Auditors Worries Vanish From Final Report (Deceptive)
Editorial by Lisa Falkenberg - Houston Chronicle
Lottery watchdog's bite 5 years in making (About Me)
Editorial by Lisa Sandberg - Express-News Staff Writer
Posted: Monday, July 11, 2005
More About Grief, Kiplin & Morris
by Dawn Nettles - The Lotto Report- Click here
Lottery security worries hidden
By LISA FALKENBERG
AUSTIN - Texas Lottery executives were warned in a draft audit last winter that their decision to gut the agency's security force and fire most of its officers threatened the lottery's security and integrity, but lottery officials never disclosed those findings publicly.
A copy of the December draft obtained by the Houston Chronicle said that a reorganization ordered by lottery executives actually heightened the lottery's vulnerability to ticket theft, ticket counterfeiting and undetected fraud.
But those findings were not included in the 2004 Biennial Security Review provided to lawmakers and the three commissioners who oversee the lottery. Instead, the report said auditors found no issues that would "materially" impact the lottery's security and integrity.
And when the lottery commission chairman expressed concerns in December about the reorganization's effect on security, he was reassured the process would be smooth and beneficial.
The discovery of the draft audit, conducted by Austin-based Jefferson Wells, disturbed the chairman of the House committee that oversees the lottery.
"I never knew that we would hire outside people to help us and only give us half the story," said Rep. Ismael "Kino" Flores, D-Palmview.
"If they don't tell you what you want to hear, you just don't make it public? Welcome to the Texas lottery," he said.
Flores, chairman of the House Licensing and Administrative Procedures Committee, said the agency lied by not making the draft audit available to him and other lawmakers.
News of the outside audit comes at a turbulent time for the $3.5 billion state agency, which is responsible for $1 billion in education funding every year.
The lottery has been subject to intense public scrutiny and ridicule since last month when then-Executive Director Reagan Greer admitted approving several inflated Texas Lotto jackpot estimates.
Greer resigned late Friday and was temporarily replaced by deputy director Gary Grief, who has worked for the agency since its inception in 1993.
Lottery commissioners plan to meet Monday to discuss the inflated jackpots and other issues.
Grief, who championed the November reorganization as a way to streamline, cut costs and improve coordination at the agency, refused to comment for this story. So did general counsel Kim Kiplin, who helped oversee the audit.
Lottery spokesman Bobby Heith could not answer specific questions about the security audit, which is required by law every two years.
Heith said only that executives stand by the official report, dated January 2005, and contend that it is an accurate representation of the auditor's findings.
The two, however, are profoundly different.
The draft audit specifically warned that the reduction in commissioned law officers from 35 to four would hinder the agency's ability to prevent and solve lottery crime.
"Investigators have been instructed to conduct investigations over the phone rather than traveling to the scene of the crime," the draft stated. "Using the phone is not an effective means of performing investigations."
The outside auditors found that eliminating the security division and discontinuing some of its functions appeared to violate the Lottery Act, which governs the agency.
But the official review says only that the reduction in force "may have impacted some security functions" and, later, "It is not possible to determine the full impact of the organizational changes at this time."
It recommended the lottery order another independent audit about 180 days after the reorganization to evaluate its impact.
Former lottery investigators and security employees say an audit at the agency was a tedious process in which executives pressured firms to portray the lottery positively. And the 2004 audit apparently wasn't the first time a draft was changed.
Concerns about the reorganization resurfaced recently while lawmakers were investigating the inflated jackpots.
Days before Greer resigned, he asked the state auditor to conduct an outside review of the reorganization, recent firings and personnel policies.
The security division, once consisting of more than 30 commissioned peace officers, including former investigators from police and state agencies, had been a source of pride for the agency.
It operated regional field offices in Houston, Dallas, Midland-Odessa and San Antonio. Its investigators were charged with investigating complaints, solving lottery crime and helping prevent it.
The executive director had boasted to commissioners about how lottery investigators were aggressively pursuing perpetrators of schemes such as Latin Lotto, which targeted Spanish speakers.
The reorganization dissolved the division and closed the field offices. Those who were left began reporting to Kiplin's legal division.
Investigators were ordered to stop investigating stolen ticket cases, which had been an invaluable service to local police departments who lack lottery technology and expertise, according to internal documents.
