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<H1>Politically connected firm has defrauded millions in Iraqi suit </H1><!--End Headline--><BR><!--Start Byline-->
<ADDRESS>Seth Borenstein of Knight Ridder Newspapers</ADDRESS><!--End Byline-->
<P><!--Start Story-->WASHINGTON -- A politically connected start-up firm,
awarded a no-bid contract to provide security for Baghdad's airport, defrauded
U.S. taxpayers of tens of millions of dollars, two top former workers charge in
a lawsuit unsealed Friday.
<P>The Bush administration decided not to join the whistleblowers' civil suit
alleging fraud against the company, run by a former Republican congressional
candidate. The whistleblowers' attorney said a Justice Department lawyer told
him the reason was that the alleged victim was the U.S.-financed and led
Coalition Provisional Authority, not the U.S. government.
<P>Justice Department spokesman Mark Corallo said the department didn't comment
on why it declined to join such suits.
<P>It's unusual for the Justice Department to decline to join a suit that has a
load of documents and when criminal prosecution is likely, said Patrick Burns, a
spokesman for Taxpayers Against Fraud, a group that monitors citizen suits.
<P>Sept. 30, the Defense Department put the firm, Custer Battles LLC of Fairfax,
Va., on a list that bans it from getting federal contracts, citing "adequate
evidence of the commission of fraud, antitrust violations, embezzlement, theft,
forgery, bribery, false statements or any other offenses indicating a lack of
business integrity."
<P>The two whistleblowers said they'd been in contact with Justice and Defense
Department investigators about an ongoing criminal investigation. Both agencies
said they didn't comment on or confirm the existence of ongoing investigations.
<P>"We don't think the allegations have any merit," Custer Battles attorney
Richard Sauber said late Friday. He blamed them on "a disgruntled employee and a
competitor" and said the government's not joining the case was a sign of "no
credible evidence." He said Custer Battles wasn't given a chance to explain what
happened before the Defense Department suspended it and that the firm disputed
the charges.
<P>The whistleblowers -- Robert J. Isakson, a former FBI agent who investigated
white-collar crime and was managing director for a Custer Battles partner, and
W.D. "Pete" Baldwin, Custer Battles' former in-country manager -- charged that
Custer Battles set up four shell companies in the Cayman Islands, Beirut,
Lebanon and Cyprus to help inflate bills that were passed on to taxpayers.
<P>"It's a crying shame for somebody to go into fraud against the United States
in the middle of a war," Isakson told Knight Ridder on Friday.
<P>Experts in contracting said the firm had little business and few employees
until it got the Iraq contract in 2003, then it exploded into more than $100
million a year in revenues. Its founders are Scott Custer, a former Army Ranger
and defense consultant, and former CIA officer Michael Battles, who ran for
Congress from Rhode Island in 2002 as a Republican.
<P>
<P>
<P>Even though it was a new company, Custer Battles got a no-bid $16.8 million
contract on July 1, 2003, to secure Baghdad's airport, according to the CPA's
inspector general. The contract was cost-plus, meaning the firm passes along all
its costs, plus a percentage profit.
<P>Isakson and Baldwin said -- and provided lease documents as proof -- that
Custer Battles set up shell companies to inflate the costs of cabins, trucks and
other items to get more money from the government.
<P>Isakson, at the time the managing director for Custer Battles' partner DRC
Inc., helped Custer Battles set up operations in Iraq. When he told the company
that a cost-plus contract wouldn't bring much profit in a war zone because such
contracts generally are capped at around 5 percent, he said, the firm's
officials told him they planned to form shell companies and buy or lease
products from them to Custer Battles at higher prices.
<P>Isakson said he was isolated after he objected. In July 2003, when he'd
finished setting up the company's camp at the airport, he said, two men armed
with submachine guns, whom he's identified as top company officials, detained
him, his 13-year-old-son and his brother. He said they took his money,
identification and gun, and left them on their own to get out of war-torn Iraq.
<P>Days after Isakson left, Baldwin showed up and soon was hired to be Custer
Battles' in-country manager.
<P>"It was quite a nightmare," Baldwin said in a phone interview from Baghdad,
where he started his own firm after quitting Custer Battles last March.
<P>Baldwin said setting up shell companies in themselves wasn't wrong, but that
inflating prices and telling the government that Custer Battles couldn't get
receipts to justify the higher prices was, and that he refused to do it.
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