IRAQ: U.S. Contracting Firm Accused of Bilking Millions

 His career in Baghdad was brief. And it ended badly.

On a blistering July afternoon, three MP5 submachine guns were pointed at Alabama businessman Robert Isakson inside the fortified Green Zone of lawless Baghdad. The men carrying the weapons wanted his money and his security pass.

As Isakson tells it, they also wanted his guns, leaving him unarmed in a mess of a country and banned from its safest haven.

"We were defenseless," says the former cop and FBI agent from Mobile. He had come to Iraq to help rebuild the devastated country, accompanied by his 14-year-old son, Bobby. Now, after less than a month, they were being expelled at gunpoint.

By Americans.

The gunmen and Isakson all worked for Custer Battles LLC, a Rhode Island-based contracting firm now mired in lawsuits and a criminal investigation by the Pentagon. Isakson claims company employees ordered him out because he refused to help defraud the U.S. government.

It is one allegation on a long list.

Custer Battles security guards have also been accused of firing at unarmed civilians. They have been accused of crushing a car filled with Iraqi children and adults. They have been accused of unleashing a hail of bullets in a Baghdad hotel, only to discover, when the dust literally settled, that they had been shooting at each other.

The company is under investigation by the Department of Defense for allegedly overcharging the government millions by making up invoices for work never done, equipment never received, and guards who didn't exist.

In September 2004, the company was banned from receiving government contracts after Air Force investigators determined it "conspired to defraud the CPA," the Coalition Provisional Authority.

Isakson and William "Pete" Baldwin, the former Iraq country manager for Custer Battles, filed a federal whistle-blower suit last year, accusing the company of war profiteering and defrauding the government of at least $50 million.

The company rejects those claims. "Custer Battles strongly denies that any of its corporate management or officers knowingly engaged in any improper conduct," the firm said, responding to a list of detailed questions e-mailed by The Associated Press. The suit, it says, is the work of disgruntled employees.

Isakson has spent three decades cleaning up natural and man-made disasters, from hurricanes to Somalia, and he says Custer Battles is a disaster of a different sort.

"I've never seen U.S. contractors do something like this," he says. "And our soldiers are out there being killed while it's going on. And so are our fellow contractors."

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Scott Custer and Michael Battles got their first government contract by sheer bravado. Sure, they could provide armed guards and security screeners at Baghdad International Airport. Absolutely, they could transport equipment and vehicles there. Sure, they could do it all in three weeks.

No matter that they had no experience. No matter that other established Pentagon contractors said the deadline was impossible. No matter that this was Iraq, just after the devastated country had fallen to invading coalition forces, and no one, nowhere in this desert had any idea what was going on, or how to get anything done.

But the CPA, mandated to run Iraq on an interim basis, wanted the airport open pronto, as proof to the Iraqi people - who hadn't seen it up and running, or been able to travel from it for years - that freedom had indeed arrived.

Calling themselves Custer Battles, the ex-Army Rangers formed a limited liability corporation before the invasion and let it be known in Washington, D.C., that they were looking to snap up rebuilding contracts once the fighting stopped.

Battles, who ran unsuccessfully for Congress in 2002 as a Republican from Rhode Island, was a GOP campaign contributor and a former CIA case worker who claimed White House connections.

Mutual friends introduced the entrepreneurs to Isakson, an Alabama businessman specializing in wartime and disaster-relief contracts. Less than a month after Isakson and Custer and Battles secured the $16.8 million airport contract, Isakson was forced to leave.

Custer Battles is one of at least 60 private firms, collectively employing more than 20,000, living in a war zone. They have their own arms, their own vehicles, their own body armor. Some even have their own helicopters. Their security ranks include ex-Special Forces members and an assortment of aging warriors who believe they can still laugh at death.

At its apex, Custer Battles employed more than 700 employees in Iraq. It parlayed that single contract into eight contracts, worth at least $100 million.

"Let me tell you this," says Isakson, leaning back in his chair, behind a big desk in his Mobile, Ala., office. He loves to spin a good war yarn, weaving in snippets of world travels, dignitaries he's met, and his personal relationship with God.

But he can also get right to the point. "It's a screaming shame for people who have been in the intelligence community, and served in the military, to go to a war zone to do a job for their country, and end up stealing," he says.

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Custer Battles gained a certain reputation in Iraq.

"Probably as gunslingers," a retired lieutenant colonel working for the firm told Chicago public radio last year. For security reasons, he gave his name only as Hank.

He described a Baghdad hotel gunfight that erupted not long after Custer Battles security agents landed. It was started by a rocket-propelled grenade attack, or that's what the men thought they heard. When the smoke cleared, the guards - who'd leaned out windows and fired more than 3,000 rounds in the middle of a residential neighborhood - realized they had been shooting at each other.

"Opening-day jitters," said Hank.

Earlier this year, four former employees, all military veterans, said they quit after witnessing Custer Battles security escorts shooting indiscriminately at civilians, including gunning down a teenager walking along a road. The men also said guards in a truck drove over a car containing children and adults while trying to make their way through a traffic jam.

Custer Battles found "no evidence" to support the claims, the company responded in its e-mail to the AP. "These stories were fabricated."

The company's financial exploits, according to the military memo and the whistle-blower suit, included fake invoices, shell companies and forgery.

The Air Force investigated a $21 million contract awarded in August 2003 to provide security for the CPA and its massive effort to exchange near-worthless Iraqi money - which featured portraits of Saddam Hussein - for 2,400 tons of new, stable currency that didn't carry the deposed dictator's face.

