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Employees of contractor barred from Iraq resurrect business
Employees of contractor barred from Iraq resurrect business

On Jan. 3, 2005, Jerry Cullen signed an unusual document at the Baghdad headquarters of his employer, Custer Battles LLC, which the U.S. military had accused of fraud and barred from receiving any new Iraq contracts.

The document was a single-page "bill of sale." Attached were several pages detailing assets such as cars, trucks, prefabricated housing and communications gear that Custer Battles was selling. The buyer was a little-known company in Bucharest, Romania, called Danubia Global Inc. The document said Danubia would pay Custer Battles "U.S. One Dollar" upfront, and an unspecified amount of money in the future. The company never gave Custer Battles any additional money, Danubia executives say.

While the U.S. sanctions technically put Custer Battles out of business, it never actually shut down. After paying its dollar, Danubia took on most of Custer Battles's employees, who continued to work out of Custer Battles trailers on the grounds of Baghdad's airport. They were paid, for a time, from Custer Battles bank accounts. Danubia's owner, Richard Levinson, was a former Custer Battles senior executive. After signing the sale document, Mr. Cullen left Custer Battles to work for Danubia as a consultant.

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Now, the Custer Battles-Danubia link is the focus of a federal criminal investigation. Law-enforcement authorities are exploring whether Danubia was an artificial entity created to evade the government ban on Custer Battles, according to investigators involved in the probe. They're examining whether Danubia executives defrauded the federal government by obtaining millions of dollars of contracts they weren't entitled to receive.

Mr. Levinson says in a phone interview that Danubia has no continuing ties to Custer Battles or that company's two founders. He stresses that neither he nor any of the employees who went with him were linked to the wrongdoing at their former firm. "I can say simply, honestly, and without reservation that Danubia is not a shell company," he says.

Meanwhile Danubia is wrestling with another controversy. This one stems from an April clash near the Baghdad airport, in which Iraqi police personnel said Danubia security guards fired on them without provocation, killing several officers including a colonel. Danubia denies wrongdoing and says its guards were fired on first. The U.S. military is pursuing a formal investigation -- separate from the one about ties to Custer Battles -- and has barred Danubia from operating in the area.

The Bush administration's effort to rebuild Iraq has been marred by mismanagement and instances of corruption. U.S. audits have found evidence that hundreds of millions of dollars was spent without proper authorization, given to contractors who performed shoddy work, or paid to firms charging unreasonably high prices. The audits have also found cases where corrupt contractors and U.S. and Iraqi government officials stole money.

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The U.S. has budgeted $20.9 billion specifically for Iraq reconstruction, not counting money for smaller projects that comes from the military's budget. Mindful of the problems, the White House didn't include any further money for the reconstruction program in its latest budget request, meaning the program is likely to end later this year when its funds run out.

Custer Battles was one of the first American contractors suspended by the government, and it is often held up as a leading example of wrongdoing. In a civil trial earlier this year, a federal jury in Alexandria, Va., found that Custer Battles defrauded the government of $3 million by filing faked invoices. The company has asked U.S. District Judge T.S. Ellis III, who presided over the trial, to set aside the verdict.

Custer Battles was founded in late 2002 by two former Army Rangers, Scott Custer and Michael Battles. After the U.S.-led invasion ousted Saddam Hussein, the two men won contracts to guard Baghdad's airport and provide logistical support for the introduction of Iraq's new currency. Soon Custer Battles had hundreds of employees in Iraq.

The American-run Coalition Provisional Authority grew suspicious of bills the firm was submitting and summoned Messrs. Custer and Battles to an October 2003 meeting. The session deteriorated into a shouting match, according to participants. After the meeting, CPA officials discovered the Custer Battles executives had left behind a spreadsheet. It showed the company had spent $4 million fulfilling the currency contract but charged the CPA $10 million.

The government opened a formal probe the following day. It concluded the company had reaped outsized profits by exaggerating costs. In September 2004, the Air Force, which signed contracts on behalf of the CPA, suspended the firm from bidding for new contracts or renewing existing ones. The move effectively put Custer Battles out of business.

