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Iraq Contractors Tap Law Firms Print
Tresa Baldas - The National Law Journal - September 5, 2007

The war in Iraq has an army of high-profile attorneys working to steer defense contractors through a minefield of lawsuits and federal investigations involving war profiteering and fraud.

During the past year, several defense contractors hired to help rebuild Iraq have come under federal investigation or faced litigation for allegedly defrauding the government. Government officials estimate that $10 billion in Iraq-related contracts are unaccounted for and may have been lost to fraud or other misconduct.
Currently, about 80 federal investigations looking into contract fraud are under way, and more than 20 cases have been referred to the Department of Justice for prosecution, according to congressional testimony offered by federal auditors. During the last three years, contract fraud investigations have yielded 10 arrests, five indictments, five convictions and two imprisonments.

High-caliber law firms have lined up to help guide defense contractors through investigations and prosecutions and relieve their fears of prosecution, not receiving payment or being banned from doing business with the government.

Akin Gump Strauss Hauer & Feld and Vinson & Elkins of Houston are representing former Halliburton subsidiary KBR Inc., which is facing scrutiny over a $25.7 billion contract to help rebuild oil services in Iraq.

Patton Boggs of Washington has come to the aid of Halliburton, the largest private contractor in Iraq, which is facing congressional scrutiny.

Washington's Brand Law Group is advising Fluor, a U.S. engineering and construction firm that is facing questions over its $1.1 billion water and sewage contract in Iraq.

WAR ZONE WORK

For lawyers, the key to handling these federal inquiries is showing investigators and lawmakers just how difficult it is to do business in Iraq.

"The difficulty is that they're trying to get a job done in the middle of a war," said Craig Margolis, partner at Vinson & Elkins who is representing KBR and a number of other defense contractors doing business in Iraq.

"Part of our job is to ensure that when auditors see either a discrepancy or a lack of documentation, that does not mean that there has been fraud." Margolis said. "The discrepancy might just be the result of contractors doing the best that they can while operating in a wartime environment."

Margolis said lawyers with clients in Iraq have three concerns: Department of Justice and Department of Defense investigations; congressional oversight; and qui tam lawsuits, which allow private individuals to sue a company on behalf of the government, and which can linger for years.

"In this environment, I think that all defense contractors assume that there are a significant number of qui tam lawsuits that remain under seal," Margolis said.

FRONTLINE ADVICE

Some lawyers feel defense contractors are under attack.

"The government has announced a priority to go after these people ... and they have to respond guardedly because the government's after them," said attorney Stan Brand, who is representing six defense contractors, including Fluor, that are facing federal inquiries over contracts in Iraq.

"What you're trying to do is keep them from making mistakes," said Brand of the Brand Law Group. He noted that liability and exposure often stem from what companies do after a federal investigation begins. His advice to contractors under investigation is to "play it straight."

"Don't throw records away," Brand said. "Don't conspire with people to cook their testimony. ... Deal with the issues head-on because what prosecutors love is to catch people obstructing the investigation or cooking their testimony or consorting with others to change their story. And even if [prosecutors] can't prove a substantive offense, they've got you."

Bryan Sierra, a spokesman for the Justice Department, dismissed accusations that contractors are being targeted.

"I don't think there's anybody here who is unfairly trying to scrutinize anybody," he said. "It's important to remember that if you're doing business on behalf of the American people and for the American people, it's important that business be conducted legally, honestly and fairly."

In response to congressional criticism that the DOJ is dragging its feet on prosecutions -- there have been less than a dozen indictments amid hundreds of investigations -- Sierra noted that "[y]ou're talking about investigations going on in an area of the world that's not always easy for us to access. It's a very labor-intensive, travel-intensive undertaking."

If recent court action is any indication, defense counsel will be kept busy dispensing advice.

Most recently, a U.S. Army major, his wife and sister were indicted on Aug. 22 for allegedly conspiring to receive millions of dollars in bribes in exchange for contracts for bottled water and other products for U.S. troops in Iraq and Kuwait. The family is accused of accepting $9.6 million in payments in exchange for the contracts. U.S.A. v. Cockerham, No. 5:07-cr-00511-WRF-1 (W.D. Texas).

Also, the U.S. Department of Defense announced last week that it will lead an 18-person team to Iraq early next month to investigate contracting practices.

The probe is a response to reports of discrepancies in military records of where thousands of weapons intended for Iraqi security forces actually ended up.