"Why would you want to get rid of your security division?" Flores said. "I would think that because of the nature of the business you're in, that security would be the division of your agency that would be the strongest."
Flores said executives never gave him a good answer to that question when he asked them about it late last year.
Lottery Commissioner C. Thomas Clowe expressed similar concerns to Kiplin and the others in a December meeting, according to an official transcript.
Clowe, one of three commissioners appointed by Gov. Rick Perry to oversee the lottery, asked if the agency still had enough officers to maintain the security standard set by the division.
"I believe we do," Kiplin responded. She assured the commissioner that executives shared the concern and if they'd missed the mark in the reorganization, they'd address it immediately.
"Well, OK," the commissioner replied. "I hope you haven't missed the mark, and I don't want to go around fixing problems as a result of this."
That same month, the draft audit described an agency unprepared for reorganization. Employees didn't know their job descriptions, and managers couldn't explain procedures or policies to their employees, the auditor wrote.
Draft's words concealed
By no longer investigating ticket thefts, the draft audit found, the lottery not only opened itself to theft, but made it easier to get away with cashing in stolen tickets.
"The lottery has heightened its vulnerability and exposure to perpetrators of ticket theft," the draft report said. "Increased theft will expose the Lottery to loss of revenue, resulting in a negative impact in the public's perception of Lottery integrity."
But again, that warning never made it into the final report.
Local authorities lack lottery technology to track specific stolen tickets, and without a lottery investigator to help, the audit found the best the lottery could do was deactivate entire packs of tickets. Those packs could contain legitimate tickets already sold.
"This would mean when a player presents a legitimate ticket they have purchased, they would be denied their winnings," auditors wrote.
Lottery watchdog's bite 5 years in making
GARLAND - This is a story of slights and grudges fueled by politics and big jackpots.It began five years ago, when the state's Lottery Commission, apparently miffed by Dawn Nettles' vocal opposition to a change in Texas Lotto rules, stopped faxing her the results of the nightly drawings she needed for her Web site, LottoReport.com.
"That was their biggest mistake," said the golden-haired 54-year-old grandma from her home in this Dallas suburb, where she runs the Web site exposing what she says are the deception and lies of an agency that takes in $3.5 billion a year running gaming in Texas.
In her five-year battle against the Texas Lottery Commission, she has scored the last lick.
Last month, in a widely circulated letter, she accused the agency of inflating the $8 million jackpot advertised for the June 8 Lotto Texas when ticket sales would only support a $6.5 million payout.
The letter sparked an internal review, followed by highly publicized hearings and an admission from Reagan Greer, the agency's executive director, that he personally approved inflated jackpots on four occasions to boost sluggish ticket sales.
Late Friday, Greer, a former Bexar County district clerk, submitted his resignation, saying a change of leadership was needed to help restore confidence in the lottery. The announcement came three days before the agency's three commissioners were expected to discuss behind closed doors whether Greer should keep his job.
Now they are expected to name an acting executive director at their meeting Monday. In the meantime, Deputy Executive Director Gary Grief will oversee day-to-day operations at the nation's third-largest lottery.
Other top lottery jobs also might be on the line Monday. According to a posted agenda, the panel might discuss the reassignment of Grief and four other staff members.
The feud between Nettles and the commission is as political as it is personal. She accuses the agency of cheating winners and changing game rules to ensure almost no one hits the jackpot and of deceptive advertising.
Agency spokesman Bobby Heith said two internal audits turned up no evidence that winners had been cheated. As for the change in rules, Heith said the agency strived to give players games they enjoyed. Allegations of deceptive advertising are being addressed, he said.
"They've hated her for a long time," said Gerald Busald, a math professor at San Antonio College and frequent critic of the commission who's known Nettle for years.
"She's made so many charges over the years, most of which are true, but they tend to tune her out. This time it's stuck. That's the difference."
In the wake of the current scandal, with the fate of the agency's leadership on the line, Nettles is earning the respect that has often eluded her. Her inbox has been flooded with messages.
"Thank you for your continued hard work to keep the lotto people clean," one woman wrote.
"Your exposé on inflated jackpots has opened up a can that stinks to high heaven," wrote another.
