A federal judge on Thursday dismissed criminal charges against five Blackwater guards involved in the massacre of 14 Iraqi civilians in Baghdad in September 2007, an incident that led to a public outcry over the government's increasing reliance on contractors in the battlefield.

US District Court Judge Ricardo Urbina ruled that federal prosecutors improperly used statements the men gave to State Department investigators under a promise of immunity to secure indictments against them.

"In their zeal to bring charges...in this case, the prosecutors and investigators aggressively sought out statements the defendants had been compelled to make to government investigators in the immediate aftermath of the shooting and in the subsequent investigation," Urbina wrote in a 90-page opinion.

"In so doing, the government’s trial team repeatedly disregarded the warnings of experienced, senior prosecutors, assigned to the case specifically to advise the trial team on [legal] issues, that this course of action threatened the viability of the prosecution. The government used the defendants' compelled statements to guide its charging decisions, to formulate its theory of the case, to develop investigatory leads, and ultimately to obtain the indictment[s] in the case."

At the time of the shooting, Blackwater had a contract to provide secruity to the State Department in Iraq.

Urbina said the guards' Fifth Amendment rights were violated and that the government built its case on statements the defendants made under threats of job loss and criminal prosecution.

"The explanations offered by prosecutors and investigators in an attempt to justify their actions and persuade the court that they did not use the defendants' compelled testimony were all too often contradictory, unbelievable and lacking in credibility," Urbina wrote. "In short, the government has utterly failed to prove that it made no impermissible use of the defendants’ statements or that such use was harmless beyond a reasonable doubt. Accordingly, the court must dismiss the indictment against all of the defendants."

The guards--Paul Slough, Evan Liberty, Dustin Heard, Donald Ball and Nicholas Slatten--were indicted on manslaughter and weapons charges in December 2008. A sixth guard, Jeremy Ridgeway, plead guilty to killing one Iraqi civilian and wounding another. He was expected to testify against his former colleagues.

Earlier this month, the Department of Justice filed a motion asking Urbina to close the court proceedings in the case to the public, saying classified information may be disclosed. The trial was scheduled to begin in January.

In a statement, Justice Department spokesman Dean Boyd said, "we're still in the process of reviewing the decision and considering our options."

Blackwater, now known as Xe, has been the subject of intense scrutiny over revelations that the CIA hired the firm's founder, Erik Prince, a former Navy Seal, after 9/11 to lead an assassination program targeting al-Qaeda leaders.

In an exclusive interview with Vanity Fair, Prince said he was working for the federal government up until two months ago.

The magazine reported that for the past six years, Prince "appears to have led an astonishing double life,"

Publicly, he has served as Blackwater’s CEO and chairman. Privately, and secretly, he has been doing the CIA’s bidding, helping to craft, fund, and execute operations ranging from inserting personnel into 'denied areas'—places US intelligence has trouble penetrating—to assembling hit teams targeting al-Qaeda members and their allies.

Explosive Allegations

Last August, a Blackwater employee and a former ex-Marine employed by the company in a security capacity said in a sworn affidavit filed in a federal court in Virginia, that Prince may have murdered or assisted in the murder of individuals who were cooperating with federal law enforcement authorities investigation the company.

The explosive allegations, which included claims the company was involved in the distribution of controlled substances, tax evasion, child prostitution, were made in a civil lawsuit filed against Blackwater that charges the company with Racketeer Influenced and Corrupt Organizations Act (RICO) violations.

Blackwater was also found to have improperly shipped about 900 weapons to law enforcement facilities in Iraq and Jordan without authorization. The weapons ended up on the black market.

Improperly Obtained Contracts

In July 2008, the Inspector General of the Small Business Administration (SBA) released a report that said Blackwater misrepresented the size of its firm so it could receive more than $100 million in small business contracts from the federal government.

The report said the mercenary outfit obtained a total of 39 contracts intended for small businesses with annual revenues of $6.5 million between 2005 and 2007. But the report said Blackwater’s revenue surpassed $200 million for those years.

Blackwater "obtained a total of 33 contracts during Fiscal Years 2005 through 2007, totaling $2,188,620, which may have involved misrepresentations to obtain the contract."

The report also found that "it is possible that misrepresentations took place" on the remaining six contracts, totaling $107,311,356."

Of the 39 contracts reviewed, 38 were awarded by the Defense Department and the Department of Veterans Affairs awarded one. The Inspector General’s report says the small business contracts "could have involved potential misrepresentations by Blackwater.

Moreover, the Department of Defense wrongfully awarded Blackwater aviation contracts worth $107 million. That contract was earmarked for companies with annual revenues of less than $25 million or less than 1,500 employees, the report said.

The report was prepared at the request of Congressman Henry Waxman, who at the time was the chairman of the House Committee on Oversight and Government Reform. Waxman sent a letter in March 2008 to Steven Preseton, the administrator of the Small Business Administration.

"As part of the Oversight Committee’s investigation into the business practices of Blackwater Worldwide, the Committee has obtained evidence indicating that Blackwater may have applied for and received federal contracts by improperly claiming that it was eligible for small business preferences," Waxman’s March 10, 2008 letter said. "It appears Blackwater sought these small business contracts by improperly designating its security guards as "independent contractors" rather than "employees."

According to a memo issued by Waxman to Oversight Committee members, "The key issue… was whether personnel hired by Blackwater to provide security services for the Department of State (DOS) and other agencies were Blackwater employees . . . or independent contractors."

"In claiming it was a small business, Blackwater argued that 1,000 security personnel it provided under the State Department’s $1.2 billion Worldwide Personal Protective Service (WPPS) contract were independent contractors," Waxman’s memo says. "The [Small Business Administration Inspector General] reports that Blackwater claimed that it "had little or no knowledge of the activities of the security personnel performing the contract and exercised little or no supervision over these personnel once they were deployed."

To date, Blackwater has received more than $1.2 billion in government contracts.