0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 COMMISSION MEETING ) 6 FOR THE TEXAS ) LOTTERY COMMISSION ) 7 8 9 10 COMMISSION MEETING 11 December 13, 2018 12 10:00 a.m. 13 AT 14 TEXAS LOTTERY COMMISSION 15 611 East 6th Street Austin, Texas 78701 16 17 18 19 20 21 22 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: J. Winston Krause 3 COMMISSIONERS: Doug Lowe Carmen Arrieta-Candelaria 4 Robert Rivera 5 GENERAL COUNSEL: Robert F. Biard 6 EXECUTIVE DIRECTOR: Gary Grief 7 CHARITABLE BINGO OPERATIONS DIVISION DIRECTOR: Michael Farrell 8 LOTTERY OPERATIONS 9 DIRECTOR: Ryan S. Mindell 10 CONTROLLER: Katheryn J. Pyka 11 PRODUCTS MANAGER: Robert Tirloni 12 McCONNELL JONES LANIER & MURPHY, LLP: Darlene Brown 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS PAGE 2 I. The Texas Lottery Commission will call the 3 meeting to order. Pledge of Allegiance to the U.S. and Texas flags . . . . . . . . . 7 4 II. Report, possible discussion and/or action on 5 the 2018 demographic report on lottery players . . . . . . . . . . . . . . . . . . 7 6 III. Report, possible discussion and/or action on 7 the biennial security study of the lottery 18 8 IV. Report, possible discussion and/or action on agency major contracts, including amendment, 9 renewal or extension of the contracts for Instant Ticket Manufacturing and Services and 10 Drawing Studio and Production Services . 25 11 V. Report, possible discussion and/or action on agency prime contracts, including amendment, 12 renewal or extension of the trademark license and promotional agreement with the Houston 13 Texans and the contract for Lottery Drawing CPA Services . . . . . . . . . . . . . . 26 14 VI. Consideration of and possible discussion 15 and/or action, including proposal, on amendments to 16 TAC §§401.315 (“Mega 16 Millions” Draw Game Rule) and 401.317 (“Powerball®” Draw Game Rule) . . . . . . 28 17 VII. Consideration of and possible discussion 18 and/or action, including adoption, on revisions to Commission Policy Number P-002 19 (Division of Responsibilities) . . . . . 31 20 VIII. Report, possible discussion and/or action on lottery sales and revenue, game performance, 21 new game opportunities, advertising, promotional activities, market research, 22 trends, and game contracts, agreements, and procedures . . . . . . . . . . . . . . . 34 23 IX. Report, possible discussion and/or action on 24 transfers to the State and the agency’s budget . . . . . . . . . . . . . . . . . 47 25 0004 1 X. Report, possible discussion and/or action on external and internal audits and/or reviews 2 relating to the Texas Lottery Commission, and/or on Internal Audit activities, 3 including approval of the Personal Identifiable Information Audit Report and the 4 Copy Center Operations Audit Report . . 26/48 5 XI. Report by the Bingo Advisory Committee Chairman; possible discussion and/or action 6 on the Bingo Advisory Committee’s activities . . . . . . . . . . . . . . . 48 7 XII. Report by the Charitable Bingo Operations 8 Director and possible discussion and/or action on the Charitable Bingo Operations 9 Division’s activities, including licensing, accounting and audit activities, pull-tab 10 review, and special projects . . . . . . 51 11 XIII. Report by the Executive Director and possible discussion and/or action on the agency’s 12 operational status, major contracts, agency procedures, awards, and FTE status . . . 51 13 XIV. Consideration of the status and possible 14 approval of orders in enforcement cases . 