IRAQ: Invoices Detail Security Firm's Alleged Fraudulent Billing

Hundreds of pages of documents provide a fuller picture of the allegations at the heart of a lawsuit against private security firm, Custer Battles, which accusers claim operated shell companies that were used to bilk millions of dollars from the Coalitio
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The Washington Post

The invoice lists $12,000-a-month trucks, $5,000-a-month buses and $2,000-a-month forklifts -- all of which a Cayman Islands-based company said Custer Battles LLC leased from it for contract work in Iraq. The total due: $1,394,000.

Fairfax-based Custer Battles submitted a bill to the U.S.-led Coalition Provisional Authority in October 2003, seeking reimbursement for Secure Global Distribution Inc.'s charges and more. Custer Battles also billed for millions in charges from other offshore companies with names like Mid East Leasing, of the Caymans, and CBL, of Lebanon, plus a 25 percent fee for overhead and profit.

Pentagon investigators would later conclude that the three companies were all Custer Battles subsidiaries. And according to a whistle-blower suit moving through federal court in Alexandria, they acted as little more than shells designed to bilk the CPA of money through phony invoices that made it look like Custer Battles was spending more than it did to fulfill a contract in Iraq. By inflating its bills, the whistle-blowers claim, Custer Battles was also able to inflate its profit.

The company denied the charges in court papers. Its lawyer said that the contract was based on fixed fees and that the invoices didn't affect Custer Battles's profit.

Hundreds of pages of documents provided to The Washington Post by the whistle-blowers' lawyers provide a fuller picture of the allegations at the heart of the lawsuit, which is the first involving allegations of fraud by contractors in Iraq to become public. They cover a period in the first months after the U.S. invasion when the fledgling security firm became a key contractor in the government's attempt to restore order in Iraq.

Scott K. Custer, a former Army Ranger, and Michael J. Battles, a former CIA agent and unsuccessful Republican candidate for Congress, founded the firm in 2002. Their break came a year later when the company won a $16.8 million contract to provide security at Baghdad International Airport after Saddam Hussein's fall. Later that year, the company won a $9.8 million contract to provide logistics support as the CPA switched Iraq to a new currency. That contract eventually was worth $21 million.

The Air Force banned Custer Battles from new federal contracts last year, citing evidence of fraud. A lawsuit by two men who worked for Custer Battles in Iraq also was unsealed last year; the Justice Department has declined to join that case.

If the lawsuit succeeds, the government will get back up to three times the initial fraud amount and the whistle-blowers will get a share of the award.

Among the documents provided by the whistle-blowers' attorneys are two invoices for the same item. A helipad cost the company $96,000 when it was purchased through a non-Custer Battles subsidiary. A second invoice shows the company buying a helipad from Laru Ltd., which one of the whistle-blowers said was partly owned by Custer Battles, for $157,000. Custer Battles billed the government for the $157,000, though Laru didn't do the work, Pentagon investigators found.

In addition, a spreadsheet that Custer and Battles allegedly left at a meeting with government investigators shows two columns, "actual cost" and "invoiced" cost. In almost every case, the invoiced costs are substantially higher. For example, generators that cost $74,000 were invoiced for $400,000, and $240,000 for trucks became $600,000 in bills, according to the spreadsheet.

"This is a company that set out right from the beginning to cheat the government. They did it in a way that was recognizable almost immediately. Yet the government paid the invoices," said Alan Grayson, a lawyer for the whistle-blowers.

Custer Battles attorney Richard Sauber denied that the spreadsheet was a company document. He also said that the offshore invoices don't show evidence of fraud because Custer Battles was operating under a contract that provided a set fee, no matter what the costs.

"If they went out there and bought paper clips for a dollar, and ran it through a subsidiary for $100, at the end of the day it wouldn't matter in terms of what Custer Battles was able to charge the CPA," Sauber said.

In the memo awarding the currency-conversion contract to Custer Battles, however, Air Force Maj. Darwin Kirby writes, "The contract type that is most appropriate is time and materials," a reference to a type of contract under which firms are reimbursed for their expenses and given a percentage fee on top of that.

A CPA contracting officer wrote an expert reviewing the case for the government that she had erred by indicating in contract modifications that the costs were fixed. The expert responded that Custer Battles's invoices were submitted under a time-and-materials contract.

Sauber said there was confusion over the type of contract because of disorganization at the CPA, which ran Iraq for a year after the U.S. invasion.

While maintaining the company's innocence on the allegations of fraud, Sauber acknowledged that in its attempts to respond to shifting demands from the CPA, the company may have created documents after the fact. "Did these guys do things based on their inexperience that were stupid? No question," he said.

A Defense Criminal Investigative Service memo reports that an address given for Custer Battles subsidiary Mid East Leasing Inc. turned out to be an abandoned building in Baghdad. Articles of incorporation for a third company that shows up frequently on Custer Battles invoices to the government, CBL, show that the acronym stood for Custer Battles Levant and that Battles was the chairman of the board.

Custer Battles lawyers have argued that the case does not belong in federal court because the firm is alleged to have defrauded the CPA, not the U.S. government, and because Iraqi, not U.S., money was at stake. The Justice Department said in two briefs this spring that U.S. anti-fraud law applies nonetheless.

U.S. District Judge Thomas Selby Ellis III has set a hearing on the matter for tomorrow.

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