Military Suspends Firm Accused of Overbilling in Iraq

Times Staff Writer

One of the highest-profile security companies in Iraq has been suspended from doing business with the U.S. government after being accused of overbilling millions of dollars through a series of sham companies.

Custer Battles, a security firm based in Virginia, sent fake bills to the U.S.-led Coalition Provisional Authority that had run Iraq during the U.S. occupation, according to an Air Force memo obtained by The Times.

The company, which provided all security at the Baghdad airport, is also the target of a lawsuit unsealed Friday that accuses employees of systematically bilking U.S. taxpayers and threatening one worker and his 14-year-old son at gunpoint.

The firm, which has a former Republican candidate for Congress as one of its principals, is the latest in a string of companies linked to Republicans that have been accused of wrongdoing in Iraq.


The suspension is believed to be one of the first leveled by the federal government against a company for problems with its operations in Iraq, contracting experts said.

The company is also under investigation by the FBI and the Pentagon inspector general’s Defense Criminal Investigative Services, the memo said. It could not be immediately determined Friday whether those investigations were still underway.

Richard Sauber, a lawyer representing Custer Battles, denied the charges. He blamed a competitor to the company and a disgruntled former employee for making false accusations.

“We believe that the allegations are baseless,” Sauber said. “We have every expectation that we can demonstrate they are meritless.”

Several other former GOP officials have come under investigation in connection with contracts in Iraq. The Pentagon’s inspector general has asked the FBI to investigate a deputy undersecretary of Defense in connection with a police radio contract. A former top Republican official in the Transportation Department was investigated in connection with an airport contract, U.S. officials have said.

Mike Battles, one of the company’s owners, unsuccessfully ran for the House as a Republican from Rhode Island in 2002. He has also contributed to Republican causes and had received campaign contributions from the nation’s top GOP officials.

The Custer Battles case “is corruption at its worst,” said Alan Grayson, a lawyer for the men who filed the lawsuit unsealed Friday, which is separate from the suspension action. “It’s perpetrated by Bush cronies, and it’s protected by the Bush administration.”

Custer Battles was a fledgling firm with no experience in the security industry when it landed a $16-million contract in the spring of 2003 to secure the Baghdad airport after the fall of Saddam Hussein.


The company hired Nepalese Gurkhas to fill out its limited staff and quickly expanded its presence. It won a contract in August 2003 to provide logistical support for a massive currency exchange in which Iraqis turned in trillions of old dinars for the nation’s new currency.

That contract committed the Coalition Provisional Authority to paying for all the company’s costs for setting up centers where the exchanges would take place, plus a 25% markup for overhead and profit, according to the Air Force memo signed by Deputy General Counsel Steven A. Shaw.

Custer Battles then purchased trucks, equipment and housing units to carry out the contract. It created a series of “sham companies” registered in the Cayman Islands and Lebanon, the memo said.

The companies were then used to create false invoices making it appear as though they were leasing the trucks and other equipment to Custer Battles. The scheme inflated the 25% markup allowed under the contract, the memo said.


In October 2003, company representatives accidentally left a spreadsheet in a meeting and it was later discovered by CPA employees. The spreadsheet showed that the currency exchange operation had cost the company $3,738,592, but the CPA was billed $9,801,550 -- a markup of 162%.

In another case, a Custer Battles employee wrote in a report that a $2.7-million invoice was based on “forged leases, inflated invoices and duplication,” the Air Force memo said. In yet another case cited by the memo, Custer Battles billed the government $157,000 to build a helicopter pad that cost $95,000.

The suspension means that no government agency can issue further contracts to Custer Battles, which had grown from a handful of employees to more than 700 during its time in Iraq.

The company can continue to work on its existing contracts, however. It recently ceased operations at the airport after deciding not to bid in a competition to award a new security contract.


In the lawsuit, known as a false claims action, former employee William Baldwin and a Custer Battles subcontractor named Robert Isakson repeated some of the accusations found in the Air Force memo. The false claims action allows citizens to sue contractors on behalf of the federal government to seek damages for fraud.

The false claims complaint said that after Isakson complained about Custer Battles practices, he and his 14-year-old son were held at gunpoint by company employees. The employees then kicked Isakson and his son off the airport base, leaving him to take a taxi through war-torn Fallouja to return to Jordan.

Sauber noted that the Justice Department had declined to participate in the case. The department often decides against participating in cases it believes are weak or without basis.

Grayson, the lawyer for the two whistle-blowers, said Justice Department officials told him that jurisdictional issues, not a lack of evidence, prevented them from prosecuting the case. The Justice Department did not return a request for comment Friday.