US: Whistleblower suit against Custer Battles can proceed

Two whistleblowers who allege that a Fairfax-based contractor cheated taxpayers out of tens of millions of dollars on reconstruction projects in Iraq can proceed with their lawsuit, a judge has ruled.

But parts of the ruling could have negative consequences for those who file similar claims against other contractors, according to a lawyer for the whistleblowers.

Two former employees of the security firm Custer Battles, Robert Isakson and William Baldwin, filed suit in federal court against their former employer under a law that allows whistleblowers to collect a portion of the proceeds when they help uncover a fraud against the government.

The two allege massive fraud by Custer Battles on $30 million in contracts the company received to provide security at Baghdad Airport and to provide security and support on a project to replace the old Iraqi currency in the months following the ouster of Saddam Hussein's regime.

Custer Battles, which was formed by former Army Rangers Scott Custer and Mike Battles, sought dismissal of the lawsuit. While the firm denies any wrongdoing, it had argued that even if the whistleblowers' charges were true, it was not the U.S. government that was defrauded but the Coalition Provisional Authority, which governed the occupied Iraq until sovereignty was transferred to an interim government.

A key question in the case had been whether the CPA was a part of the U.S. government or an independent entity.

Judge T.S. Ellis III, who issued his ruling late Friday in U.S. District Court in Alexandria, wrote that the CPA's origins in 2003 were murky. He also chided the Justice Department for its reluctance to weigh in on the issue.

Government lawyers, after repeated prodding from Ellis, eventually argued that the CPA should be considered a U.S. entity only for the purposes of the whistleblower law.

Ellis wrote that the government's stance is "reminiscent of the guest invited to dinner ... who proceeds to complain about the menu."

As it turns out, Ellis based his ruling less on the status of the CPA and more on the status of the money used to pay Custer Battles.

When the CPA used money that was seized from the old Iraqi regime, those payments are eligible for a whistleblower claim because international law generally recognizes that an occupying force claims title to seized funds.

Payments made from a pot of money called the Development Fund for Iraq, however, are not subject to the whistleblower law because the DFI fund was established by a United Nations resolution and the funds there never vested in the U.S. Treasury.

Alan Grayson, a lawyer for the whistleblowers, said the ruling is a good one for his clients because most of the money paid to Custer Battles - including an initial $2 million payment in shrink-wrapped blocks of $100 bills - came from seized funds and is therefore subject to recovery.

"The ruling is good for us because it means we can use this law to attack this war profiteering and remedy some of the mistakes made by the Bush administration" early in the occupation, Grayson said.

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• 23 Private Security
• 124 War & Disaster Profiteering
• 185 Corruption