"She's cool," said Rep. Ismael "Kino" Flores, the Democrat from Mission who leads the House Licensing and Administrative Procedures Committee, which has oversight over the Lottery Commission. "It does take her a little time to get to her point but she's always on cue."
Her critics try their best to be diplomatic.
"She has a purpose," said Heith, the agency spokesman, when asked about her work.
The Texas Lottery Commission was founded in 1991 as a way to raise revenue in the cash-strapped state. Last year the commission took in from its five online and 70 scratch-ticket games some $3.5 billion in sales - $1.1 billion of which went to fund public schools.
Nettles, who in the early 1990s was publishing a real estate magazine, grew up with a fondness for games and remembers being thrilled that Texas was establishing its own.
She not only played numbers, she studied them. She felt that analyzing winning numbers would give her an advantage in picking lucky numbers.
Other players evidently agreed. The biweekly newsletter she started in 1993, "Lotto Report: A Racing Form of the Texas Lottery," was profitable after only six months, she said.
By the late 1990s, however, Lotto Texas ticket sales were starting to drop.
And as they dropped, so too did sales of "Lotto Report."
The reason ticket sales dropped, agency officials acknowledge, was that a series of changes in game rules was making it harder to win.
Odds that a player of Lotto Texas would hit the jackpot tripled from one in 16 million in 1999 to one in nearly 48 million today. Subsequently, even as jackpots have grown larger, Lotto Texas sales have dropped from $715 million in 1999 to $477 million last year, according to the agency.
Nettles started speaking out - loudly - against game rule changes.
In 2000, when the commission presented lawmakers with a survey showing shop clerks supported a change in rules, Nettles hired two forensic experts to analyze the signatures on hundreds of questionnaires. Both concluded that the signatures were "questionable."
Nettles couldn't persuade the agency to keep the odds at one in 16 million. But her willingness to take a stand may have angered top officials. A short time later she received a fax telling her the agency did not consider her a journalist and would no longer fax her the results of the nightly drawings.
Nettles went to war. First, she started posting online the exact amount a winner would receive if they collected the cash payment - which was considerably less than the jackpot amounts advertised on billboards. Soon she was scrutinizing the jackpot calculations the agency advertised for each drawing, and posting discrepancies between the agency's numbers and her numbers on her Web site.
From her home office, where she works seven days a week, Nettles explains the fine print of the games the commission runs. She tells players their odds. And she reminds them that if they would win the Lotto jackpot they shouldn't expect a single check for the amount advertised on the billboards.
Winners are entitled to only 39.104 percent of ticket sales. The amount on the billboard is a complicated guesstimate of what winners would likely get if the amount on the billboard were paid over 25 years.
Only the first four drawings in every roll are guaranteed.
Now Nettles is caught between two worlds: games advocate and agency critic.
Smoking from a pack of Misty menthols, she says she'll stick with her campaign until Texans get "fair games, fair rules, fair payouts, consumer protections and until cheated winners get paid."
Her husband, Perry, an airline pilot, appears less than enthused by the hours she devotes to her work.
"It's a mind-boggling thing," he said, before deciding it was probably better to keep his comments short. "You can keep me out of this."
But at times it seems even she wonders about the 18-hour days, the constant calls to lawmakers, and the daily open records requests she files with the Lottery Commission.
"This is a get-even," she said. "It's stupid, isn't it?"
About Grief, Kiplin & Morris
by Dawn Nettles - The Lotto Report - Click here
Read the easy 2 step process for estimating jackpots.
Click here and read the June 30, 2005 entry.
How Texas Lottery Advertised Make-Believe Payoff For Suckers
Ken Rodriguez - San Antonio Express News, Click here
Attorney General investigating advertised Lotto jackpots
Ft. Worth Star Telegram (6/9/05), Click here
Lottery panel to consider changing jackpot policy
This one makes me MAD! We don't want guaranteed
jackpots, we want truth in advertising and a guarantee
that we'll receive 100% of our share of sales.
Ft. Worth Star Telegram (6/10/05), Click here
Lotto Critic Efforts Pay Off
Dallas Morning News (June 11, 2005)
The Lotto Report
P. O. Box 495033
Garland, Texas 75049-5033
(972) 681-1048 Fax
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