Monday, October 08, 2007
Halliburton: The New Enron. How the Aristocracy of Pull is Wasting Your Tax Dollars.
The People vs. the Profiteers
Americans working in Iraq for Halliburton spin-off KBR have been outraged by the massive fraud they saw there. Dozens are suing the giant military contractor, on the taxpayers' behalf. Whose side is the Justice Department on?
by David Rose November 2007
On first meeting him, one might not suspect Alan Grayson of being a crusader against government-contractor fraud. Six feet four in his socks, he likes to dress flamboyantly, on the theory that items such as pink cowboy boots help retain a jury's attention. He and his Filipino wife, Lolita, chose their palm-fringed mansion in Orlando, Florida, partly because the climate alleviates his chronic asthma, and partly because they wanted their five children to have unlimited access to the area's many theme parks.
Grayson likes theme parks, too. Toward the end of two long days of interviews, he insists we break to visit Universal Studios, because it wouldn't be right for me to leave his adopted city without having sampled the rides. Later he sends me an e-mail earnestly inquiring which one I liked best.
He can be forgiven a little frivolity. In his functional home-office in Orlando, and at the Beltway headquarters of his law firm, Grayson & Kubli, Grayson spends most of his days and many of his evenings on a lonely legal campaign to redress colossal frauds against American taxpayers by private contractors operating in Iraq. He calls it "the crime of the century."
His obvious adversaries are the contracting corporations themselves—especially Halliburton, the giant oil-services conglomerate where Vice President Dick Cheney spent the latter half of the 1990s as C.E.O., and its former subsidiary Kellogg, Brown & Root, now known simply as KBR. But he says his efforts to take on those organizations have earned him another enemy: the United States Department of Justice.
Over the past 16 years, Grayson has litigated dozens of cases of contractor fraud. In many of these, he has found the Justice Department to be an ally in exposing wrongdoing. But in cases that involve the Iraq war, the D.O.J. has taken extraordinary steps to stand in his way. Behind its machinations, he believes, is a scandal of epic proportions—one that may come to haunt the legacy of the Bush administration long after it is gone.
Consider the case of Grayson's client Bud Conyers, a big, bearded 43-year-old who lives with his ex-wife and her nine children, four of them his, in Enid, Oklahoma. Conyers worked in Iraq as a driver for Kellogg, Brown & Root. Spun off by Halliburton as an independent concern in April, KBR is the world's fifth-largest construction company. Before the war started, the Pentagon awarded it two huge contracts: one, now terminated, to restore the Iraqi oil industry, and another, still in effect, to provide a wide array of logistical-support services to the U.S. military.
In the midday heat of June 16, 2003, Conyers was summoned to fix a broken refrigerated truck—a "reefer," in contractor parlance—at Log Base Seitz, on the edge of Baghdad's airport. He and his colleagues had barely begun to inspect the sealed trailer when they found themselves reeling from a nauseating stench. The freezer was powered by the engine, and only after they got it running again, several hours later, did they dare open the doors.
The trailer, unit number R-89, had been lying idle for two weeks, Conyers says, in temperatures that daily reached 120 degrees. "Inside, there were 15 human bodies," he recalls. "A lot of liquid stuff had just seeped out. There were body parts on the floor: eyes, fingers. The goo started seeping toward us. Boom! We shut the doors again." The corpses were Iraqis, who had been placed in the truck by a U.S. Army mortuary unit that was operating in the area. That evening, Conyers's colleague Wallace R. Wynia filed an official report: "On account of the heat the bodies were decomposing rapidly.… The inside of the trailer was awful."
It is not unheard of for trucks in a war zone to perform hearse duty. But both civilian and U.S.-military regulations state that once a trailer has been used to store corpses it can never again be loaded with food or drink intended for human consumption. According to the U.S. Army's Center for Health Promotion and Preventive Medicine, "Contact with whole or part human remains carries potential risks associated with pathogenic microbiological organisms that may be present in human blood and tissue." The diseases that may be communicated include aids,hepatitis, tuberculosis, septicemia, meningitis, and Creutzfeldt-Jakob disease, the human variant of mad cow.
But when Bud Conyers next caught sight of trailer R-89, about a month later, it was packed not with human casualties but with bags of ice—ice that was going into drinks served to American troops. He took photographs, showing the ice bags, the trailer number, and the wooden decking, which appeared to be stained red. Another former KBR employee, James Logsdon, who now works as a police officer near Enid, says he first saw R-89 about a week after Conyers's grisly discovery. "You could still see a little bit of matter from the bodies, stuff that looked kind of pearly, and blood from the stomachs. It hadn't even been hosed down. Afterwards, I saw that truck in the P.W.C.—the public warehouse center—several times. There's nothing there except food and ice. It was backed up to a dock, being loaded."
As late as August 31, 11 weeks after trailer R-89 was emptied of the putrefying bodies, a KBR convoy commander named Jeff Allen filed a mission log stating that it had carried 5,000 pounds of ice that day. This ice, Allen wrote, was "bio-contaminated." But to his horror, on that day alone, "approx 1,800 pounds [were] used."
