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$10 Million Verdict Against Custer Battles Overturned

In June, I profiled the ill-fated and poorly named Custer Battles, LLC. While the company was not awarded Halliburton-sized contracts to operate in Iraq, Custer Battles engaged in some of the most deplorable and atrocious acts of fraud and profiteering.

Back in March, a federal jury found Custer Battles guilty of defrauding the government. Retired Brigadier General Hugh Tant, who testified, said the fraud "was probably the worst I’ve ever seen in my 30 years in the Army." Custer Battles was ordered to pay almost $10 million in damages and thousands of dollars to Robert Baldwin for wrongful termination.

It was the first civil fraud verdict brought against a defense contractor. Blackwater USA faces lawsuits from the families of the four slain in Fallujah in March 2004.

Yesterday, the Boston Globe reported that a federal judge overturned the verdict "on a technicality," issuing a 23-page ruling (available here [PDF] via the Corporate Crime Reporter).

[ed. note: Blogger Ethics 101 — I wanted to make a distinction between myself and the behavior of our frothing-friends on the right following the ruling that the NSA domestic surveillance program is unconstitutional. For instance, I disagree with the outcome in the Custer Battles appeal as they did with Judge Anna Taylor Diggs’ ruling. However, you won’t find me hoping for the next bomb to land on Judge Ellis’ head or accuse him of hating America. That would be fever swamp-ish of me.]

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.

It is quite apparent that Judge Ellis sees the blatant wrongdoing by Custer Battles but because the CPA, in his opinion, was not shown to be a U.S.-entity, he overturned the decision. The New York Times noted today that the Justice Department "said that some of the Custer Battles invoices were indeed claims against the American treasury and that the False Claims Act applied." That was from Bush’s Justice Department in a flash of honesty.

From the Boston Globe:

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. [emphasis added]

However, don’t ask the defendants’ attorneys, they’re drinking the same kool-aid the "everything in Iraq is fine" crowd are chugging.

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.

[…]

"We believe there was no evidence of fraud," [another defense attorney, David] Douglass said.

No evidence? NO EVIDENCE? You’re kidding, right? This is all for show, am I correct? Go out there, proclaim your clients’ innocence and then laugh about it later over a bottle of Brandy.

-Custer Battles employees had a reputation as "gunslingers."

-They stood accused of driving over a car, with children in it, to get out of a traffic jam and, along with Kurdish associates, fired randomly on Iraqi civilians, including teenagers. (The accusers, working for Custer Battles, quit immediately after.)

Painted over Iraqi Airways forklifts to charge "thousands of dollars in fake invoices" to "lease" the equipment.

-Former Custer Battles executives, banned from winning any other contracts, created companies to solicit more workall with the same office address.

-Bedding for U.S. forces arrived late and delivered trucks that did not work.

More from the today’s Washington Post buried on page D01:

Although a jury found the company guilty, U.S. District Judge T.S. Ellis III ruled on review that the firm could not be sued under the federal False Claims Act because of the ambiguous structure of the authority, which issued the contract. The judge also concluded that the way in which the company had been paid distanced it from the U.S. government. He said there was ample evidence that the company had submitted "false and fraudulently inflated invoices" but found that the nature of the Coalition Provisional Authority precluded a fraud claim. Ellis signed his ruling Wednesday; it was made public yesterday. [emphasis added]

As you may recall, Custer Battles was paid in crisp $100 bills — stuffed in duffle bags.

However, as the CPA left, the money was shifted to the State Department’s responsibility. From the June 29, 2004 article in the Washington Post:

The $18.6 billion allotted by the U.S. government for the reconstruction of Iraq, money that was previously administered by the occupation authority, will come under control of the State Department. Payments on those contracts are expected to continue without interruption. [emphasis added]

While the claims against Custer Battles were probably made before the shift, wouldn’t this show a linkage of responsibility between the CPA and the U.S. government?

For now, here’s the rundown as I understand it: Custer Battles bilked the Coalition Provisional Authority, funded by U.S. taxpayers through our government, for millions. (Ellis writes, "The contract at issue is between the CPA and Custer Battles…") It is quite clear that fraud did occur. Judge Ellis did not rule on that specifically, but it appears as though he is convinced Custer Battles committed acts of fraud.

In this ruling, the CPA is considered a transitional government independent from the U.S., though undoubtedly financed by American taxpayers. However, Custer Battles cannot be sued for defrauding the U.S. government because it was the now-defunct CPA that Custer Battles worked for and not the U.S. government itself. The U.S. money used by the CPA, it seems, is categorized as some kind of foreign aid to another country. Specifically in this instance, to the transitional government of Iraq, the CPA. Therefore, Custer Battles cannot be sued for defrauding the U.S. government because it was the CPA they bilked, which Ellis ruled there was insufficient evidence to suggest that that the CPA was a U.S.-entity.

Under what jurisdiction could such a claim be filed then? I am not sure there is one. The current Iraqi "government" is the successor to the CPA and last time I checked, war profiteers are exempt from Iraqi law.

Did I get that right? (I don’t have any legal training so this is a novice attempt at imitating Glenn Greenwald.) I fear what this means for future fraud cases brought against war profiteers if this decision is not overturned on appeal.

Updated: Readers Hugh and Peterr noted L. Paul Bremer’s title and role as the U.S. administrator of the CPA and question how the CPA is not a U.S.-entity.

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