"Custer Battles: A Case Study in Postwar Chaos"

Saturday, March 12, 2005

UNDER FIRE: THE REBUILDING OF IRAQ. FIRST IN A SERIES OF OCCASIONAL STORIES.
A Case Study in Postwar Chaos
The dealings of coalition officials in Iraq and a contractor now accused of
fraud illustrate what went wrong in early rebuilding efforts. 
By T. Christian Miller
The Los Angeles (CA) Times


WASHINGTON - Mike Battles needed money fast. It was June 2003 and his
cash-starved 
company had just won a contract to guard the Baghdad airport.

Battles turned to a lender that had lots of cash and few questions about how
it 
would be spent: the U.S.-led coalition in charge of Iraq.

As Battles later told criminal investigators, he descended into a vault in
the 
basement of one of Saddam Hussein's former palaces, where a U.S. government 
employee handed him $2 million in $100 bills and a handwritten receipt.

Battles "was informed that the contracting process would catch up" later to 
account for the money, according to a statement he gave investigators.

By the time it did, the adventures of his fledgling security company, Custer

Battles, had become a case study in what had gone wrong in the early days of
the 
U.S. effort to rebuild Iraq, not least the haphazard and often ineffective
U.S. 
oversight of the projects.

Today, Battles and his partner, Scott Custer, are facing a criminal
investigation, 
lawsuits by former employees and a federal order suspending them from new 
government business because of allegations of fraud.

Neither Custer nor Battles responded to requests for interviews made through
their 
attorney. However, in court records and interviews with criminal
investigators, 
the two men have denied any wrongdoing.

They have blamed the accusations on disgruntled employees who were fired; on

former employees who now compete with Custer Battles for security work in
Iraq; 
and on government officials who harbor grudges against the company.

Court records, internal company memos, interviews with current and former 
employees and government investigators, and confidential documents from a
Pentagon 
criminal investigation reviewed by The Times depict a company that ran into 
trouble almost from the moment it hit the ground in Iraq.

Company employees allegedly forged invoices, clashed with government
officials and 
tried to dodge taxes. The company is accused of missing deadlines, providing

shoddy equipment, failing to deliver services and botching routine security 
inspections, the records and interviews show.

Along the way, two of its guards allegedly moved to attack some Iraqi
teenagers. 
And U.S. officials were startled to discover that Custer Battles was also 
operating a dog kennel and a catering service on airport grounds, according
to 
interviews.

Just as worrisome as the allegations, perhaps, has been the U.S.
government's 
response.

Beginning shortly after Custer Battles won its Baghdad airport contract, at
least 
five senior U.S. government officials or consultants came to suspect
wrongdoing by 
the firm or its employees, records show. Yet over the next 14 months, the
company 
continued to win new government business, and even today holds a key
contract in 
the U.S. program to equip and arm Iraq's new security forces.

Not until September 2004, when the U.S. Air Force acted to prevent the
company 
from receiving any new federal contracts, did Custer Battles' explosive
growth 
slow.

In most cases, high turnover and enormous workloads among government
officials 
prevented them from taking action against a company that repeatedly
deflected 
attempts to examine its operations, the records and interviews show. It was
a 
messy situation easily exploited.

"They were the only constant in a sea of change," said Frank Willis, who
oversaw 
civil aviation during a six-month stint working for the now-defunct
Coalition 
Provisional Authority, which administered Iraq. "That's called playing the
chaos, 
and they were masters at it."

Army Col. Richard Ballard, then inspector general for the U.S.-led forces
that 
invaded Iraq, said he lacked the staff to focus on Custer Battles in the
face of 
other problems such as the Abu Ghraib prison scandal.

"In an environment where an organization is undermanned, overworked and
struggling 
just to let contracts . there are few checks and balances," said Ballard,
who is 
now retired. "That environment characterized the contracting process in Iraq

during the second half of 2003, and probably still does today."