Conyers and Logsdon say that R-89 was not the only truck that was loaded with ice after being used as a mortuary. They attribute this state of affairs to a chronic shortage of trucks brought about by systemic failures in KBR's operation. The firm had purchased some 200 reefers in Iraq, but only a quarter of them worked. "We had crap-assed trucks they'd bought from local dealers," Logsdon says. "Often you'd be driving one they'd pieced together from several just to get it on the road." He and other former KBR workers say that even new vehicles, some of which cost hundreds of thousands of dollars, often broke down because of an absence of affordable spare parts. Instead of paying to repair them, the company often burned disabled trucks in pits or by the side of the road. Conyers tried repeatedly to draw his superiors' attention to these and other alleged abuses, but to no avail. (In an e-mailed statement, KBR denied that it "did or does" order defective vehicles, adding that it disposes of equipment only with "the approval of designated Army personnel.")
Like many of KBR's employees, Conyers was risking his life on the job, which paid about $7,000 a month. He had already lost half a leg in an accident—coincidentally, while working for Halliburton—in 1990. Twice, in August and October 2003, his convoy was hit by roadside bombs, and although he was not seriously injured, his prosthetic leg was damaged. A third attack caused swelling and infection, making it impossible to wear the prosthesis. Then, three days after Christmas of 2003, about three months after he'd reported the contaminated ice, he was fired. His superiors accused him of refusing to work, an allegation he denies. Conyers says he had already been warned by KBR management that he was "not a team player," and he believes that the real reason for his dismissal was his refusal to keep quiet. Along with his job went his health insurance. Now confined to a wheelchair, he is still unable to work.
Others in the world of Iraq contracting have fared much better. Halliburton's stock price rose fourfold between the time of the invasion and early 2006, from $10 to $40. And in 2006 alone, according to Forbes, Halliburton C.E.O. David Lesar collected nearly $30 million in compensation.
In the fall of 2006, Conyers told me he was planning to file a lawsuit against KBR under the False Claims Act, a law crafted by Abraham Lincoln to punish war profiteers. Under the act's "qui tam," or whistle-blowing, provisions, anyone who comes across a suspected fraud can file a suit on taxpayers' behalf. ("Qui tam" is an abbreviation of a Latin phrase that means "He who sues for the king as well as for himself.") If the government—in the shape of the Department of Justice—decides that the case has merit, it "intervenes," adopting the suit as its own and bearing its costs. The original whistle-blower will get a proportion (usually about 18 percent) of the damages, which can be considerable: when qui tam cases succeed, contractors have to pay back three times as much as they stole.
A suit ordinarily remains sealed for 60 days while the D.O.J. makes up its mind about whether or not to proceed. During this period, anyone who divulged the suit's contents—plaintiff, lawyer, or journalist—would risk prosecution, fines, and imprisonment. According to court precedents, a violation of the seal might also cause the case in question to collapse. But when the seal expires, the lawsuit's contents are made public—whether the D.O.J. intervenes or not.
We must assume that Conyers did file his suit, because he now says he's unable to talk at all about his experiences with KBR in Iraq. This is presumably because the case remains under seal, though neither he nor Grayson can confirm even that. The seal is, in effect, a sweeping gag order, preventing them or anyone else from discussing the case in any way. Vanity Fair is able to publish Conyers's story only because he told it before any gag was imposed, to a writer for Hustler magazine, and to me. If he spoke about his allegations now, he could go to jail.
So far, Alan Grayson estimates, his efforts to pursue qui tam cases against contractors in Iraq have cost him about $10 million. The severe terms of the False Claims Act mean that he cannot even reveal how many fraud whistle-blowers he represents, but there are dozens. Stuart Bowen is the special inspector general for Iraqi reconstruction (sigir), a unique watchdog whose office reports to both the Pentagon and State Department. He reported last year that his office knew of 79 suppressed qui tam cases, some of which have multiple plaintiffs. As of August, 66 are still under seal. There may be many more. (KBR refuses to say how many qui tam cases have been filed against it.)
If some of Grayson's clients win their cases, he could see a return on his investment, in the shape of reimbursed costs and a percentage of any damages. There is also the possibility that he won't see a dime. Fortunately for him, he doesn't need the money. In 1990 he launched a telecommunications company and installed its switching system in a bathroom above a New York funeral home. It grew to become IDT, the world's largest calling-card corporation, nearly half of which was sold in 1998 to AT&T for $1 billion. More recently, Grayson has realized impressive returns in far-flung locations: he is, for example, the third-largest shareholder in Kentucky Fried Chicken Indonesia. "I made all this money in my spare time," he says with a shrug. "I don't quite know how it happens. I'm like Dustin Hoffman in Rain Man."
He certainly didn't start with much. Born in 1958, he grew up in the Bronx in a 21st-floor apartment next to an elevated train. His father was the principal of an elementary school where a third-grader once threatened him with a knife. Grayson's mother spent much of her time attending to her son's asthma. "I had a lot of trouble breathing, and needed special injections four times a week," he remembers. "Each time, she had to take me to the hospital. She also made huge efforts to ensure I got a good education."
Those efforts paid off. Admitted as a student at the highly selective Bronx High School of Science, Grayson went on to Harvard and then Harvard Law School. (While still a law student, he somehow managed to obtain a master's degree in public policy and to pass the exam for a Ph.D. in government.) But his struggles weren't over yet. A brief first marriage left him so broke that he once found himself locked out of the motel room where he'd been living.
In 1984, he got a job as a clerk for the D.C. federal appeals court, where he worked for future Supreme Court justices Antonin Scalia and Ruth Bader Ginsburg. The following year, he joined Ginsburg's husband, Marty, at his renowned Washington law firm, Fried, Frank, Harris, Shriver & Jacobson. "There," Grayson says, "I learned the smallest details of the law that applies to government contracting." The Federal Acquisition Regulation, 600 small-type pages of rules governing every aspect of commercial relationships between the U.S. government and private business, became his bible.
