Military contractor ordered to pay $10M for Iraq overcharging

A jury has ordered Custer Battles, a military contractor, to pay $10 million for fraudulently billing the government on Iraq reconstruction contracts.

The jurors in the federal courthouse in Alexandria, Va., found Thursday that Custer Battles and its owners, Scott Custer and Michael Battles, had overcharged the government on a contract to replace old Iraqi currency with new bills. They also awarded William Baldwin, one of the whistleblowers who brought the case, $230,000 in back pay for being demoted after complaining about Custer Battles' billing practices.

Damages were calculated at $3 million, an amount that gets tripled under federal law. Other penalties also were added.

Under the False Claims Act, private citizens can bring cases against companies they believe have defrauded the government, even if-as in this situation-the Justice Department decides not to pursue the case. The two whistleblowers in this case, Baldwin and Robert J. Isakson, are eligible to receive 30 percent of the damages. The remaining 70 percent goes to the U.S. Treasury.

Baldwin worked for Custer Battles in Iraq and also worked for DRC Inc., a contractor that worked with Custer Battles. Isakson is managing director of DRC. Sen. Chuck Grassley, R-Iowa, questioned the Justice Department's decision not to take on the Custer Battles case. "The jurors in this case listened to the arguments and sent back a strong statement of intolerance for fraud, waste and abuse of taxpayer dollars. I remain concerned as to why the Justice Department chose not to join this case," he said in statement e-mailed to reporters Thursday.

In the complaint filed in court, Isakson and Baldwin accused Custer Battles of "war profiteering" that resulted in tens of millions of dollars of damage and the deaths of four company employees as the result of faulty trucks.

During the trial, retired Army Brig. Gen. Hugh Tant III told the court that the trucks were "very dangerous," and that brake failure led to a wreck. "I felt these two men turned their backs on us and it crushed me internally," he said. Tant directed the Iraqi currency exchange program for the Coalition Provisional Authority in Iraq in the fall of 2003.

The case raised the legal question of whether the False Claims Act could be applied when contractors were paid with funds that came through the currency contract and not directly from the U.S. government. In this case, the judge ruled that the False Claims Act applied because the currency contract was funded by the federal government.

According to an analysis of the court's decision by Brian A. Hill, a lawyer at the Washington-based firm Miller & Chevalier, "The touchstone for [False Claims Act] liability is not who controls payment of the money at issue, but who owns the money that is being paid out." Hill's analysis was published by the Washington-based Bureau of National Affairs Inc. He said that the court's logic will potentially affect other cases involving Iraq reconstruction contracts.

Custer Battles attorney David L. Douglass said several legal issues remain in play, including whether the claims were ever presented to the U.S. government for payment (or if they were only presented to the Coalition Provisional Authority). These issues, he argued, could negate the jury's decision. "The evidence overall shows [Custer Battles] fulfilled the contract according to its terms," he said.

"What this case illustrates is the peril government contractors face when they're dealing with unusual situations, novel institutions or any situation where they're asked to execute a contract when the rules are not clear," said Douglass. Emergency situations such as contracting related to Hurricane Katrina pose the same problem, he said. Douglass argued that confusion resulted in Custer Battles being asked to perform services that were not in the contract.

"Some people thought Custer Battles was intending to submit false claims, but they were just trying to comply with requests for what they needed to get paid," he said, while acknowledging that the jury rejected that view. Alan M. Grayson, attorney for the whistleblowers, did not return a call seeking comment.