US: Security Company on Trial for Fraud

ALEXANDRIA, Va. -- Four years ago, West Point graduate Michael J. Battles was preparing to run for Congress from Rhode Island on his record as a former Army Ranger and foreign operative for the CIA.

Two yearslater, Battles was a defense contractor shuttling in and out of Baghdad, plunged into Wild West scenes of wartime danger and millions of dollars in shrink-wrapped bricks of cash.

Yesterday, Battles, 35, was in federal court here answering civil charges of wartime profiteering. He and codefendants are charged in a whistleblowers' lawsuit with allegedly defrauding the U.S. government of some of the millions paid to their company.

"A terrible injustice has been done," Battles, the cofounder of Middletown-based Custer Battles, said shortly before the trial began. The lawsuit was filed by two other men who had worked with Custer Battles on multimillion-dollar contracts to distribute a new Iraqi currency and to provide security at the Baghdad airport after the fall of Saddam Hussein.

The two, Robert J. Isakson, a former employee of Custer Battles, and William D. "Pete" Baldwin, a former subcontractor, have charged under the Civil War-vintage False Claims Act that the defendants bilked the government out of millions by inflating their expenses and transferring money through shell companies they set up in the Cayman Islands.

Defendants Battles, his founding partner Scott Custer, 37, of Virginia, and their former employee Joseph Morris, 43, of Connecticut, have all denied the charges. Battles has described Isakson as embittered by his firing from Custer Battles and said Baldwin was denied a request to become an equity partner.

Battles also said the whistleblowers have a big stake in their lawsuit. Under one provison of the federal False Claims Act, the whistleblowers and their lawyers stand to collect at least 12 percent of any damages that the jury may award if it finds against Battles and his associates.

One former employee of the U.S.-led group in charge of post-invasion contracts in Iraq has pleaded guilty in an unrelated criminal case of war profiteering and others are under investigation.

One federal inspector general found in a report last year (also not directly related to Custer Battles) that the Coalition Provisional Authority -- the U.S.-led body in charge of contracts for many months after the fall of Saddam in 2003 -- failed to oversee its spending, issued improper contracts and lost track of about $9 billion dollars worth of contracts. But the Custer Battles trial before federal district court Judge T.E. Ellis III is the first to go before a jury.

Yesterday's preliminary proceedings showed a glimpse of what promises to be a colorful and hard-fought trial. During the final minutes of the session, Alan M. Grayson, a lawyer for the whistleblowers, began to describe what he called an effort by the Custer Battles side to pay $50,000 to a witness.

Ellis cut off Grayson and instructed him to use the charge to discredit the witness, if he so chooses. If someone "tried to bribe a witness, you can report it to the U.S. Attorney," the judge said.

"We have, Your Honor," replied Grayson.

Ellis then recessed by reminding Grayson of his admonition "not to try the case in the media," a reference to Grayson's recitation of the charges Sunday night on 60 Minutes.

Defense attorney David Douglass, who was not invited to answer the charge in court, declined a reporter's request for comment later, citing the judge's warnings about speaking to the media.

Partly because of the 60 Minutes show, which Ellis likened to closing arguments for the whistleblowers, selection of nine jurors and alternates took so long that Ellis postponed opening statements until this morning. The judge said at the end of the day that he had asked every member of the jury pool whether they had seen the show.

"Out of 75 people, not one watched it," Ellis said. "I was astonished."

This morning, before the jury was brought into the courtroom to hear opening statements, Douglass told Ellis that Grayson's allegation was "baseless and harmful."

"Your concerns about it being in the press are understandable" Ellis told Douglass. He again warned both sides that "this matter is not to be tried in the press."

He also instructed Grayson to alert the court and the lawyers for Custer Battles if he intended to raise the allegation about the attempted payment of a witness during the trial.

In his initial instructions to the jurors, Ellis explained that they must decide whether the whistleblowers prove their case by a preponderance of the evidence -- a lower standard than the criminal requirement for proof "beyond a reasonable doubt."

The False Claims Act permits whistleblower suits to be filed secretly in order to give government prosecutors a chance to consider seeking related charges. In the case of Custer Battles, the Justice Department decided last year not to prosecute. It gave no explanation.

Isakson and Baldwin filed a lawsuit alleging false claims in connection with more than $16 million in contracts to Custer Battles for the Iraqi currency distribution and the security on the civilian side of Baghdad International Airport.

But because of preliminary rulings that suggest how complicated it was to do business in post-invasion Iraq, the current trial concerns only about $3 million in contracts for the Iraq Currency Exchange ("ICE," as it is also known.)

Partly because the Coalition Provisional Authority drew some funds from other nations and from Iraqi oil revenues, Ellis ruled last year that the ambiguity of the CPA's mandate made it unclear how much of its expenditures were U.S. government money. Thus, he limited the amount of contract money at issue in this trial. There is to be a separate trial later on money connected to the Baghdad airport security contract.

Grayson, the whistleblowers' attorney, said that today will be "a very important day in the trial," featuring what he promised would be "a stemwinder" of an opening statement, plus the testimony of one of his side's key witnesses.

• 174 War & Disaster Profiteers Campaign