A cynic might argue that Grayson is hoping for political dividends from his Iraq-fraud campaign. He mounted a run for Congress last year in his local Florida district and, after joining the race very late, came within 2,000 votes of winning the Democratic primary. But he maintains that his emergence as a whistle-blowers' white knight was anything but calculated.
He had, he says, handled a "trickle" of qui tam cases for years, representing both whistle-blowers and contractors. Many of those cases were swiftly adopted by the D.O.J. But when the Bush administration came to power and the "war on terror" began, he quickly came to realize that the scale of fraud spawned in its wake was of a different order of magnitude. More and more would-be plaintiffs began to contact his firm after hearing about it on the informal whistle-blowers' grapevine or through nonprofit organizations such as Taxpayers Against Fraud and the Project on Government Oversight, both based in D.C. "I certainly could be doing a lot of different things in my life," says Grayson. "It's possible that when all is said and done on these cases I will have lost a substantial amount of money. I'm O.K. with that. Some things you do because they're really worthwhile and important."
It is perfectly normal, Grayson says, for the D.O.J. to seek to extend the seal on a qui tam suit for 6 or 12 months while it carries out investigations. But with many of the Iraq cases it has gone back to court time and again, successfully asking judges for extension after extension. As a result, even many suits first filed in 2003 and 2004 remain entirely secret.
"What you have here is a uniform practice that goes across an entire class of cases, something I've never seen before," says Grayson. "They're being treated in a fundamentally different way from normal cases that don't involve fraud in Iraq. They're being bottled up indefinitely."
In fiscal year 2006, according to Taxpayers Against Fraud, the D.O.J. won damages in 95 separate qui tam cases in fields ranging from Medicare to homeland security, recovering a total of almost $3.2 billion. Yet not a cent of this sum arose from suits against contracting firms in Iraq. In four years, the total False Claims Act damages from Iraq amount to just $14 million, the result of four cases that were settled out of court, according to the D.O.J.
Nine other cases have been unsealed, but the D.O.J. decided not to intervene in any of them. Five promptly collapsed, because neither the whistle-blowers nor their lawyers were prepared to bear what might have been huge costs. That leaves four suits that are being fought in public, all by Alan Grayson.
Given that the same lawyers who are suppressing the Iraq cases continue to be cooperative on other matters, Grayson suspects that they are following orders from on high. Would it be so outlandish, he wonders, to suggest that the same Justice Department that has been accused of firing U.S. attorneys for political reasons might be suppressing war-related fraud claims for political purposes?
One such purpose might be to shield from view the monumental scale of U.S. military contracting in Iraq and elsewhere, and the size of the flaws associated with it. The Department of Defense is easily the biggest federal agency, with a budget that has ballooned more than 90 percent since 2000, to about $460 billion this year. Much of that increase has been spent on private contracting, which rose from $106 billion in 2000 to $297 billion in 2006.
KBR's Iraq logistics contract was awarded in December 2001, almost a year and a half before the war started. By August 2007 the company had received about $25 billion from the D.O.D., and the funds continue to roll in at a rate of more than $400 million a month. KBR builds America's bases and trucks in soldiers' food, cooks their meals, washes their laundry, and provides their gyms and Internet connections. When the Pentagon decided to outsource the repair of military communications equipment, this too was assigned to KBR. Soon, as Grayson points out, there will be no one left in the U.S. Army who knows how to fix a radio. This profound shift of duties from the military to private companies was supposed to save the government money, and it is an uncomfortable political fact that it has instead triggered a free-for-all of fraud and waste.
At the same time, the Bush administration has special sensitivities to claims concerning KBR and its former parent company, Halliburton. Dick Cheney's deep connection with the firm is well established. It is less widely known that former attorney general Alberto Gonzales, the Cabinet member who headed the Justice Department until August, when he was forced to resign, also has long-standing links with both Halliburton and its legal counsel, the venerable Texas firm of Vinson & Elkins.
Grayson says that all the qui tam suits he has filed against Halliburton and KBR have been defended by attorneys from V&E. In 1982 it was V&E that gave Gonzales his first job as a lawyer. Nine years later he became one of the firm's first minority partners—a promotion that his biographer Bill Minutaglio would single out as "the defining moment of his life." In 2000, Gonzales amassed a record $843,680 war chest to finance a race for the Texas Supreme Court, even though he had no Democratic opponent. V&E, which had already represented Halliburton for many years, was the source of his biggest donation—almost $30,000. Halliburton executives also stepped up, with a gift of $3,000.
The Justice Department declined to answer detailed questions about the qui tam cases, saying, "We cannot comment on the number of cases that are under investigation or under seal." In an e-mail, a spokesman wrote, "We do not agree with any statement that might suggest that the Department is not giving these cases due consideration for political or other improper reasons, and there is no support for such a conclusion." The cases, he added, "arise from allegations of fraud in a war zone, where acquiring evidence is necessarily more time consuming and complex."
Whatever the government's reason for keeping the qui tam cases under seal, its secrecy has so far obscured the true picture of alleged fraud in Iraq. For now, only slivers of the whole are visible—thanks to the handful of cases that have been opened to scrutiny.
