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IRAQ: Cashing in on Security Contracts

Documents unearthed as part of a whistleblower suit against private security company, Custer Battles, reveal the extent to which the defense contractor is accused of gouging the Coalition Provisional Authority, which governed Iraq following the U.S. invasion of the country in 2003.


by Jason McLureLegal Times
March 4th, 2005

A $33,000 food order in Mosul was billed to the U.S.-led interim government of Iraq at $432,000. Electricity that cost $74,000 was invoiced at $400,000. Even $10 kettles got a 400 percent markup.

Documents unearthed as part of a whistleblower suit against Fairfax, Va.'s Custer Battles reveal for the first time the extent to which the defense contractor is accused of gouging the Coalition Provisional Authority, which governed Iraq following the U.S. invasion of the country in 2003.

Among those documents is a spreadsheet that appears to show the company billing the government nearly $10 million for dozens of items, including food, vehicles, and cooking pots. The total cost to Custer Battles, according to the spreadsheet, was less than $4 million -- a profit margin of 150 percent, far higher than the 25 percent margin allowed under its contract.

For critics of the Bush administration's handling of postwar Iraq, Custer Battles has become something of a symbol of contractor excess during the 14-month period that the Coalition Provisional Authority governed Iraq. The company was able to secure tens of millions of dollars' worth of security and logistical contracts from the CPA -- despite the fact that it didn't even exist until just months before the invasion of Iraq.

Last fall, Custer Battles was suspended from government contracting after Pentagon investigators documented evidence indicating that the company had defrauded the CPA by inflating its costs. The scheme, according to the investigation, involved a series of "sham" companies that were used to produce false invoices and hide the actual costs of items.

Now, much of that evidence is coming to light through the whistleblower suit in the U.S. District Court for the Eastern District of Virginia. Legal Times obtained access to the spreadsheet and hundreds of other previously confidential documents from the government's investigation of Custer Battles. The spreadsheet and other documents were provided to Legal Times by the whistleblowers' lawyers, who obtained the material from Custer Battles as part of the discovery process.

A spokeswoman for Custer Battles declined to comment for this article. But a lawyer representing the company in the whistleblower suit, John Boese of the D.C. office of Fried, Frank, Harris, Shriver & Jacobson, issued a response to a series of detailed questions referencing the documents. In an e-mailed statement, he said that the issues raised "do not demonstrate any type of fraud or wrong-doing by the company or any of its employees, and the company vigorously denies any such conduct or allegations."

In the statement, Boese also maintains that the documents were subject to a court-issued protective order, and thus "we do not believe it is appropriate to comment on the contents of confidential documents."

Alan Grayson, a lawyer for the plaintiffs, disputes that assessment, saying that the defense "had withdrawn the [confidential] designation" on the documents reviewed by Legal Times.

A TENSE MEETING

Among the documents in the files is an account of a tense Oct. 18, 2003, meeting in Baghdad's Green Zone between Custer Battles' two principals -- Scott Custer and Michael Battles -- and CPA officials.

The tension arose over questions about Custer Battles' performance and billing practices in a contract to provide logistical support for U.S. efforts to distribute the new Iraqi currency.

One attendee at that October meeting was Jeffrey Ottenbreit, a consultant for BearingPoint, a company contracted to manage the currency-distribution project.

According to a signed statement Ottenbreit provided to the Defense Criminal Investigative Service, the meeting between Battles, Custer, and CPA officials was combative. "At one point during the contentious discussion," Ottenbreit states, "both [Custer and Battles] stood from their chairs and threatened to walk out of the room as well as pull their company from the project." (Through a BearingPoint spokesman, Ottenbreit declined comment.)

If CPA officials were suspicious of Custer Battles' billings before the meeting, they were even more so after the pair left.

According to an Air Force memo supporting the company's suspension last fall from government contracting, after the meeting "Battles left a spreadsheet labeled 'Iraq Currency Exchange Logistics Support Requirements,' which was discovered by CPA personnel."

The CPA officials couldn't have been pleased with the numbers they found.

Under its contract, Custer Battles was to file invoices with the government for its costs. It was then eligible to be reimbursed for those costs and could receive an additional 25 percent on top of that as profit. The spreadsheet indicated that Custer Battles, by inflating its costs, was reaping a profit roughly six times the allowable amount.

The day after the spreadsheet was discovered, a Sunday, the Defense Department's inspector general's office informed Custer Battles that it would be conducting a review of the company's only other contract with the CPA in Iraq, a $16.8 million project to provide security for Baghdad's airport.

CONTRACTOR AND CANDIDATE

Scott Custer and Michael Battles, both in their 30s at the outset of the invasion of Iraq, had served together in the U.S. Army.

Custer is a former Army Ranger who had worked for Arlington, Va.-based defense contractor Science Applications International Corp. Battles ran unsuccessfully for Congress as a Republican in Rhode Island in 2002 and, according to the record of Custer's interview with the Defense Criminal Investigative Service, is a former Central Intelligence Agency case officer who was -- according to Custer -- "very active in the Republican Party and speaks to individuals he knows at the White House almost daily."

