunpoint by Custer Battles officials, led from the safe confines of the airport complex and forced to flee to Jordan through some of the most dangerous areas of Iraq.
DRC is demanding compensation from Custer Battles for about $10 million it claims to be due for services rendered on the Baghdad contract.
That sum includes costs incurred by DRC when it "recruited, provisioned and leased over 50 ex-British Army Gurkha soldiers from the country of Nepal, transported these men to Iraq and leased them to Custer Battles" to provide security at the Iraqi airport, according to the court filing.
In a previous interview, Isakson described the Himalayan fighting men from the tiny country of Nepal as "the most fearless warriors on Earth."
Also this summer, DRC, Isakson and Baldwin filed a whistleblower lawsuit against Custer Battles under what's known as the federal False Claims Act. The plaintiffs alleged that Custer Battles defrauded the coalition authority out of tens of millions of dollars.
In such cases, plaintiffs file sealed lawsuits against companies they accuse of defrauding the government. If successful, plaintiffs can receive up to 30 percent of funds collected by the government as a result of the cases.
False claims lawsuits remain sealed pending a decision by the government to join in the cases. On Oct. 8, DRC's whistleblower case was unsealed, with the federal government deciding not to participate -- a decision that ordinarily does not bode well for such cases.
The U.S. Justice Department elected not to join with DRC because the alleged fraud was against the coalition authority, which while heavily funded by the United States, was not in itself a federal agency, said a Virginia-based lawyer for DRC.
Boese, who specializes in defending false claims lawsuits, said he expects the case to be dismissed, for the very reasons the Justice Department declined to participate.
On its Web site, Custer Battles stated that the government's decision not to join the lawsuit reflects that the federal government "has found no credible evidence" that the company committed fraud.
The unsealing of the case led to a spate of stories in the national media, including New York Times, Los Angeles Times and Associated Press articles detailing the accusations against Custer Battles.
Isakson said Thursday night that Custer Battles' actions on the Iraq work are "a disgrace" that "makes you want to throw up."
DRC, he said, remains active in Iraq, and recently entered into a one-year, $30 million contract to provide security for a private firm that is building cellular telephone towers in Iraq.
To secure the telephone towers, DRC has hired more than a thousand people, including Gurkhas and Iraqis, Isakson said.
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