"In my mind, one of the basic reasons, maybe even the basic reason, why the war has gone badly is war profiteering," says Grayson. "You could say that the only people who have benefited from the invasion of Iraq are al-Qaeda, Iran, and Halliburton. America has spent so much money that we literally could have hired every single adult Iraqi and it would have cost less than what it has cost to conduct this war through U.S. military forces and contractors."
In Grayson's view, a nightmare combination of jacked-up bids, waste, kickbacks, and inflated subcontracts means that as much as half the value of every contract he has seen "ends up being fraudulent in one way or another." He adds, "Cumulatively, the amount that's been spent on contractors in the four-plus years of the war is now over $100 billion. Pick any number between 10 percent and 50 percent—I don't think you can seriously argue that the scale of the fraud is less than 10 percent. Either way, you're talking cumulatively about something between $10 and $50 billion."
Indeed, in February, the House Committee on Oversight and Government Reform got the news from Pentagon auditors that contractors in Iraq had claimed at least $10 billion—three times more than previous official estimates—in expenditures that were either unreasonably high or unsupported by proper documentation. Of this amount, $2.7 billion had been billed to the government by KBR.
KBR's current military-support contract is known as the Logistics Civil Augmentation Program, or logcap. This is the contract's third incarnation, and, like its predecessors, logcap 3 is a "cost-plus" contract: whatever KBR spends, the government agrees to reimburse, with the addition of a fee of about 3 percent. The more the company spends, the more it makes, so it pays to be profligate. All the former employees I spoke to told of KBR's over-ordering equipment such as computers, generators, and vehicles on an epic scale. Millions of dollars' worth of equipment was left to rot in yards in the desert.
logcap is also an "indefinite-delivery, indefinite-quantity" contract, which means that the Pentagon can go on commissioning whatever it wants from KBR whenever it wants. Instead of being subject to competitive bids, fresh items can be added to the contract at will: all officials have to do is issue a "task order." These can be worth hundreds of millions of dollars—even billions, in the case of Task Order 59, which put KBR in charge of supporting the 130,000 U.S. troops in Iraq.
The first logcap contract dates back to 1992, when Secretary of Defense Dick Cheney paid Brown and Root, as KBR was then known, to devise a contract for providing overseas support services to the military. Under federal law, a firm that designs a contract is prohibited from bidding for it, but this regulation was ignored, and B&R bid for and won logcap 1. (More than a decade later, the rules were breached again when Halliburton designed and then won the $2 billion contract to restore Iraq's oil industry.) Three years after logcap 1 was awarded, Cheney, who had no business experience, became C.E.O. of B&R's parent company, Halliburton, where he would collect some $44 million in earnings.
logcap 1 expired in 1997, and Halliburton lost its bid for logcap 2 to DynCorp. By this time, however, B&R was so deeply embedded in Bosnia and Kosovo, where U.S. forces were then concentrated, that the region was exempted from logcap 2 altogether. DynCorp was left fuming on the sidelines while Halliburton remained in the Balkans, reaping a harvest that eventually reached $2.2 billion.
In the April 2005 issue of this magazine, Michael Shnayerson wrote about Bunnatine Greenhouse, a former civilian procurement chief at the Army Corps of Engineers. Greenhouse had been demoted after protesting the decision to give Halliburton the Iraqi-oil-industry contract. In the summer of 2001, she had led a team of Pentagon inspectors sent to Bosnia and Kosovo. The team, she says, found that KBR and its bills were "out of control." The General Accounting Office, now named the Government Accountability Office (G.A.O.), reached similar conclusions, reporting that KBR's Balkans operation was over-equipped and overstaffed to the point where "half of these crews had at least 40 percent of their members not engaged in work."
Verdicts such as these should have been devastating, especially since they were delivered in the fall of 2001, when the Pentagon was about to decide which of several rival corporations should be awarded the new logcap 3. The contract promised to be extremely lucrative: after 9/11, war was looming, and big foreign deployments seemed inevitable. Somehow, KBR's record of wasting government money was overlooked.
One reason may have been KBR's shrewd strategy of employing former government regulators. Tom Quigley, Bunny Greenhouse's predecessor as civilian procurement chief of the Army Corps of Engineers, went on to become KBR's logcap procurement director in Iraq. Still more senior was Chuck Dominy, who had been a three-star general with the Army Corps when Cheney hired him, at Halliburton, in 1996. When it came time to award logcap 3, Dominy was Halliburton's vice president for government affairs and chief Washington lobbyist. (KBR denies courting government favor through its hiring practices.)
Although Cheney was by then vice president, he still owned substantial stock options and was receiving deferred salary payments from Halliburton, which have totaled more than $946,000 during his first five years in office. To date, no hard evidence has surfaced to suggest that he or his staff was directly involved in awarding logcap 3. However, as Time first reported, an Army Corps internal e-mail states that the firm's Iraqi oil contract was "coordinated with the VP's [vice president's] office."
The upshot was that KBR's past sins were forgiven in 2001. "What is clear is that they took no heed of what I'd been saying about Halliburton in the Balkans," Greenhouse says. "And they should have. Many of the problems that have become apparent with logcap in Iraq, I had identified years earlier in Kosovo and Bosnia."
And they were apparent almost from the start of the Iraq war. On November 23, 2004, the sigir, Stuart Bowen, complained to the Pentagon that it had proved impossible to determine whether KBR was delivering value for money. He wrote in a memo: "The logcap contract was awarded to KBR even though the contractor did not have certified billing or cost and schedule reporting systems." In other words, there was no way to track how money was being spent, and those responsible for awarding the multi-billion-dollar contract hadn't seemed to care.
