Judge overturns verdict against Iraq war contractor in fraud case

ALEXANDRIA, Va. --A federal judge has overturned on a technicality a $10 million jury verdict against a military contractor accused of defrauding the U.S. government in the initial months of the Iraq war.

The verdict, awarded in March against Fairfax-based Custer Battles LLC, had been the first civil fraud verdict arising from the Iraq war. Custer Battles based most of its operations in Rhode Island.

A former Custer Battles employee filed the lawsuit under a whistleblower statute, alleging that Custer Battles used shell companies and false invoices to vastly overstate its expenses on a $3 million contract to assist in establishing a new currency to replace the old Iraqi dinar used during Saddam Hussein's regime.

The verdict reached $10 million because the law calls for triple damages, plus penalties fines and legal costs.

But U.S. District Judge T.S. Ellis III, in a ruling made public Friday, ruled that Custer Battles' accusers failed to prove that the U.S. government was ever defrauded. Any fraud that occurred was perpetrated instead against the Coalition Provisional Authority, formed shortly after the war to run Iraq during the occupation until an Iraqi government was established.

Ellis ruled that the trial evidence failed to show that the U.S. government was the actual victim, even though U.S. taxpayers ultimately footed the bill.

Alan Grayson, lawyer for whistleblowers Robert Isakson and William Baldwin, said he will appeal the ruling. He faulted the Bush administration for creating the CPA in a manner that essentially allowed it to act as a money launderer for unscrupulous military contractors.

"The Bush administration incompetently created this Frankenstein monster called Coalition Provisional Authority. They did it without thinking about it. They blundered into it," Grayson said.

The Bush administration tried to portray the CPA as an international entity for public relations purposes when in reality it was wholly controlled by the United States, Grayson said.

"Everybody seems to agree that the defendant committed fraud ... but now you have a situation where the judge is puzzled about what he can do about it," Grayson said.

In pretrial motions, Custer Battles' lawyers had advanced a similar argument about CPA's status. At that stage, Ellis allowed the trial to go forward and said a case could be made to show that defrauding CPA is tantamount to defrauding the United States.

During that pretrial debate, Ellis prodded the Justice Department to weigh in on its assessment of the CPA's status. Eventually, government lawyers argued that the CPA should be considered a U.S. entity, but only for the purpose of the whistleblower law.

Ellis said in his ruling that the plaintiffs failed to establish CPA as a U.S. entity during the three-week trial earlier this year.

Custer Battles' attorneys portrayed Ellis' ruling as a broad vindication of their clients' actions.

"The fact of the matter is that (Custer Battles founders) Scott Custer and Mike Battles did what they were contracted to do under unimaginably difficult circumstances," defense lawyer Robert Rhoad said in a statement.

In his ruling, though, Ellis makes clear that he is overturning the verdict only on the technical question of whether the CPA is a U.S. entity.

"If the CPA was a U.S. entity, the result differs dramatically," Ellis wrote.

Another defense attorney, David Douglass, acknowledged that Ellis' ruling turns on the narrow legal question of whether the CPA was a U.S. entity. Because the judge found for the defendants on that, he never had to revisit the jury's finding that the defendants overbilled and submitted fraudulent invoices.

"We believe there was no evidence of fraud," Douglass said.

Rhoad said Custer Battles is essentially a dormant company because of the lawsuits.

"It still exists but it certainly isn't active any more," Rhoad said.

Ellis left intact the jury's $165,000 wrongful termination verdict in favor of Baldwin, one of the whistleblowers.

A civil suit involving an even larger Custer Battles contract to provide security at Baghdad International Airport has not yet gone to trial. Grayson said that lawsuit will face similar obstacles.