A series of government audits of the Iraq reconstruction process has
confirmed lax 
oversight and identified billions of unaccounted-for dollars.

In an interview, the firm's attorney said the company may have made mistakes
in 
paperwork but denied that Custer and Battles had defrauded the government.
The 
attorney, John Boese, said the two men had fulfilled all contract terms in
the 
midst of a war zone.

"The rules were nightmarish. They didn't really exist. Radar O'Reilly from
'MASH' 
would clearly go to jail under these rules," said Boese, referring to the 
television character who was famous for maneuvering through military
bureaucracy.

At first glance, Custer Battles seemed an unlikely candidate to win work on 
critical missions.

Before Iraq, Custer Battles had never landed a government contract. The
2-year-old 
firm booked less than $200,000 in revenue before the war, providing private 
security services in Afghanistan, its lawyers said.

The company's two founders were brash, energetic and inexperienced. Custer
was a 
former Army Ranger. Battles was an ex-CIA agent who had made an unsuccessful
run 
for Congress in 2002 as a Rhode Island Republican.

But within six months of landing the airport deal, Custer Battles had taken
in $32 
million in revenue from its contracts, records show. The two men built a 
headquarters, complete with swimming pool, at the airport.

The company won the $16.8-million contract to protect the airport despite
never 
having guarded a site. It beat two more-experienced firms, according to
interviews 
and records, by promising to start work sooner than anybody else, a key
criterion 
in Iraq's post-invasion mayhem.

Coalition officials initially expected Custer Battles to perform routine
security. 
Instead, the airport quickly became an insurgent target and the firm was
suddenly 
guarding a fortified facility and surrounding grounds.

Such rapidly changing missions became a common difficulty in Iraq. Coalition

officials frequently altered contract terms, ordering up million-dollar
changes 
with a handwritten scrawl or spoken order.

Some contractors resisted such haphazard changes, delaying the
reconstruction 
process. Others, like Custer Battles, rolled with the new demands, tallying 
charges with little paper trail to account for them.

First to raise concern was Ballard, who found that Custer Battles employees
lacked 
training and equipment. In 20 on-site inspections, Ballard said, he watched
guards 
wave trucks through without inspecting them. He said he never saw Custer
Battles 
use dog teams, as the firm had promised, to screen incoming vehicles.

Ballard said he also witnessed two company security guards in black fatigues

conducting what he termed an unauthorized mission, firing an automatic
weapon into 
the air, in an attempt to stop young Iraqis suspected of firing rounds near
an 
airport checkpoint. He halted the incipient attack.

Ballard said his attempt to investigate the firm was blocked by Custer, who 
disputed his authority despite a written order from U.S. Army Lt. Gen.
Ricardo 
Sanchez, the top military official in Iraq. Ballard recommended that the
coalition 
terminate the contract. But he became distracted by the scandal at the Abu
Ghraib 
prison, he said, and took no formal action before leaving Iraq.

"I concluded that they were intentionally attempting to defraud the
government," 
he said.

Willis, a retired senior official at the U.S. Department of Transportation
who 
oversaw the civilian side of the Baghdad airport, clashed with Custer
Battles 
repeatedly.

Without seeking permission, the company opened a dog kennel at the airport, 
offering bomb-sniffing dogs to other clients, Willis said. It also began 
mysteriously bringing in Filipino workers, apparently to work on catering 
contracts. On one visit to Custer Battles headquarters, Willis found 40
Filipinos 
living in cramped quarters.

Willis demanded that Custer justify use of the airport to expand his
business. He 
said Custer rebuffed him. Willis left Iraq after six months of service, and
again 
no formal action was taken.

Custer Battles continued to guard the airport until June 2004. Although the 
government did not extend the contract, the firm won high praise from
Douglas 
Gould, the fourth coalition official in a year to oversee the airport.

A U.S. official said Gould, who took over last spring, was aware of "rumors"
about 
problems with Custer Battles. But nobody passed on word that the Pentagon
had 
opened a criminal investigation of a money-exchange contract in October
2003.