In the early years of his career, Alan Grayson spent most of his time representing military contractors. "It was the most heavily regulated business in existence anywhere in the world, and the result of that was that it was clean," he says. "There was a tremendous bureaucracy that existed to make sure that contractors stuck to the rules, and also to punish those who did not stick to the rules very severely." In one famous case, he recalls, a uniform manufacturer that had made hundreds of thousands of military garments was investigated because he asked his workers to sew one dress as a gift for his daughter.
Today, such stringency is unthinkable. "What has happened is a systematic dismantling of the protections that kept the system honest," says Grayson. Between 1991 and 2005, the size of the staff responsible for managing and auditing Pentagon contracts was cut in half. "What we have seen in recent years is an explosion in contracting, while at the same point in time we have seen a contraction of those engaged in oversight of contracting matters," says Comptroller General David M. Walker, the head of the G.A.O. This, he says, serves "to exacerbate the systemic problems that have existed for years."
G.A.O. reports on contracting in Iraq describe a state of affairs that borders on the surreal. According to one document, issued in December 2006, the Army Materiel Command—the division that assigned logcap and is responsible for cutting KBR's checks—was "unable to readily provide [the G.A.O.] with comprehensive information on the number of contractors they were using at deployed locations or the services those contractors were providing to U.S. forces."
KBR's performance is supposed to be monitored by another part of the Pentagon bureaucracy, the Defense Contract Management Agency. This, says the G.A.O. report, is so short-staffed that one of its officials, who was supposed to be overseeing logcap at 27 separate locations, "told us that he was unable to visit all these locations during his 6-month tour in Iraq." As a result, the G.A.O. remarks dryly, "he could not effectively monitor the contractor's performance at those sites." Then again, at least he got to the Middle East. Other officials from the agency supposedly overseeing KBR in Iraq are based in Germany and the United States.
The D.O.J.'s stifling of fraud claims against the big contracting companies is all the more curious in light of its willingness to prosecute individuals for offenses including bribery and embezzlement. Eight people who worked under logcap are being investigated for such crimes. Two employees of a KBR subcontractor have already pled guilty. In a separate case, a former KBR employee pled guilty in July to participating in a kickback scheme. In August 2007, Bowen reportedly promised that a new task force drawn from several government departments was escalating the fight against fraud and corruption, which he labeled the "second insurgency."
Grayson says that the crackdown on individuals "creates an illusion of activity, but so far they've done nothing against firms such as KBR." When it comes to qui tam cases, he adds, the government isn't just hiding the complaints from view; it also appears to be neglecting its obligation to investigate their claims.
In 2006, Grayson filed the most recent version of a suit on behalf of four former KBR employees: Julie McBride, Linda Warren, Denis Mayer, and Frank Cassaday. Their formal complaint, which was sealed for more than a year, focuses on the fall of 2004, when Marines in Fallujah were daily risking their lives in grim street combat. Meanwhile, KBR managers back at their base outside the city were allegedly telling their staff to record grossly exaggerated numbers of soldiers using the Morale, Welfare, and Recreation (M.W.R.) facility, a two-building complex with a gym, a cinema, a game room, and an Internet café.
"Everyone who came through the doors had to sign in," Warren says, "and that was recorded as a user visit. But if they went from one room to another—say, from the gym to the Internet area—that was supposedly another visit; the same if someone put his backpack down in the movie theater, whether he watched the film or not. If someone wanted a bottle of water, or a towel, the same person who'd already been counted would be counted again. Then there were the hourly counts: everyone using the facility was counted once more as if they'd just arrived. You could easily be counted 12 times in two hours."
According to the complaint, the practice of reporting inflated figures "increases the M.W.R. budget in Iraq, allowing for more KBR facilities, administrators, staff and equipment, and boosting KBR's fee." (At a hearing in June, KBR denied basing its M.W.R. billing on the number of reported users.)
The practice, the suit alleges, was not confined to Fallujah—which might help explain a September 2006 press statement in which KBR boasted of having served "more than 73.5 million patrons in MWR facilities." As the complaint notes, "the number of patrons that KBR says it has hosted at MWR facilities is three times the population of Iraq." Given that Iraqis weren't allowed to use the facilities, it's worth noting that the figure is roughly 565 times the total number of U.S. troops deployed in the country.
Linda Warren, a former Marine who brought up five children as a single mother in Abilene, Texas, says she "flatly refused" to fill in the bogus head counts. She had gone to Iraq for patriotic reasons, and recoiled at being asked to compile inflated records. Once, she says, "I did the head counts accurately. Next day when I got to work I could see that the sheet had been replaced."
She and her colleague Julie McBride, a former attorney from California, both protested to their KBR bosses. Having filed a formal grievance, Warren was accused of "not getting along with employees" and was fired in January 2005. "They made it clear there was no place for me any longer," she says. "There was no appeal, no accountability."
