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.

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.

Justice Department spokesman Mark Corallo said the department didn’t comment on why it declined to join such suits.

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.

On 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.”

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.

“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.

The whistleblowers 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.

“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.

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.


The Federal Election Commission fined Battles for misrepresenting campaign contributions. He’s a Fox News Channel commentator and is writing a book called “Blood in the Streets: Seizing Opportunity in Crises,” according to the company.

“This is corruption at its worst, perpetrated by Bush cronies and protected by the Bush administration,” charged Isakson’s attorney, Alan Grayson of Orlando, Fla.

Isakson said politics had nothing to do with this.

“I’m a hard and fast Republican,” Isakson said. “This has nothing so far to do with Republicans or Democrats or anything. This has to do with thieving and government and fraud.”


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.

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.

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.

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.

Days after Isakson left, Baldwin showed up and soon was hired to be Custer Battles’ in-country manager.

“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.

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.


Baldwin and Isakson sued in August to try to recover for the government what they said was tens of millions of dollars in defrauded money. If they win, they get a percentage of the recovered money and fines.

When the government joins such suits, the whistleblowers win or settle about 95 percent of the time, but they win only 25 percent of the time when the government passes. No reason was listed in the document the Justice Department filed with the U.S. District Court in Alexandria, Va.

(c) 2004, Knight Ridder/Tribune Information Services.

AP-NY-10-08-04 1921EDT

Only subscribers are eligible to post comments. Please subscribe or to participate in the conversation. Here’s why.

Use the form below to reset your password. When you've submitted your account email, we will send an email with a reset code.