Danubia came into existence a short time later.

Financial registration documents from the British Virgin Islands show that the company was incorporated in the city of Tortola on Dec. 7, 2004, with $50,000 in authorized capital. Danubia said it operated out of Bucharest, which lies on a tributary of the Danube River. It listed its corporate parent as a second British Virgin Islands firm called Security Ventures International Ltd. Mr. Levinson, the Danubia owner, says he also owns Security Ventures International. He explains that he created the companies to avoid paying U.S. taxes in the event the firms were later sold and to minimize his liability in American courts if employees were killed or wounded in Iraq.

Mr. Levinson, a 53-year-old lawyer, joined Custer Battles as a contract manager in December 2003 after a series of personal and professional setbacks.

He had worked for a time in the State Department, where he served as a political officer at the American Embassy in Rome. He was also an aide to senior officials including then-Assistant Secretary of State Richard Holbrooke. He left the State Department in 1998 for the private sector.

Mr. Levinson says his marriage ended in the early 1990s in a divorce that took more than 12 years and $1 million in legal fees to resolve. Toward the end of the battle with his ex-wife, Mr. Levinson was laid off and spent 18 months looking for work. In July 2003, Mr. Levinson and his second wife filed for Chapter 7 bankruptcy protection, citing liabilities of nearly $400,000.

After the demise of Custer Battles, Mr. Levinson says he saw Danubia as a way to ensure a steady income for himself and former colleagues. He says Messrs. Custer and Battles agreed to effectively give him the company's Iraq assets as a reward for past work. "It was a kind of severance package," he says.

The new company quickly got off the ground. Custer Battles's remaining security contractors and support staff were summoned to the small office housing the firm's Baghdad operations center. They were told their positions were being eliminated but they could apply for identical positions with Danubia, Mr. Levinson says. Virtually all of them went to work for the new company, he says.

Several Danubia employees had their salaries paid from Custer Battles bank accounts until at least the end of May, according to bank-account statements.

Mr. Levinson says Danubia was actually paying the salaries but the money was funneled through Custer Battles's accounts to take advantage of the established firm's payroll system. Mr. Cullen, whose responsibilities as a consultant to Danubia are similar to those he had at Custer Battles, didn't reply to emails seeking comment.

David Douglass, a lawyer representing Custer Battles in its bid to get the jury verdict against the company overturned, says Custer Battles and Danubia are separate entities. "Custer Battles sold Danubia some equipment and some of its people went to work for Danubia in Iraq, but you're talking about two completely different companies," he says. Messrs. Douglass and Levinson say Messrs. Custer and Battles have no link to Danubia.

Danubia decided to focus its operations on volatile western Iraq, the scene of near-daily violence, marking a shift from Custer Battles's work around Baghdad. Marines stationed in western Iraq employ logistics companies to deliver supplies, and the logistics firms hire security firms to guard their convoys.

Danubia's business strategy called for undercutting rival security companies. Danubia general manager Amy Clark -- who held a similar position with Custer Battles -- says other companies charged $15,000 per convoy, while Danubia charged just $7,500. "We told people that we were the Target of security, not the Nordstrom's," she says.

The firm won a series of government-related contracts worth $1.28 million per month, according to internal Danubia emails.

Just two months after taking over Custer Battles's assets, Danubia itself sought a buyer, hoping an infusion of cash would help it meet payroll and other obligations. The suitor was Windmill International, a Virginia-based financial-services firm run by Douglas Combs, who had served as a special assistant to acting Secretary of the Navy Hansford Johnson in 2003. On May 26 of last year, Windmill International put out a press release announcing that it had "acquired a major shareholding in Danubia."

The announcement was premature. As Windmill International executives carried out their final due diligence, they grew alarmed about the murky nature of Danubia's ties to Custer Battles. "It began to feel like a shell game," says Christopher Johnson, Windmill International's attorney.

Hoping to salvage the deal, Mr. Levinson met in July with Windmill International's chief operating officer, Peter Majeranowski, in downtown Bucharest. Mr. Majeranowski says in an interview that Mr. Levinson had the demeanor of a "beaten man laying all of his cards out on the table" during the three-hour session, which ended close to midnight.