Two months later, the complaint states, McBride was summoned to the office of Kevin Clarke, KBR's top official at Camp Fallujah. Having repeated her concerns about the M.W.R. head count, she was told she was being fired for "insubordination." Among her offenses: occasionally using a pencil instead of a pen to fill in her time sheets. Shipped by helicopter to Camp Victory South, near Baghdad, she was told by Ted Kowalski, KBR's human-resources supervisor in Iraq, that she was under "house arrest." "KBR guards surrounded McBride," says the complaint. "They made her ride with them in a sports utility vehicle. They did not tell McBride where they were taking her. She feared for her safety.… They required her to stay in an isolated trailer, with no amenities. They stood guard outside the trailer throughout the night." Eventually she was escorted to the Baghdad airport and flown back to America.
Warren and Cassaday both say that neither federal agents nor D.O.J. lawyers have ever made any attempt to ask them about the claims in their suit. Mayer wasn't interviewed, either, according to Grayson. "The [D.O.J.] investigation consisted of asking KBR for an explanation," he says. "Then, without checking into its validity, they declined to prosecute. Having spoken to the firm, the government said, 'Okey-dokey, then we decline the case.'" The suit makes three further allegations, involving overpayments that run into the millions, but the D.O.J. didn't investigate them at all.
KBR declined to comment on any aspect of the suit's allegations in its statement. Meanwhile, the Justice Department's summary investigation has left the four plaintiffs in a bind. "The way this normally works, in non-Iraq cases, is that, even when the government does decline to prosecute, they subpoena records, they interview witnesses, and they tell you what they are doing," Grayson says. "We could have built on that. Here, too, they screwed us up and put us at a terrible disadvantage."
Qui tam cases from Iraq are investigated by an F.B.I. unit in Rock Island, Illinois. According to Grayson, the unit has a "standing order" to get approval from the attorneys at Vinson & Elkins before questioning anyone at Halliburton or KBR. "F.B.I. agents are not supposed to politely ask permission," he says. "The most common interview technique by the F.B.I. is a knock on your door at nine o'clock at night. They're not allowed to do that when it comes to Halliburton and KBR employees." (In its e-mailed statement, the D.O.J. said it cannot comment on how any Iraq case has been investigated; Vinson & Elkins did not respond to a request for comment.)
Inflated bills are not the only factor driving up the price of logcap. There's also this astounding fact: according to government auditors, 80 percent of the work under contract is being done not by KBR but by a bewildering array of subcontractors. In essence, Grayson says, logcap is not a contract to provide services but "a contract to shop"—to the tune of some $20 billion.
Some of these subcontracting firms are large and well-established companies from countries such as Britain, Kuwait, and Saudi Arabia; others are fly-by-night outfits owned by Iraqis who insist on having their names concealed, owing to well-founded fears of reprisal.
In one place the job of laundering soldiers' uniforms, for example, might be performed by a company working directly for KBR. But in another a subcontractor will have sub-subcontracted the work to someone else, and sometimes even sub-sub-sub-subcontracted it. "I've come across examples where you get down four or five levels," says a government auditor who spoke on condition of anonymity. "There's the U.S. prime, the subcontractor from the Middle East, then a sub-subcontractor from Pakistan, then a shell corporation with a box number in Michigan, and finally the Iraqis who're actually doing the work—for next to nothing."
This system has created great difficulties for anyone attempting to oversee the process on behalf of American taxpayers. It has also substantially increased the overall costs of the war by creating the conditions for obscene markups between contract levels. "There is an enormous need to get a closer handle on the detail in the field," says the auditor. "If you go ask one of the inspectors general, 'Tell me about the subcontracts,' they can't tell you anything. It's a black hole. What this means for oversight, and basic issues of fairness, is that there is none."
Establishing logcap as a contract to shop has had a further consequence. Whereas government contracting is bound by a stringent set of rules, the requirements are far more lax when it is KBR or one of its subcontractors that's farming out work. "The government has basically deputized Halliburton to do its contracting for it," says Grayson. "And Halliburton, rather than enforcing the rules of government contracting that have developed since World War II, has generated its own set of rules."
Instead of offering a given job to bidders in an open and public auction, for instance, KBR can approach a few favored subcontractors. And whereas government agencies tend to favor cheaper bids, the fact that logcap is cost-plus means that KBR benefits from accepting the most expensive offer. The higher the subcontract's cost, the higher KBR's "award fee" profit.
For more than three years after the Iraq invasion, matters were further obscured by KBR's insistence that all its contract data was "proprietary"—of potential value to competitors and therefore not subject to disclosure. In October 2006 a stinging report by Stuart Bowen, the sigir, found that this was making it almost impossible to determine whether logcap was delivering value for money, and was "an abuse of the procurement system." Since the report, says Bowen, KBR has begun to make more information available.
On one occasion, the secrecy engendered by multiple levels of subcontracting descended to black farce. On September 28, 2006, Tina Ballard, the deputy assistant secretary of the army, testified to the House committee on government reform about one of the watershed moments in the developing Iraqi insurgency, the lynching of four security contractors on March 31, 2004. The men were employed by the North Carolina security firm Blackwater USA, and Army Secretary Francis J. Harvey had denied in a letter that they had been doing work for KBR under logcap. That would have been a breach of contract, Ballard told the House committee, since logcap prohibits KBR from billing the government for private security. The company is supposed to rely on U.S. troops for protection.
On February 7, 2007, Ballard came before the committee again to say that her earlier claims, and Harvey's letter, had been mistaken. After "extensive research," the army had ascertained that the murdered Blackwater guards were working for KBR under logcap after all—though not directly. They had been engaged by the Kuwait-registered Regency Hotel & Hospital Company, which in turn had been subcontracted by ESS Support Services. ESS had a subcontract from KBR to build and operate dining facilities for troops. "We understand that these security costs, which were not itemized in the contracts or invoices, were factored into ESS's labor costs under its … service contracts with KBR," Ballard said.
