Two former Pentagon officials, including an acting secretary of the Navy, have been accused of scheming with a banned American contractor to get lucrative rebuilding contracts in Iraq, The Associated Press has learned.

The contracting firm, Custer Battles LLC, was suspended two years ago by the military for submitting millions of dollars in fake invoices.

he charges come in a sealed federal lawsuit, a copy of which was obtained by The AP. It was filed by two whistleblowers _ one of whom won a $10 million judgment in another suit when a federal jury agreed that Custer Battles had swindled the government.

The current suit names former acting Navy Secretary Hansford T. Johnson, former acting Navy Undersecretary Douglas Combs, and Custer Battles LLC officials including founders Scott Custer and Mike Battles, who were barred in 2004 after billing the government for work that was never done and for padding invoices by much as 100 percent.

Also named were six companies connected to the contracting firm, including Windmill International Ltd., a worldwide contractor run by Combs and Johnson, and a Romanian company, Danubia Global, which purchased Custer Battles in 2005.

The new lawsuit contends Custer and Battles, both Army veterans with Washington political connections, tried to get around the suspension order by plotting with Johnson and Combs "to set up sham companies (thereby) concealing their ownership and control of those entities."

According to the suit filed in Virginia, the shell companies committed other illegal acts, including selling weapons on the Iraqi black market, creating a dangerous possibility that "insurgents could buy them and use them to attack U.S. soldiers."

In both lawsuits, a plaintiff is former Custer Battles associate Robert Isakson. He is also a former FBI agent.

His $10 million judgment, won in March, is the first civil fraud verdict arising from the Iraq war. Isakson and a former associate contended Custer Battles created imaginary offshore companies that overcharged the Coalition Provisional Authority, which ran Iraq after the 2003 invasion, by as much as $50 million.

Isakson is joined in the current action by Rory Mayberry, a medic who said he was fired last year from a Custer Battles shell company after pointing out fraud. Under the federal False Claims Act, whistleblowers may file suits on behalf of the government and collect a portion of awarded damages.

Phone messages left for Isakson were not returned. His attorney declined comment.

Windmill attorney Chris Johnson said Johnson and Combs had never engaged in any conspiracy, but acknowledged Combs had a business meeting with Custer in 2004.

hones at Custer Battles offices in Rhode Island and Virginia have been disconnected.

Custer Battles also is under federal criminal investigation for accusations of fraud and two alleged incidents in which its security guards opened fire on Iraqi civilians and soldiers.

The AP reported in June 2005 that former officials of Custer Battles continued to do contracting work in Iraq, despite the U.S. military suspension. Its officials formed new companies to bid on fortune-making contracts. Two of those companies, according to property records, were located in Custer Battles' Rhode Island office.

The head of those two firms _ Emergent Business Services and Tar Heel Training _ is Rob Roy Trumble, former operating officer for Custer Battles. He is also named as a defendant in the current lawsuit.

The new federal lawsuit also names Emergent, Tar Heel and others as coconspirators in a scheme "to circumvent the suspension order and to defraud the government by getting false or fraudulent claims allowed or paid." It seeks an unspecified amount in damages.

According to the suit, Custer Battles sought to flout the suspension order in two ways:

_It transferred Iraq operations to Danubia Global. "This would be a change in name only, since all Custer Battles Iraq operations managers ... would retain the same responsibilities and perform the same functions," the suit says.

_In the United States, Custer Battles continued recruitment, benefits administration and travel arrangements through Emergent and Tar Heel _ the new companies formed at Custer Battles' office.

"Again, this would be change in name only since Custer Battles managers performing these functions, including defendant Trumble, would retain the same responsibilities and perform the same functions," the suit said.

Trumble's office phone has been disconnected.

A Custer Battles e-mail, obtained by the AP in 2005, instructs employees to send all further correspondence to Emergent Business Services.

State records show Windmill International is located at 53 Weathersfield Lane in Amissville, Va., the home of company president Combs. Windmill director Michael Ussery, a former State Department official and former U.S. ambassador to Morocco, listed the same address as Combs, the records show.

Combs served as acting undersecretary in the Navy from 1999 to 2003, and made frequent trips to Iraq during that period and worked with contractors and military advisers there. He also was a special assistant to Johnson, who was acting secretary of the Navy, the service's top civilian position, in 2003.

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