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