U.S. Argues Court Can Try Contractor

WASHINGTON —  For the first time, the Bush administration has taken the position that fraud claims arising from contracts issued in Iraq can be litigated in federal courts in the United States.

In a brief filed late Friday, the Justice Department argued that a case involving alleged fraud by an American firm should proceed even though the contract was paid using Iraqi funds and was administered by the U.S.-led Coalition Provisional Authority, which ruled Iraq after the fall of Saddam Hussein’s regime.

Government watchdogs welcomed the administration’s position, saying that it cleared the way for the pursuit of hundreds of millions of dollars in potential fraud cases in Iraq.

“This is big,” said Patrick Burns, spokesman for Taxpayers Against Fraud, a watchdog group. “It’s a shot across the bow to everyone in Iraq who thought that getting a contract meant they had a license to run a con.”

Thousands of contracts were issued in Iraq by the coalition authority using Iraqi money -- funds that were either held by the United Nations in the Oil for Food program or seized after the U.S.-led invasion of Iraq in March 2003.

Many of those contracts have been sharply criticized by government auditors, who have accused U.S. officials and contractors of failing to account properly for billions of dollars.

The legal status of the contracts has remained unclear, however. No claims involving Iraq contracts have proceeded under the False Claims Act, a U.S. statute that allows private citizens to sue on behalf of the government. In the United States, the act is considered one of the most powerful tools against fraud, with more than $12 billion in bilked costs recovered by the government since 1986.

In Friday’s action, the government was adding its input to a false claims lawsuit filed in the U.S. District Court for the Eastern District of Virginia against Custer Battles, a private security company that was one of the highest-profile firms operating in Iraq.

Two whistle-blowers have accused the company and its founders, Mike Battles and Scott Custer, of setting up shell companies in the Cayman Islands to falsely bill the government on two Iraq contracts. The Los Angeles Times profiled the company’s legal troubles last month.

Lawyers for the firm have denied any wrongdoing. In court, they have argued for the dismissal of the case because the contracts were issued by the coalition authority -- not the U.S. government -- and were paid for with Iraqi money -- not U.S. funds.

The Justice Department argued that the United States was responsible for the contracts. The court is expected to rule later this month.

“To the extent contractors fraudulently frustrated the United States in the fulfillment of its rights or responsibilities as an occupying power, the United States should be able to use its laws ... to redress and deter that kind of conduct,” said the brief, which was signed by Assistant U.S. Atty. Richard Sponseller.

On Friday, Jack Boese, a lawyer for Custer Battles, said he was disappointed with the U.S. position.

“We trust that the district court will recognize that the DOJ is attempting in this brief to extend the False Claims Act far beyond its intent and purpose and will dismiss the action,” Boese said in a statement.

Alan Grayson, a lawyer for the whistle-blowers, invited the government to join the litigation. Last fall, the Justice Department decided not to participate on the side of the whistle-blowers.