KBR had spent an awful lot on these guards it didn't know it had. Blackwater was paying them $500 a day, but billed their services to Regency at a rate of between $815 and $1,075 a day. Regency was adding a markup of $285 to $425 per guard per day when it in turn billed ESS, bringing the annual cost for each individual to between $401,500 and $547,000—about 4 to 10 times higher than an army sergeant's salary. All of this was billed to the government by KBR, which naturally claimed its usual fees on top. (In September, the government of Iraq threatened to expel Blackwater from the country after an incident in which at least eight civilians were killed.)
Before she went to Fallujah, Linda Warren had been supervising a KBR military laundry in Baghdad. She says KBR was billing the government $75 per bag, whereas the Iraqi sub-subcontractor whose staff actually did the work got just $12. The laundry workers themselves, several of whom would be killed by insurgents, were paid just $5 a day.
The dirtiest open secret about contracting in Iraq is that much of the real physical work is done not by Americans but by an army of "third-country nationals"—or T.C.N.'s—from places such as India, Nepal, Sri Lanka, and the Philippines. In 2006, a Pentagon investigation found that T.C.N.'s are often subject to abuses, "some of them considered widespread." In addition to "substandard living conditions" and illegal confiscation of their passports, many workers have had to deal with "deceptive" hiring practices—meaning that they weren't told that their jobs were in Iraq until they'd been shipped there. According to the State Department, T.C.N.'s seeking employment have been forced to pay large "recruitment fees," which are deducted from their future earnings. The effect is to reduce them to a state of "involuntary servitude." (KBR claims to be "an industry leader in implementing a policy in Iraq against trafficking in persons.")
"There were times when their treatment made me ashamed to be an American," says Linda Warren, who became especially close to some Filipino women while posted at Radwaniyah, an installation just outside Baghdad. "They'd come into work with a hard-boiled egg and some tea and offer to share it, while Americans were taking enough to feed five people at the chow halls and throwing most of it away. They were virtually imprisoned, told they would lose all their pay unless they served out their contracts." Several former KBR staff say that the equipment used to protect T.C.N.'s, from blast walls to body armor, was markedly inferior to that of the Americans. As of August, about 1,000 civilian contract workers had been killed in Iraq. Most were T.C.N.'s.
Like many of those who went to work for KBR in Iraq, Barrington Godfrey—a naturalized U.S. citizen who was born in Wales—is a military veteran who applied for the job because he wanted to support the war effort. He, too, is a Grayson client, and his suit was kept under seal for well over a year. When the D.O.J. asked for a further extension in April 2007, its lawyers were so confident of their chances that they showed up in court with a drafted legal order marked motion for extension granted ready to be signed. Instead, Judge Gerald Bruce Lee of the Eastern District of Virginia made a show of crossing out granted and inserting the word denied.
Now in his early 60s, Godfrey has 18 years' experience as a contract-management executive in Saudi Arabia's oil industry. When he joined KBR, in the summer of 2004, concerns had already begun to surface in Washington about overcharging from KBR's troop dining facilities—known in the trade as "D-Facs." Hoping to allay those concerns, KBR set up a "tiger team"—a group that operated outside the normal chain of command—and tasked it with negotiating new D-Fac contracts and cleaning up the existing ones. Godfrey was assigned to the unit.
The team's boss, Jill Pettibone, was another beneficiary of KBR's revolving-door relationship with the Pentagon. Until 2000 she had been executive director for operations at the Defense Contract Management Command, which had been responsible for overseeing KBR's very expensive work in the Balkans. (The body has since been renamed the Defense Contract Management Agency.)
Like most service facilities in Iraq, the D-Facs were staffed by T.C.N.'s. They were paid a bit better than the laundry workers observed by Linda Warren. Depending on their skills and seniority, they earned between $300 and $400 a month.
Unlike most qui tam plaintiffs, Godfrey managed to retain documentary records, and they reveal just how huge the margins on subcontracts can be. For example, a Kuwaiti subcontractor named ABC International Group was in charge of providing D-Fac labor at H4, a base near Mosul. Between March and November of 2004, ABC sent KBR monthly bills ranging from $756,000 to $1.38 million. Godfrey discovered that the facility employed precisely 137 people, all of them T.C.N.'s. On the most generous assumption, that they were all making $400 a month, the true amount being paid to the workers was no more than $54,800. The markup, therefore, was between 1,500 and 2,500 percent.
Until February 2004, H4's D-Fac had been staffed by a Turkish company named Serka. Actually, that continued to be the case. The only difference now was that Serka had become a sub-subcontractor to ABC. "All ABC did was take their slice of the profit. There was no change to the operation at all," Godfrey says.
Godfrey's documents show that margins well in excess of 1,000 percent were to be found at other D-Facs, which Grayson says is unexceptional among contractors in Iraq. "A thousand percent is common, 500 percent routine. I have never seen a markup of less than 100 percent." Back in the U.S., "the average markup under government contracts is 10 percent, and anything more than 12 percent will usually be rejected when the government conducts audits. If your profit margin on a government contract conducted outside Iraq is more than 10 percent, you may well be accused of committing fraud."