It was a dangerous undertaking. Convoys trucking $4 billion worth of Iraqi cash had to deliver it to three distribution centers on unsafe roads in a country engulfed by chaos. Custer Battles was to provide support - from trucks to armed guards to temporary housing for those handing out the money to citizens.

But CPA officials soon complained that promised trucks never showed up. Others broke down. A convoy carrying prefabricated cabins got lost for a week, its cargo ending up scattered across the desert.

Pete Baldwin was in charge of this project and all others in Iraq. He, too, complained - first to his Custer Battles bosses, then to the military, and finally to Pentagon investigators and the FBI.

Baldwin's ultimate concerns went beyond broken-down trucks and wayward convoys.

He accused his employers of fraud. He said the owners - and other company officials - concocted a scheme to overcharge the coalition by running Custer Battles invoices through offshore companies, which in turn jacked-up the prices.

The companies were really "shells" owned by Custer Battles, Baldwin said. And he refused, in several memos, to sign off on the "fake" invoices.

Isakson also said he was recruited to participate in such schemes. When he refused, he claims Custer Battles employees held him at gunpoint with his 14-year-old son and took their security passes, his weapons and other property. Then, Isakson says, they were thrown out of the secured Green Zone in Baghdad.

Isakson said he hightailed it across northern Iraq to Jordan, driving his SUV at 120 mph.

The company denies the allegations, and says Isakson's decision to leave was his own.

Baldwin, in a phone interview from Iraq, said he went to military officials in November 2003 and said, "There's a problem here."

Custer Battles had ignored admonitions that its billing practices constituted fraud, Baldwin said. He told Defense Criminal Investigation Service officials that Custer Battles was using forged and fake invoices, and was billing the coalition for services it never provided, including a nonexistent security detail for the caravan that got lost.

Since then, Baldwin said he has been interviewed by FBI agents and DCIS investigators, who are conducting a joint investigation of the company.

The Pentagon and the FBI declined comment.

In their suit, Baldwin and Isakson also name as defendants companies owned by Custer Battles in the Cayman Islands, Cyprus and Lebanon, as well as foreign business associates. The Air Force memo also names those firms, calling them "sham companies."

The overall operation, the military said, "fraudulently increased profits by inflating its claimed costs. CB (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 memo cites a spreadsheet entitled "Iraq Currency Exchange Logistics Support Requirements." It had been accidentally left behind by Custer Battles employees leaving a tense meeting with CPA officials who were questioning bills submitted by the contractor.

The spreadsheet included line items of the currency exchange contract. It showed Custer Battles had charged more than $9.8 million for work that actually cost the company about $3.7 million - a markup of more than 162 percent, the memo said. Under the terms of its contract, Custer Battles was allowed to charge no more than 25 percent profit.

Also, the memo said, a December 2003 invoice charged the coalition $157,000 for building a helicopter pad in the northern Iraqi city of Mosul. The actual cost to Custer Battles was $95,000, the memo said.

One of the most astounding allegations in the whistle-blower's suit: At the airport, Custer Battles took forklifts abandoned by Iraqi Airways, painted them to cover the airline's name, and then charged the coalition thousands of dollars on fake invoices, claiming it was "leasing" the equipment.

Franklin Willis, a senior official with the CPA, testified in February before a U.S. Senate committee investigating waste and inefficiency during the coalition's 13-month existence. He used Custer Battles as an example of both.

He described Iraq as the "Wild West," a place where cash and chaos were everywhere. More than $3 billion - in new, shrink-wrapped $100 bills - had been confiscated by coalition forces searching Hussein palaces and elsewhere. It was stored in a vault in the basement of coalition headquarters, Willis said.

The money was simply handed out to eager contractors converging on Baghdad. "We called Mike Battles in and said, 'Bring a bag,'" Willis told the senators. Coalition officials filled a duffel with $2 million, which Custer Battles used as startup capital for the airport contract because the company had no funds of its own.

Willis, who served in the state and the transportation departments under President Reagan and worked for the CPA as an aviation and communications adviser, said the firm continued to collect money on the contract, even though the decision to open the airport was rescinded for security reasons, and it never accepted scheduled civilian traffic during the life of the CPA.

"Custer Battles interpreted their obligations solely by themselves and continued collecting on the $16 million," Willis testified. "They refused to coordinate with Skylink, the airport manager, and became an entity unto themselves at the airport."

For five months, Willis said, he tried to nail down what the money was being spent on because "the reason for the Custer Battles contract had disappeared."

But Willis kept getting sent on other assignments, and the CPA was overwhelmed.

In an interview with The Associated Press, Willis said the CPA was in over its head from the beginning. It didn't have enough people, it didn't have enough security, and it didn't have enough time to keep track of billions awarded to private companies.

"The contract process was a joke," Willis said.

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On April 1, the whistle-blower lawsuit got a boost from the Justice Department. It filed a brief saying the CPA, which relinquished power last June to an interim Iraqi government, was subject to U.S. law. Lawyers for Custer Battles had contended American law had no jurisdiction over moneys spent by the coalition.

The suit was filed under the False Claims Act, which allows citizens to sue on behalf of the government when they suspect fraud in federal contracting. The plaintiffs, Baldwin and Isakson, may receive up to 30 percent of any judgment.

Baldwin is back in Iraq, working on his own as a private contractor. He is supervising the building of an outpost in Fallujah for the Iraqi Army.

"There's a group of us who are here for the right reasons. We're here to make a living, and we owe it to Iraq to rebuild the country," he said.

• 174 War & Disaster Profiteers Campaign