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Custer Battles Royale

Posted by David Phinney on March 10th, 2006

Our man in DC, David Phinney, has been covering the upstart private security contractor Custer Battles since long before the mainstream media had a clue who they were. Now the company, which has made millions in taxpayer money in Iraq, has been found guilty of federal contract fraud amounting to nearly $3 million. The firm was ordered pay nearly $10 million in restitution.

David has been at the trial in recent weeks, and sends us this post-verdict dispatch:

Scott Custer and Michael Battles discovered contracting business to be so good in Iraq for their new private security firm that they soon paid themselves bonuses between $3 million to $4 million in January 2004.

One month later company managers fired off internal memos warning the two entrepreneurs that the firm was regularly charging for goods and services never delivered or, if they were, at freakishly inflated prices.

Thatís just one of the tasty items to come out of the three-week trial that found their company, aptly named Custer Battles, liable for massive contract fraud while working for the Coalition Provisional Authority after the March 2003 invasion On Thursday, a federal jury in Alexandria, Va., determined that Custer Battles must now shell out more than $10 million in penalties and damages.

"What they did is treason," claims attorney Alan Grayson, the lead attorney for two former Custer Battles business associates who filed the fraud suit more than two years ago. "There's no other word for it."

The $10 million judgment addresses only part of the complaint filed by the two whistleblowers, Robert Isakson and William Baldwin, which accuses Custer Battles of orchestrating a sweeping swindling scheme on Iraq contracts with the use of bogus invoices, forgery and shell companies in the Cayman Islands to fraudulently pump up their billings.

Thursday's verdict rules on a CPA contract to protect the multi-billion currency exchange program that replaced money used by Saddam Hussein's regime with new Iraqi dinars. A second trial is expected on a $16 million security contract for Baghdad's airport. Damages for the airport contract could reach $40 million or more if the company is found of wrongdoing.

During the three-week trial, Grayson was able to tease out the tale of the $3-million-plus bonuses.

"On January 2nd, 2004, you took a bonus of $3 million out of the company, did you not?" Grayson asked Michael Battles as he sat on the witness stand.

"I didn't take a bonus necessarily, but I took a draw," Battles, a 2002 Republican candidate for Congress in Rhode Island, responded curtly.

Grayson: "What's a draw?"

Battles: "A draw is a disbursement of funds to the principals.... And I was happy to say that, yes, we were successful enough that I took a $3 million draw."

At one point Battles attempted to deflect any responsibility in the management of his company by insisting he was largely involved with business development and "strategic initiatives." He rarely took a hands-on executive role, he said.

"One thing I learned as lieutenant is that the secret to successful leadership is to surround yourself with people smarter than you are," he said.

Later, Battles shared another lesson: "In retrospect, one of the things I've learned is don't put your name on your company,"

Meanwhile, it looks as though Isakson and Baldwin will be counting their money. Individuals are allowed to sue on behalf of the government when they have knowledge that the government is being defrauded. They may receive up to 30 percent of the money paid by Custer Battles.

Those not counting their money will be the Iraqi people. Much of the money paid to Custer Battles was from seized Iraqi assets. Judge T. S. Ellis III, of the Federal District Court in Alexandria, Va., had ruled early in the trial preliminary proceedings that the False Claims Act applies only to bills paid directly from the American treasury.