Operation Iraqi free ride: thanks to administration stonewalling, only one crooked contractor in Iraq has been brought to justice. And there's even more to that story.

Last March, Custer Battles, a McLean, Virginia-based security contractor run by Scott Custer, a former Army Ranger, and Mike Battles, an occasional Fox News commentator and one-time Republican candidate for Congress, was found by a federal jury to have defrauded the government of $3 million in contracting services in Iraq. Its crime was brought to light by whistleblowers within the company. Among many other tricks, the firm had issued fake invoices and created sham companies to fool its employer into paying for services not provided. Sometimes, Custer Battles was less devious: In one case, according to the trial testimony of retired Brigadier General Hugh Tant III, the company was hired to provide trucks to the military, but the vehicles it procured didn't run, and had to be towed from the site. When confronted, Mike Battles replied: "You asked for trucks ... it is immaterial whether the trucks were operational." Tant, who oversaw the contract, called Custer Battles's work "probably the worst I've seen in my 30 years in the army."

Custer Battles is the only CPA-era whistieblower case to go to trial, but a slew of evidence has now emerged pointing to widespread waste, fraud, abuse, and negligence in the awarding and oversight of Iraq reconstruction contracts. Smart W. Bowen Jr., the Special Inspector General for Iraq Reconstruction, wrote in a report that the authority's "less than adequate" financial controls left "no assurance" that $8.8 billion in seized Iraqi funds was used properly. But the Bush administration and its allies have blocked most other high-profile efforts to gather more information about further instances of abuse. The administration has invoked an obscure part of the False Claims Act to prevent all but one of more than 50 whistleblower suits brought by employees of U.S. contractors in Iraq from moving forward to trial. And the Republican Congress has held only cursory hearings on the contracting process.

That essentially means that we'll get little new information on Iraq's reconstruction-contracting disaster unless Congress changes hands in November. But Custer Battles itself may not be so lucky. This summer will likely see the start of the second phase of the company's trial, which will focus on allegations that, on a contract to provide security for Baghdad International Airport (BIAP), Custer Battles short-changed the Coalition Provisional Authority (CPA) by diverting airport guards to other jobs. Whatever the result of that trial, an investigation by The Washington Monthly into Custer Battles's handling of the airport job makes clear that the firm played by its own rules--quickly setting out to expand the size of the area under its control, and resisting, with striking success, attempts by CPA and military authorities to hold it accountable. It also suggests that the chronically disorganized environment in which Custer Battles was operating exacerbated the problems. In this sense, the story of Custer Battles and the Baghdad International Airport offers a window onto the broader shortcomings of a chaotic and failed occupation.

Terminal neglect

In the weeks after the fall of Saddam Hussein, reopening the airport quickly emerged as a priority for the nascent CPA. A working airport would be crucial in encouraging foreign trade and investment, and in helping to get the Iraqi economy back on its feet. In June, CPA officials issued a Request for Proposal for airport security, with bids due just three days later. According to the request, the job involved guarding a 700-acre complex of terminals, administrative buildings, residences and more, while fending off "disruptive elements" that continued to "prey upon coalition forces in and around Baghdad." Four days after the bids were due, Mike Battles received an email from Scott Custer: "We just won BIAP. CALL ME ASAP."

According to records obtained by The Washington Monthly, the hasty award was made by a committee of five "select" CPA members, headed by Franklin Hatfield, a senior Department of Transportation (DOT) official who was reporting back to the office of Transportation Secretary Norman Mineta in Washington, D.C. The committee also included Vincent Taylor, an assistant DOT secretary. A few days later, Custer Battles signed a "letter contract" for $16.8 million with Hatfield. In an interview, Taylor says he was presented with the list of candidates and doesn't know how Custer Battles came to be on it. In considering bids, he says, he was acting as an Army officer, not a DOT official, and at the time was heading three battalions with a mission to "do anything and everything to get that city of Baghdad" up and running, including opening the airport quickly. Speed, he says, was the key factor in choosing Custer Battles.

But from the start there were questions about Custer Battles's qualifications. "They had never hired a security guard in their lives," says Alan Grayson, a lawyer who is suing Custer Battles on behalf of two whistleblowers. "They had no equipment, no revenues, no personnel, no office, no history--no nothing." David Douglass, Custer Battles's lawyer, says the firm's principals had experience providing security for relief organizations and performing other essential logistical tasks in post-conflict environments, including Afghanistan. But Douglas acknowledges that Custer Battles as a firm had never handled a job of anything like this size and complexity.

Almost immediately, the company was operating as if Baghdad were the Wild West--and the chaotic CPA often encouraged this approach. With Iraq's banking system in shambles, contractors were frequently paid from a stash of cash in the basement of the Republican Palace, according to Frank Willis, a Ministry of Transportation (MOT) aide. One day, Willis was working in the MOT offices when someone entered pushing a wheelbarrow filled with $2 million in bricks of $100 bills. A short time later, a team of grim-faced men from Custer Battles strode in, carrying heavy weapons and duffel bags. The men stuffed the cash into bags, piled into a Chevy Suburban, and sped off. A few months later, an official acting as the airport's director emailed officials at the MOT complaining that Custer Battles was taking over big chunks of the airport for Filipino workers, Gurkhas, dogs, and more. "Needless to say, our Iraqi partners are absolutely livid over ... Custer Battles's obvious disregard for any type of civilized process of acquiring space," the director wrote. "Nowhere in the civilized world would the airport owner or operator tolerate these actions." David Douglass, Custer Battles's lawyer, says that various government officials authorized the firm's moves.

