March 8, 2007 - By Peter H. Stone, National Journal

From a Capitol Hill hearing room to a California courtroom last month, a disturbing picture came into focus: Billions of taxpayer dollars spent on Iraq reconstruction projects may have been squandered through mismanagement and fraud.

At a February 7 hearing of the House Oversight and Government Reform Committee, executives from some of the biggest companies in the construction, engineering, energy, and security contracting industries -- including Halliburton, KBR, Fluor, and Blackwater -- were pummeled with criticisms and questions about the projects they are running to rebuild Iraq's roads, hospitals, schools, and oil infrastructure.

Seated nearby in the hearing room was a small army of lawyers, lobbyists, and public-relations experts from such K Street powerhouses as Akin Gump Strauss Hauer & Feld, Crowell & Moring, Patton Boggs, Qorvis Communications, and Vinson & Elkins who were hired to help steer the companies through the minefield of the congressional investigative process.

A week later, the committee held a second hearing at which Stuart Bowen, the special inspector general for Iraq reconstruction; David Walker, the head of the Government Accountability Office; and a third government auditor estimated that $10 billion of the $57 billion in federal Iraq-related contracts they had scrutinized was either not documented or had been squandered through failed oversight, bloated expenses, and payments for work that was shoddy or never done.

It looks like the K Street litigators, spin-meisters, and other damage-control experts are going to be busy for a while.

"A lot of old hands were back on deck," said one lawyer, referring to the presence of several oversight and investigations specialists, such as attorneys Steve Ross of Akin Gump, who represents KBR, and Ron Liebman of Patton Boggs, who represents KBR's parent company, Halliburton.

"Historically, every time we have had government procurement problems, we've had an uptick in oversight and legislative activities," added Stan Brand, who represents Fluor.

Meanwhile, in San Diego on February 13, a federal grand jury indicted the former No. 3 official at the CIA, Kyle (Dusty) Foggo, and defense contractor Brent Wilkes on charges of conspiracy, fraud, and money laundering involving an Iraq contract. According to the indictment, Wilkes provided tens of thousands of dollars in lavish gifts -- including a Scotland vacation in August 2003 -- to his high school buddy Foggo, who, in turn, helped steer a contract worth $1.7 million to the Wilkes-run company Archer Logistics to supply bottled water to CIA operatives in Iraq.

The defendants, who pleaded not guilty, separately hired prominent K Street defense lawyers. Wilkes has tapped Nancy Luque of DLA Piper and Mark Geragos, who practices in California, while Foggo has retained Mark MacDougall of Akin Gump.

Some veteran lawyers say that the reconstruction mess was predictable. "We went in with no systems to do the contracting," including the proper oversight, Arnold & Porter lawyer Jeffrey Smith, a former CIA general counsel, told National Journal.

"The result is what you'd expect: chaos, confusion, and corruption," said Smith, who represented Paul Bremer, the former head of the Iraq Coalition Provisional Authority, when he testified last month before the House panel. "It was a kind of a perfect storm of inadequate planning, insufficient personnel, and extraordinary challenges that had not been anticipated. The tragedy is that so much of the money which could have done so much good went down so many dark holes."

The stakes are high for the private contractors and their lobbying, legal, and PR teams. For example, Bowen's recently completed 579-page audit contains strong allegations about Virginia-based DynCorp, which has a $1.8 billion contract from the State Department for police-related projects in Iraq.

One controversy centers on allegations that DynCorp spent about $4.2 million on 20 VIP trailers and an Olympic-size swimming pool that was requested by some Iraqi officials but that lacked the necessary authorization from the U.S. government. Further, a training camp for DynCorp workers built with the lion's share of the money from a $43.8 million contract had never been used.

Bowen's audit report also raised questions about some $36.4 million for armored vehicles, body armor, and other equipment that DynCorp billed to the government but that the State Department hasn't been able to adequately account for. According to the audit, DynCorp invoices were "frequently ambiguous and lacked the level of detail necessary to identify what was procured."

In 2005, State Department officials raised concerns about "potential fraud" in a DynCorp billing for 500 trailers that may not have been constructed, the audit said. Bowen's office has indicated that a probe into the billing is continuing.

A DynCorp spokesman has said that the company hasn't been contacted about the audit but that it has acted responsibly and would cooperate fully with any inquiry.

Meanwhile, DynCorp has hired PR shop Qorvis to help the company with its media image and to broaden the marketing of its contracting work into areas other than Iraq. Qorvis partner Don Goldberg said his firm is working with DynCorp on "messaging" and is helping to "position them in the government market."

Qorvis has teamed with Patton Boggs to help Halliburton navigate the congressional probes and handle media inquiries. The Houston oil-services giant has faced various allegations of mismanagement by its KBR unit, which received contracts valued at an estimated $25.7 billion for its work in Iraq, according to an analysis by the House committee. KBR's Iraq business has included two multibillion-dollar Pentagon contracts to supply services to U.S. troops and to rebuild the country's oil-services industry.

Halliburton started to spin off KBR last year, prompting the unit to recruit its own Washington influence team headed by Akin Gump and Prism Public Affairs. New headaches for KBR came at the February 7 hearing when a top Army official disclosed that $19.6 million in payments to the company were being withheld because a KBR subcontractor, ESS Support Services, hired private security guards in violation of the KBR contract. KBR has played down the problem, saying it disagrees with the Army and is planning to appeal the decision.

Bowen indicated in his report that his office has about 80 ongoing investigations into allegations of fraud and waste in reconstruction work and that some 20 cases have been referred to the Justice Department for prosecution.

Auditors estimated that one of every six dollars had been wasted or was unaccounted for in the State and Defense departments' contracts they had reviewed. "There is no accountability," a clearly frustrated Walker testified.

That may be changing with more scrutiny from the Hill, the widening criminal probes, and new legislation to expand oversight and impose tough penalties for wrongdoing. Sens. Byron Dorgan, D-N.D., and John Kerry, D-Mass., have introduced a bill that would stiffen protection for whistle-blowers, bar sole-source contracts, and impose fines of at least $1 million and a prison term of up to 20 years for war profiteering. The bill has more than 20 co-sponsors.

"This is probably the most significant case of waste, fraud, and abuse in this country's history," Dorgan said in an interview.

"I think we've only seen the tip of the iceberg" when it comes to wasteful spending on Iraq's rebuilding, said Rep. Henry Waxman, D-Calif., chairman of the House oversight panel. Waxman said he intends to reintroduce a bill he first offered last year that is aimed at boosting "transparency and competition in contracting."

To analysts of Iraq reconstruction, the problems seem humongous.

"The data show that we were more involved in the rebuilding of Iraq than any other nation in history," said Brookings Institution Senior Fellow Peter W. Singer, the author of Corporate Warriors: The Privatized Military Industry. "It also looks like we wasted or lost to corruption more [money] than any other nation before. This is not going to be a pretty episode in the history books."