Huge labor markups were not the only irregularities Godfrey says he found in the ABC invoices he processed. He also came across blatant accounting inflation of the kind Linda Warren had seen in Fallujah. According to his qui tam complaint, there was a period in 2004 when the D-Fac at H4 was serving 1,000 to 2,000 people a day but billing as if there were 5,400: "At three meals a day, this was billing for almost 10,000 meals a day that were not served at H4."
Godfrey made repeated attempts to force ABC to reduce its bills. All of them, he says, were blocked inside KBR. That December, Godfrey went on leave. When he came back, his cell phone and computer had been stolen. Meanwhile, ABC's C.E.O. was writing to Tom Quigley, the KBR chief of Iraq contracts, who had once been Bunnatine Greenhouse's colleague at the Army Corps of Engineers, claiming that Godfrey was "treating ABC unfairly." Godfrey was suspended for 10 days and told by another KBR executive, "We can't have subcontractor C.E.O.'s complaining about subcontract administrators."
As a result of KBR's inaction, his complaint says, "ABC's overbilling continued through the completion of its first contract period in June 2005, and through the filing of this complaint, and beyond. The amount that ABC overbilled to KBR, and KBR overbilled to the government, exceeded $10 million." This figure covered just one of about a hundred D-Facs spread across Iraq.
In December 2004, a suicide-bomb attack on the H4 dining hall killed 22 people, including 14 troops. Afterward, according to Godfrey's complaint, ABC was paid not once but twice for new kitchen equipment and a new $2 million facility. The complaint also alleges that a Saudi firm, Gulf Catering Company, used inflated head counts to overcharge KBR by nearly $5.3 million between February and October 2004. He relayed these findings to Quigley, who promised to "forward the matter for further inquiry." Then, in a separate e-mail, Quigley told Godfrey he felt "submarined" by the disclosures. (KBR refused to comment on the suit to Vanity Fair.)
Godfrey left Iraq in February 2005, frustrated that the waste he'd encountered seemed uncontrollable. He had come across officials from the Defense Contract Management Agency, his team leader's former billet, and he had little faith that they would succeed where he had failed. "The ones I met were pathetic," he says. "Some had no experience: they'd just got their degrees. They didn't ask questions, and they missed the issues that I brought up. They had access to me and my memos, and not once did one ever come to me and say, 'Can we talk, Barry?'"
Apart from its connections in Washington, there is something else that protects KBR: the perception, widespread throughout the military, that it has provided generally good-quality services in war-zone conditions. As Grayson puts it, "Halliburton's philosophy is not to deliver crap. Halliburton's philosophy is to deliver extraordinarily overpriced but adequate services in support of the government."
That these have cost billions of dollars more than they should have is an inconvenient detail, and already the Pentagon is moving on. Officials now accept that the monopoly granted by logcap 3 had its drawbacks, and at the end of June the army announced that the contract will soon be terminated and replaced with a new one, logcap 4. Under this, the largesse will be split among three corporations: DynCorp, Fluor, and KBR. logcap 4 is another cost-plus, indefinite-delivery, indefinite-quantity contract, but at least this time KBR's income, as well as DynCorp's and Fluor's, will be capped. Over the next 10 years, KBR will have to satisfy itself with charging American taxpayers $50 billion for its services under logcap 4.
These improvements may turn out to be little more than cosmetic. According to Bowen, what's needed is full disclosure of all subcontracting arrangements and a substantial increase in the number of officials who spend their time designing and policing contracts.
With logcap 4, however, the reverse is about to happen. The government agencies responsible for oversight will be assisted by Serco, a Virginia-based services company that in February was awarded a "planning support contract" worth up to $45 million a year. The Bush administration maintains that hiring Serco to regulate logcap 4 will improve efficiency and counter fraud and waste.
David Walker, of the G.A.O., fears that the weakened state of oversight is poised to get "much worse." Not only is there a large "skills gap," but "a significant percentage of the existing contract workforce is eligible to retire or will be eligible to retire within the next few years." Outsourcing oversight brings still more problems in its wake, he says, starting with conflicts of interest, which arise whenever the company being monitored has other business, existing or potential, with the one doing the monitoring.
False Claims Act suits could help to remedy these deficiencies, if only the Department of Justice weren't suppressing them. One day, though, the seals on the complaints will have to be lifted. "I wish I could tell you about the ones that are under seal," says Grayson, "because some of them really are time bombs. They're literally burying these cases to keep the public from finding out about them, and to keep anything from being done on them. But it is a time bomb, because any normal amount of attention on these cases would result in massive amounts of money being recovered for the taxpayers."
There are a few encouraging signs that a day of reckoning is drawing near. Committees in both the House and the Senate have held hearings on contracting in Iraq, and several plan to hold more. Patrick Leahy, the Democratic chairman of the Senate judiciary committee, has introduced a War Profiteering Prevention Act, which would make it much easier to investigate corrupt contractors and call them to account. And in August, the news that tens of thousands of weapons intended for Iraqi security forces had vanished or been stolen prompted the Pentagon to announce that its inspector general, Claude M. Kicklighter, would lead an 18-person team to investigate "contracting practices" in Iraq.
In the more distant future, a Democratic administration might open up the vaults and expose the American public to the scale of what has been looted. "What we have seen up to now is the worst of the worst in terms of a deliberate cover-up," Grayson says. But if and when it comes to an end, he thinks it's entirely possible that Congress will appoint a special prosecutor—one whose targets might one day reach "an extremely high level."