In the fall of 2002, the two founded Custer Battles as a security firm. Within months, President George W. Bush would order U.S. troops into Iraq. Custer Battles was among the first contractors into Baghdad after the fall of Saddam Hussein and, by the end of June 2003, had managed to win the contract to provide security for Baghdad's airport, a contract Custer told investigators was the first time the company had provided actual security for a site.

Two months later, the company bid on and won the contract to support Iraq's currency distribution. The value of the contract, including allowable profit, would eventually be worth approximately $20 million.

To maximize profit from that $20 million, the Air Force suspension memo says, Custer Battles employed a group of "sham companies" to create bogus invoices that vastly overstated the cost of items.

In an interview with government investigators, Scott Custer acknowledged that Custer Battles set up companies in the Cayman Islands named Secure Global Distribution and Mid-East Leasing.

A third company, MT Holdings -- named after the initials of two Custer Battles employees -- was also set up in the Caymans as a holding company for Secure Global and Mid-East Leasing. The offshore companies, Custer told investigators, were designed to limit Custer Battles' liability in the event that its employees were killed or injured in Iraq and to maintain Custer Battles' image as a security contractor by providing a different brand identity for the company when it was providing logistical work.

But several documents -- the company's suspension memorandum from the Air Force, the signed statement from BearingPoint's Ottenbreit, an internal report written in February 2004 by Custer Battles manager Peter Miskovich, and the statements of the two whistleblowers in the current suit -- suggest that Mid-East Leasing and Secure Global were just two of several companies set up to inflate the company's equipment and supply costs.

Custer told investigators he had set up the companies on the advice of Marc Stanislawczyk, an attorney in the D.C. office of Arnold & Porter. Stanislawczyk declined to comment for this article. Stanislawczyk left Arnold & Porter last month to work in the Wilmington, Del., office of pharmaceuticals firm AstraZeneca.

One way the offshore companies were used was in the project involving Iraqi currency. For its work on the project, Custer Battles was advanced the first $3 million of the contract on the condition that it submit invoices reflecting expenditures as they were made.

In reviewing invoices from suppliers submitted by Custer Battles during the fall of 2003, BearingPoint's Ottenbreit told investigators, one receipt in particular stood out.

It was a bill to Custer Battles from Secure Global for leases on trucks, buses and forklifts. That bill showed Secure Global charging Custer Battles rates of $12,500 per month for a single five-ton truck. (The spreadsheet obtained by CPA officials indicates that Custer Battles' actual cost for a five-ton truck was $5,000 per month.)

Ottenbreit also took notice of the fact that Secure Global listed its address as a post office box in Oakton, Va. Ottenbreit said he was unable to locate any reference to the company in an online search. He then searched for the name of the person from Secure Global who signed the invoice for the trucks, buses and forklifts -- and found that she was an employee of Custer Battles.

According to the Air Force suspension letter, Custer Battles created invoices totaling at least $8.5 million in the name of its companies based in Lebanon and the Caribbean. That conclusion is supported by Miskovich's internal report, Ottenbreit's statement to investigators, and court filings of the whistleblowers.

The Air Force noted in its suspension memo last fall that "[Custer Battles] purchased cabins, trucks, and equipment and created false leases between CB and the sham companies, making it appear that the sham companies were leasing the goods to the CPA through CB. The scheme allowed CB to lease the goods to the CPA at prices exceeding the original cost of the goods."

In his interview with government investigators in January 2004, Custer denied inflating supply costs or using the offshore companies to overbill the CPA. When confronted with the invoice from Secure Global, Custer acknowledged that the name on it was that of a woman who had been his personal secretary at Custer Battles.

DOJ DECISIONS

The whistleblower suit that brought the documents to light is being heard by federal Judge T.S. Ellis III in Alexandria, Va. It was filed by a former Custer Battles manager, William Baldwin, and a subcontractor, Robert Isakson, who accuse the company of defrauding the government.

Under the False Claims Act, whistleblowers can file a qui tam suit against a company for bilking the United States. The Justice Department can then choose to join the suit; if successful, the government can collect three times the amount of damages it sustains, plus penalties and fees. The plaintiffs are also eligible for 15 percent to 30 percent of the claim.

In October, the DOJ, without explanation, declined to join the Custer Battles suit, but gave the whistleblowers permission to proceed in the government's name. A Justice Department spokesman declined comment on the case.

Grayson, the whistleblowers' attorney and a partner in McLean, Va.'s Grayson & Kubli, says that the Justice Department declined to join the suit because of uncertainty over whether the CPA was a part of the federal government.

The court is currently considering that question, and Ellis has asked the DOJ to file a brief stating the government's view of the question. On Feb. 25, the Justice Department told the court it would file a brief by April 1.

One senior Pentagon lawyer told Legal Times that a number of other suits have been filed that will turn on this exact question.

Should the court decide that the False Claims Act does not apply to CPA contracts in the Custer Battles case, procurement attorneys say it's unclear how violations of those contracts can be prosecuted in other cases.

"The government has played this both ways," says Steven Schooner, a government contracts expert at George Washington University Law School. "When it's been to the government's advantage to say the CPA was a federal agency, they've said it was a federal agency. When it wasn't, they've said it wasn't."