Scott Custer and Michael Battles once boasted of funding their nine-month old private security firm with credit cards and personal loans after they landed in Baghdad following the March 2003 Iraq invasion.
Only months later, they were swimming in contracts worth tens of millions of dollars. One was a $16 million deal to guard Baghdad’s airport. A second $21 million contract called for protecing the multi-billion program that issued new Iraqi dinars to replace money printed with Saddam Hussein’s profile.
Now, Custer and Battles may be finding themselves living off credit once again.
On Thursday, a federal jury in Alexandria, Va., determined that Custer Battles engaged in massive contract fraud and ruled that the defendants must shell out more than $10 million in penalties and damages.
It was fraud that a company manager had already warned them about in a November 2003 e-mail.
“I don’t want to/won’t end up in some country club prison,” the manager said. “Failure to disclose certain things can get you there.”
After being reminded of that warning during the trial, Michael Battles said he attempted to call the manager, but that phones were hard to come by in Iraq.
AND BESIDES, business was REALLY REALLY GOOD, for the new firm, aptly named Custer Battles. Both Custer and Battles soon paid themselves bonuses between $3 million to $4 million in January 2004.
One month later, company managers again fired off internal memos warning the two that the firm was regularly charging for services never rendered or at freakishly inflated prices.
The company founders, both former Army Rangers now in their mid-30s, apparently didn’t connect the dots.
The $10 million judgment is only part one of a two-part whistleblower case filed by former Custer Battles business associates, Robert Isakson and William Baldwin. Thursday’s verdict stems from fraud charges on the currency exchange program. A second trial is expected for the Baghdad airport deal. On both, Isakson and Baldwin claim that Custer Battles orchestrated a sweeping swindling scheme with the use of bogus invoices, forgery and shell companies in the Cayman Islands to fraudulently pump up their billings.
“What they did is treason,” claims attorney Alan Grayson, the lead attorney for the Isakson and Baldwin who filed the suit more than two years ago. “There’s no other word for it.”
As the de facto poster child for contractor waste, fraud and abuse in Iraq, Custer Battles frequently takes center stage in the news media whenever the topic comes up. Each time the tawdry allegations of profiteering and contract weaseling by Custer Battles are repeated, more and more tales of abuse and misbehavior spill out.
During the three-week trial, Grayson was able to tease out the tale of the $3-million-plus bonuses.
“On January 2nd, 2004, you took a bonus of $3 million out of the company, did you not?” Grayson asked Michael Battles as he sat on the witness stand.
“I didn’t take a bonus necessarily, but I took a draw,” Battles, a 2002 Republican candidate for Congress in Rhode Island, responded curtly.
Grayson: “What’s a draw?”
Battles: “A draw is a disbursement of funds to the principals…. And I was happy to say that, yes, we were successful enough that I took a $3 million draw.”
At one point Battles attempted to deflect any responsibility in the management of his company by insisting he was largely involved with business development and “strategic initiatives.” He rarely took a hands-on executive role, he said.
“One thing I learned as lieutenant is that the secret to successful leadership is to surround yourself with people smarter than you are,” he said.
Later, Battles shared another lesson: “In retrospect, one of the things I’ve learned is don’t put your name on your company,” he said.
No court date has been set for the fraud trial involving the Baghdad airport. If found guilty, damages for that claim could top $40 million.
Meanwhile, it looks as though Isakson and Baldwin will be counting their money. Individuals are allowed to sue on behalf of the government when they have knowledge that the government is being defrauded. They may receive up to 30 percent of the money paid by Custer Battles.
Those not counting their money will be the Iraqi people. Much of the money paid to Custer Battles was from seized Iraqi assets. Judge T. S. Ellis III, of the Federal District Court in Alexandria, Va., had ruled early in the trials preliminary proceedings that the False Claims Act applies only to bills paid directly from the American treasury.