Mr. Levinson says he told Mr. Majeranowski that Danubia was unable to make its payroll in Iraq or raise money to expand the business because of its perceived ties to Custer Battles. He says he cited the example of a Kurdish security company that claimed Custer Battles owed it several hundred thousand dollars. Mr. Levinson says the Kurdish company was withholding payments it owed Danubia as a way of recovering the disputed funds. He added that Danubia's then-general manager in Iraq resigned after continually being presented with bills that belonged to Custer Battles.

Mr. Majeranowski says he felt sympathetic to Mr. Levinson personally. "He kept saying that he wasn't a wealthy guy and that he needed the job, and I never felt like he was being dishonest," Mr. Majeranowski says.

Still, after the meeting, Mr. Majeranowski told colleagues in an email that Windmill International should "pull out and pull out hard" of the deal, because of potential legal and operational problems posed by Danubia's association with Custer Battles. The company ended the negotiations with Danubia in late August.

Danubia managed to generate enough revenue to keep operating in Iraq. Two months ago, crisis hit. On the morning of April 10, a long convoy of supply trucks guarded by Danubia personnel left the Camp Victory compound near Baghdad's international airport. The convoy was bound for an American military outpost outside Fallujah.

When the convoy approached a bridge in Fallujah, a roadside bomb tore into one of the security vehicles, puncturing its tires, destroying its bulletproof windshield and wounding the head of the Danubia security force and another Danubia guard, according to Danubia reports of the encounter. The vehicles limped into a military compound outside the city to regroup, then made their way to their original destination, a American military outpost on the other side of Fallujah called Taqqadam.

Later that afternoon, as the convoy attempted to return to Baghdad, the vehicles were hit by a trio of roadside bombs. They pushed forward to a small Marine checkpoint, where they took sniper fire from a nearby mosque and machine-gun fire from a passing vehicle full of Iraqi police officers, Danubia said later. The Danubia team suffered four more casualties. A wounded Pakistani truck driver was dragged away by insurgents and several of the gravel trucks were destroyed.

The Danubia team made its way through Fallujah, and linked up with a second Danubia convoy to make the return trip to Baghdad. What happened next is subject to dispute. In an account submitted to the U.S. military, a Danubia security guard said uniformed Iraqi National Guard personnel and men on nearby roofs wearing ski masks fired at the convoy as it tried to enter the Baghdad airport complex. The Danubia personnel returned fire and finally made it back to the Danubia base in Baghdad that evening, thinking the incident over.

It wasn't. The following day, a convoy belonging to a second Western security company was stopped by Iraqi National Guardsmen who said they were looking for a group of security contractors who had killed one of their officers the day before, according to an internal military investigative report compiled in the aftermath of the clashes. The Iraqi personnel later told military investigators Danubia had fired on them without provocation because it mistook them for insurgents, according to U.S. military officials familiar with the investigation. The Iraqis said that Danubia personnel killed three Iraqi officers, including a high-ranking colonel, according to the military investigative documents.

With Iraqi officers killed, possibly by Americans, the U.S. military told Danubia that it was opening a formal probe into Danubia's conduct in Fallujah and suspending the company from operating in western Iraq. Danubia was warned that personnel trying to evade the ban would be arrested by the U.S. military and detained for up to two weeks.

Ms. Clark, the Danubia general manager, says the military has yet to tell her the details of its investigation. Danubia's formal suspension was lifted after about a month, but when Danubia has sought routine clearance to operate convoys in western Iraq the military has refused, she says. Ms. Clark left for the U.S. and is unsure if she will return to Iraq. The company has reduced the number of employees in Iraq to 12 from 70.

But Danubia remains active in the country, providing teams of Western bodyguards to protect American and British engineers charged with repairing and modernizing Iraq's electricity infrastructure in and around Baghdad. Ms. Clark says the company is looking for new work and hoping the military will soon allow it to resume its security work in western Iraq.

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