Something had to be done to keep Custer Battles in line. A State Department lawyer arrived in formalize their contract, which had been written on the fly. But he soon returned home, badly shaken, after a rocket shell landed in his hotel closet. In October, Colonel Richard Ballard, an inspector general for the coalition forces, arrived with orders from Lieutenant General Ricardo Sanchez, the commander of US ground troops in Iraq, to "verify that the contract is being performed as represented." Custer Battles, it appeared, resented this intrusion, and soon was informed by its lawyers at the high-powered Washington law firm of Arnold & Porter that it might not need to cooperate with Ballard. "it is unclear what authority he has to review a contract that the CPA entered, particularly considering that the CPA relies on seized Iraqi assets, not Department of Defense dollars to compensate Custer Battles," a lawyer at Arnold & Porter wrote in an email to Custer. So when Ballard returned to the firm's airport offices, no one would give him the time of day. "I told him that none of our employees would speak to him and I asked him not to put them in an awkward situation by asking them questions," a subordinate wrote Custer. "And wouldn't you know it? At the end of the conversation he asked if I could direct him to the Duty Free shop." In a later email to a staffer, Custer wrote: "Col. Ballard has no authority to discuss any issue with us ... Please post a guard."

Subsequent efforts to keep the firm in line were no more successful. Ed McVaney, an MOT staffer assigned to try to rework the Custer Battles contract, soon reported back to MOT chief Darrell Trent that Custer Battles had blown off his requests for information and disregarded demands to move the kennels and evict the Filipinos. Amid another dispute with the firm over payment, McVaney wrote a furious note to Trent, calling Custer Battles "incompetent," "deceitful," "manipulative," and "war profiteers." He added: "Other than that, they're 'swell fellows.'"

By this point, Ballard had reached a similar conclusion. In an email to MOT officials, he lambasted the contractor's performance in manning a vehicle checkpoint at the airport, complaining of "grossly inadequate techniques, poorly-trained and equipped personnel, [and] inadequate equipment including lack of dogs and interpreters." Ballard also registered concern that the CPA had improperly approved Custer Battles's performance, despite clear evidence that the company had failed to fulfill its contractual obligations. "A formal audit," he wrote, "would likely conclude fraud and potentially gross negligence in the area of contract oversight." In an email a few weeks later, Ballard recounted visiting a Custer Battles-manned checkpoint at BIAP: "On every single occasion we visited the inspection point, we were told that no one was in charge, all were equals, and that this worked just fine for them. However we would then check and discover that no one was wearing protective gear; no one had radios back to their base camp, and when we challenged them to use the cell phones [that] they said worked just as well, on one occasion two had dead batteries." Ballard also noted that Custer Battles employees didn't use metal detectors and ignored suggestions that an interrogator look over paperwork while a two-man team inspected each vehicle. "What horrified us most of all, however," Ballard wrote, "was their refusal to open the cargo doors of lorries to inspect." Douglass says the firm faithfully fulfilled the terms of its contract to protect BIAP and that the airport had no major security breaches during the period Custer Battles was in charge. "Measure our performance by what was in the contract. We did what was asked: We maintained security in a very dangerous situation."

For their part, CPA contracting officials sent Custer Battles a letter detailing numerous concerns regarding the company's performance on the airport contract. In response, they received a nine-page memo from Arnold & Porter, informing them that modifications to the original contract had been approved by a variety of U.S. officials "with apparent authority"--including Hat-field, the DOT official, and Taylor, the assistant transportation secretary and Army colonel, who "specifically" gave the firm office space at the airport. According to Taylor, "I merely said I didn't have a problem with it. I didn't have that kind of authority."

In November, word got around that an agent from the Defense Criminal Investigative Service was looking into "potential irregularities" in Custer Battles's handling of the currency exchange project. But the firm remained on the government payroll. That was in part because, thanks to turf battles and political infighting within the CPA, no one could agree on what to do about the company. One camp, comprised mainly of DOT staffers like Hatfield, supported the firm to the end. Trent, the MOT chief, wanted to fire them. But still others believed that the mission was difficult enough without getting rid of them. The CPA's chief financial officer said in a memo that firing Custer Battles would have a "disastrous impact" on the currency exchange program, and confirmed that the company would be kept on.

Running aground 

By that time, the firm's leaders were receiving stern warnings of impending disaster. Just as Ballard was firing off angry emails to MOT, one Custer Battles executive offered a litany of the firm's failings in a memo to a colleague. These included serious problems with (or an outright lack of) administrative procedures; a faulty command-and-control system in the field, especially at the airport; and a lack of accountability for tracking weapons and other sensitive items. He concluded: "I do not have a really good feeling about the company right now ... unless some things are fundamentally changed this whole thing could very easily implode."

That same month, the company's Iraq country manager, William D. "Pete" Baldwin, who would later become a whisdeblower, sent an even more alarming memo, this time to Custer and Battles themselves. Detailing problems with employee retention, staff morale, gravely inadequate accounting procedures, and other issues, Baldwin all but begged his bosses to pay attention: "Professional emails have not really worked. Maybe this one will!" he wrote. "ICE BERGS AHEAD. You ARE IN AN ICE PACK traveling full speed ahead and you are not listening to me down here. Members of the crew are already abandoning the ship, expect tragic end soon!"

That tragic end did not come soon: Custer Battles served out the remaining months of its contract to guard BIAP. But it may come this summer.

Dean Starkman is a freelance journalist in New York.