In San Diego, a federal jury in February indicted defense contractor Brent Wilkes on charges of conspiracy, fraud and money laundering involving an Iraq contract worth $1.7 million to distribute bottled water to CIA operatives in Iraq. U.S. v. Foggo, No. 07 CR 0329 LAB (S.D. Calif.).

Also in February, U.S. contractor Philip Bloom was sentenced to 46 months in prison and ordered to forfeit $3.6 million for bribing public officials with cars, computers and jewelry, and laundering money in exchange for more than $8.6 million in contracts for construction work in Iraq. Co-conspirator Robert Stein also was sentenced to nine years in prison for related charges in the same scheme. U.S. v. Bloom, No. 1:06-cr-00053-CKK-1 (D. D.C.).

In Virginia, contractor Custer Battles, which had a $9 million contract to help distribute new currency in Iraq, was hit with a $10 million jury verdict last year over allegations that it inflated expenses with fake invoices. A judge overturned the verdict in August. U.S. ex rel. DRC Inc. v. Custer Battles, No. 1:04cv199 (E.D. Va.).

But it's not just lawsuits that have defense contractors worried, lawyers note. It's surviving a congressional investigation, which could hurt a company's reputation no matter what the outcome, they said.

THE SPECIALISTS

The first step in surviving a government inquiry: Get the right lawyer.

"This is like looking for a doctor who is experienced in a specific disease," said Steven Ross, of Akin Gump, who is representing KBR, the Halliburton subsidiary that is facing a congressional investigation over its oil contract in Iraq. "The earlier that you bring on that specialist, the better off the experience it will be for you."

Ross, who has defended companies facing congressional investigations for years, said a big part of his job in the defense contractor probes is playing communicator: He lets his clients know what congressional committees are after, why they want it and when they want it. He then lets lawmakers know what the contractors have done, why they've done it and the legitimacy behind their actions.

"I think most defense contractors would like to be judged on the reality of the job that they did under the circumstances they were operating," Ross said.

It's those circumstances -- working in a war zone under tight deadlines with short notice -- that have many defense contractors questioning the government's investigations, said attorney Jason Matechak, of Washington's Reed Smith, who is advising a number of defense companies facing scrutiny in Iraq.

"They were told, 'Do what it takes to protect the convoys. Build the roads,' " Matechak said. "They did what they were told. They did everything that was asked of them and more ... and now they're feeling that they should be showed a bit of gratitude rather than scrutiny."

While Matechak acknowledged that the government has some "legitimate concerns" about proper documentation by contractors, he also noted that keeping good records isn't so easy in Iraq. Low-tier subcontractors lose things that go undocumented. Equipment blows up. Things get stolen.

And sometimes managers will try to recreate records when questioned, making matters worse.

Matechak's advice is for contractors to self-audit. And if any wrongdoing is suspected, "approach the government before they approach you."

CHILLING EFFECT?

Attorneys note that the increased government oversight of defense contractors is having a chilling effect on many contractors in Iraq, who fear they're next on the list.

"There's a certain attitude of, 'Fasten your seat belts because we're in for more scrutiny,' " said Peter Spivack, a partner at Hogan & Hartson in Washington, who has clients in Iraq, none of whom is under investigation, he added.

Spivack said he expects more defense contractors will come under closer scrutiny in the near future given the increased amounts of government spending in Iraq and the increased resources that the Department of Justice has put into investigating contract fraud.

According to federal auditors, the DOJ has 70 prosecutors devoted to contract fraud cases.

"I expect a large uptick in investigations and then enforcement action," Spivack said.

"One of the most significant challenges that any contractor faces is the possibility of debarment," Spivack said. "That's, frankly, the big club that the government has."

The government also can impose stiff penalties on contractors that commit fraud, which also ensures compliance, said Dale H. Oliver, of Quinn Emanuel Urquhart Oliver & Hedges in Los Angeles, who is familiar with defense contractors that have come under federal investigation. He declined to give further details.

"Contractors have been, in my view, extremely zealous in ensuring that they have ethical processes to guard against fraud because the penalties are so draconian," Oliver said.

Oliver also stressed that while war profiteering often raises regulatory eyebrows, it's not illegal, so long as complete and accurate data have been provided to the government, without misrepresentation.

"There is no prohibition against making profit or making large profits," Oliver said. "As long as you're not jimmying the books, the profit is what it is."
 
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