"Nothing was raised as a red flag," the U.S. official said.

Soon after Custer Battles won the airport deal, it landed a second job: a
$9.8-
million contract to build housing for workers in a project to exchange
Iraq's old 
currency for newly minted dinars. That contract would grow to be worth as
much as 
$21.4 million.

The coalition team heading the project soon grew frustrated with Custer
Battles. 
The company had missed deadlines to set up the camps. Its trucks frequently
broke 
down. Subcontractors complained to coalition officials of not being paid, 
according to a memo from a government consultant obtained by The Times.

Then the consultant found a spreadsheet that appeared to show that the firm
was 
artificially boosting profit, according to a memo from the consultant. The 
spreadsheet indicated that the company had invoiced the government $2.1
million 
for $913,000 worth of work.

Despite the Pentagon investigation, coalition officials approved an
additional 
$5.6 million in contract changes, saying they would recoup any money paid
out on 
fraudulent invoices later, records show.

"Termination of work by Custer Battles . would have a disastrous impact on
the 
success of the currency exchange program," Al Runnels, then the chief
financial 
officer for the Coalition Provisional Authority, wrote in a memo in November
2003.

As the criminal investigation progressed, two Custer Battles insiders came
forward 
and described a complex scheme to defraud the government.

The insiders told investigators that the company had set up shell companies
in the 
Cayman Islands to create fake invoices. They said Custer Battles submitted
the 
invoices to the government to be reimbursed for work done by the offshore 
companies without disclosing that it owned them.

The subsidiaries' invoices were padded with a markup that led to profits of
as 
much as 130%, versus the 25% limit the contract imposed, the whistle-blowers
told 
investigators.

The two whistle-blowers, William "Pete" Baldwin and Robert Isakson,
confirmed 
their account in interviews with The Times. Both men worked for Custer
Battles and 
left under acrimonious circumstances. They have filed a civil lawsuit under
the 
False Claims Act, which allows private citizens to sue on behalf of the 
government. If successful, the men are entitled to a portion of the money
returned 
to the government.

(A firm run by Isakson has since been sued by the U.S. Agency for
International 
Development alleging fraud. The suit claims that the firm, DRC Inc.,
illicitly 
profited from a contract for construction work in Honduras after Hurricane
Mitch 
in 1999. Isakson has denied wrongdoing.) 

Pentagon auditors tried to take a look at the company's books on the money-
exchange contract in February 2004. But Custer Battles was able to block
inquiries 
from the Defense Contract Audit Agency because there was no provision in the

contract for an audit, according to the Pentagon.

The investigative trail was further obscured by ambiguity in the contract.
In 
denying illegal behavior, lawyers for Custer Battles argued that the company
was 
to be paid a fixed price, which meant there would be no incentive to inflate
its 
costs. But some contract documents reviewed by The Times contradict this 
interpretation. 

The attorneys for Custer Battles said the fraud allegations were ludicrous
because 
the company had lost money on the contract. Company records submitted by the
firm 
say that the company received about $9 million from the government and spent
more 
than $14 million. The attorneys also said the Cayman Island firms were
legitimate 
businesses.

"This is not about not delivering," Boese said. "These are questions about 
accounting and contract interpretation." 

Finally, in September, the Air Force issued what's known in the business as 
a "death sentence," forbidding any U.S. agency to issue contracts to Custer 
Battles or a long list of affiliated companies and people. It can, however, 
fulfill its existing contracts.

The Justice Department continues a criminal investigation of the company,
and the 
whistle-blower case is proceeding slowly through the courts.

The case raises questions about the U.S. government's performance in an area
as 
important as the reconstruction of Iraq.

"We went to Iraq to show them how a nation of laws works," said Patrick
Burns, a 
spokesman for Taxpayers Against Fraud, which monitors fraud and has closely 
followed the Custer Battles case.

"Instead, we're teaching them how to get away with fraud."


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