Military fraud tied to former officials

Two former Pentagon officials, including an acting secretary of the Navy, have been accused of scheming with a banned American contractor to get lucrative rebuilding contracts in Iraq, Associated Press has learned.

The contracting firm, Custer Battles LLC, was suspended two years ago by the military for submitting millions of dollars in fake invoices.

The charges come in a sealed federal lawsuit filed by two whistleblowers — one of whom won a $10 million judgment in another suit when a federal jury agreed that Custer Battles had swindled the government.

The current suit names former Acting Navy Secretary Hansford T. Johnson; former Acting Navy Undersecretary Douglas Combs; and Custer Battles LLC officials, including founders Scott Custer and Mike Battles, who were barred in 2004 after billing the government for work that was never done and for padding invoices by much as 100 percent.

Also named were six companies connected to the contracting firm, including Windmill International Ltd., a worldwide contractor run by Mr. Combs and Mr. Johnson, and a Romanian company, Danubia Global, that purchased Custer Battles in 2005.

The new lawsuit contends that Mr. Custer and Mr. Battles, both Army veterans with Washington political connections, tried to get around the suspension order by plotting with Mr. Johnson and Mr. Combs “to set up sham companies [thereby] concealing their ownership and control of those entities.”

According to the suit, filed in Virginia, the shell companies committed other illegal acts, including selling weapons on the Iraqi black market, creating a dangerous possibility that “insurgents could buy them and use them to attack U.S. soldiers.”

In both lawsuits, a plaintiff is former Custer Battles associate Robert Isakson. He also is a former FBI agent.

His $10 million judgment, won in March, is the first civil fraud verdict arising from the Iraq war. Mr. Isakson and a former associate contended that Custer Battles created imaginary offshore companies that overcharged the Coalition Provisional Authority, which ran Iraq after the 2003 invasion, by as much as $50 million.

Mr. Isakson is joined in the current action by Rory Mayberry, a medic who said he was fired last year from a Custer Battles shell company after pointing out fraud. Under the federal False Claims Act, whistleblowers may file suits on behalf of the government and collect a portion of awarded damages.

Phone messages left for Mr. Isakson were not returned. His attorney declined comment.

Windmill attorney Chris Johnson said Mr. Johnson and Mr. Combs never engaged in a conspiracy but acknowledged that Mr. Combs had a business meeting with Mr. Custer in 2004.

Phones at Custer Battles offices in Rhode Island and Virginia have been disconnected.