updated 2/8/2007 5:31:20 PM ET 2007-02-08T22:31:20

For the second time, a judge has dismissed a lawsuit against a military contractor that whistle-blowers accuse of scamming the U.S. government out of tens of millions of dollars in the first months of the Iraq war.

U.S. District Judge T.S. Ellis III in Alexandria ruled in favor of Fairfax-based Custer Battles LLC, which has been pilloried in Congress and elsewhere as an example of the fraud and mismanagement that plagued the occupation of Iraq under the U.S.-led Coalition Provisional Authority.

Dismissing a lawsuit filed by two whistle-blowers, Ellis said there was no evidence that Custer Battles committed fraud while under a $16.8 million contract to provide security at Baghdad International Airport in 2003. The ruling was issued Feb. 2 and made public Tuesday.

The whistle-blowers, former Custer Battles employees Robert Isakson and William Baldwin, said the company failed to deliver on promises that it would provide 138 security personnel at the airport.

But Ellis found that Custer Battles never specified how many security personnel it would provide. He said Custer Battles initially provided more than 138 workers and received glowing performance evaluations in its first few months on the job.

The whistle-blowers’ attorney, Alan Grayson, said Ellis’ ruling ignored evidence that Custer Battles later diverted airport security workers to other contracts it obtained from the Coalition Provisional Authority, and illegally double-billed the government for those employees’ work.

Inspector general testimony
He cited testimony from CPA inspector general Richard Ballard, who said Custer Battles left the airport woefully understaffed, resulting in long lines at checkpoints and, at times, vehicles being waved through checkpoints without inspection.

“The judge never even bothers to mention (the inspector general’s testimony) in his decision,” Grayson said Thursday.

Scott Custer, one of Custer Battles’ founders, said in a statement that he was relieved by the judge’s ruling “but it does not dispel the cloud that hangs over us or erase the two years of legal battles we’ve fought to clear our name.”

Last year, Ellis threw out a separate case against Custer Battles, after a jury awarded a $10 million judgment against the company over its work on a contract to replace the old Iraqi currency. Ellis ruled that any fraud was perpetrated on the CPA rather than the U.S. government, even though the U.S. government ultimately footed the bill.

Grayson said he will appeal both rulings to the 4th U.S. Circuit Court of Appeals in Richmond.

The two cases were initially part of the same lawsuit, which was among the first filed against an Iraq war contractor under the federal False Claims Act. The law allows whistle-blowers to bring suits against companies they believe are cheating the government, with the whistle-blowers getting a percentage of any damages awarded.

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