52 Lottery NSF License Revocation Cases (Default) 15 A. Docket No. 362-18-5016 – First Shot Liquor B. Docket No. 362-19-0128 – Keenan Grocery 16 C. Docket No. 362-19-0416 – Swadeshi Plaza of Plano Inc. 17 D. Docket No. 362-19-0417 – Shop Smoke N Beverage 18 Lottery Agreed Orders 19 E. Docket No. 362-18-4350 – 100 Shady Oaks Food 20 F. Docket No. 362-18-5142 – Kingsland Food Mart 21 G. Case No. 2018-598 – Lockhart Grocery H. Case No. 2018-599 – Jiffy Mart #3 22 I. Case No. 2018-741 – Tip Top Food Mart 1 J. Case No. 2018-743 – Stripes No. 2406 23 K. Case No. 2018-744 – Fuel Maxx 14 24 Other Lottery Cases L. Docket Nos. 362-18-3432 – Coyote Den 25 Bingo Agreed Orders 0005 1 M. Case No. 2018-676 – Jeffrey Trevino (Bingo Worker) 2 N. Case No. 2019-27 – Arturo Esquivel (Bingo Worker) 3 O. Case No. 2019-28 – Samuel D. Macklin (Bingo Worker) 4 P. Case No. 2019-110 – Kameron Bernal (Bingo Worker) 5 XV. Public comment. . . . . . . . . . . . . . XX 6 XVI. Commission may meet in Executive Session XX 7 A. To deliberate personnel matters, including the appointment, employment, 8 evaluation, reassignment, duties, discipline, or dismissal of the 9 Executive Director and/or Charitable Bingo Operations Director pursuant to 10 §551.074 of the Texas Government Code. B. To deliberate the duties of the General 11 Counsel and/or the Human Resources Director pursuant to §551.074 of the 12 Texas Government Code. C. To receive legal advice regarding 13 pending or contemplated litigation or settlement offers, or other legal 14 advice, pursuant to §§551.071(1) and (2) of the Texas Government Code, including 15 but not limited to legal advice regarding the following items: 16 Pending and potential litigation regarding Fun 5’s Scratch Ticket Game #1592, including 17 Tex. Supreme Court Docket No. 18-0159 (Steele, et al. v. GTECH Corp.) and Tex. 18 Supreme Court Docket No. 17-1010 (Nettles v. GTECH Corp. and Texas Lottery Commission). 19 Julam Investments, Inc. v. Texas Lottery Commission (Travis Co. District Court Cause 20 No. D-1-GN-16-006124) State of Texas v. Equal Employment 21 Opportunity Commission, et al. State of Texas v. C.D. (On Petition for 22 Review from the Twelfth Court of Appeals) Prescott Lovern, Sr., Private Attorney 23 General v. Texas Lottery Commission, et al. Legal advice regarding Texas Government Code 24 Chapters 466 (State Lottery Act) and 467, the Bingo Enabling Act, the Open Meetings Act, 25 the Public Information Act, the 0006 1 Administrative Procedure Act, employment and personnel law, procurement and contract law, 2 evidentiary and procedural law, ethics laws, and general government law. 3 Legal advice regarding any item on this open meeting agenda. 4 XVII. Return to open session for further 5 deliberation and possible action on any matter posted for discussion in Executive 6 Session. Any matter posted for Executive Session also may be the subject of discussion 7 and/or action in open session prior to Executive Session . . . . . . . . . . . . XX 8 XVIII. Adjournment . . . . . . . . . . . . . . . 82 9 Reporter's Certificate . . . . . . . . . . . . . . 84 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0007 1 P R O C E E D I N G S 2 MONDAY, DECEMBER 13, 2018 3 (10:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN KRAUSE: All right. Good 6 morning. This meeting is called to order. It is 10:00 7 a.m. on December 13th, it is Thursday. And we have all 8 of our commissioners here, so we have a quorum and we 9 are open for business. But, as we always do, we always 10 say the Pledge of Allegiance to the American flag and 11 the Texas flag, so we have a designated pledge 12 commissioner who is going to lead us. 13 (Pledges recited) 14 CHAIRMAN KRAUSE: All right, we could use 15 some of that. 16 AGENDA ITEM NO. II 17 CHAIRMAN KRAUSE: So we are going to 18 first hear from Ryan Mindell, who is going to introduce 19 the professor. 20 MR. MINDELL: Good morning. For the 21 record, Chairman and Commissioners, my name is Ryan 22 Mindell, Director of Lottery Operations. As you know, 23 Section 466.021 of the State Lottery Act requires the 24 executive director to conduct a demographic study of 25 Texas lottery players every two years. The results of 0008 1 the study must be presented to the Commission, the 2 Governor, and the Legislature prior to each legislative 3 session. Item 2 in your notebook is the 2018 4 demographic study. And with me is Dr. Gail Buttorff, 5 visiting assistant professor at the University of 6 Houston's Hobby School of Public Affairs, to present 7 the results of the demographic study. 8 CHAIRMAN KRAUSE: Outstanding, welcome. 9 MS. BUTTORFF: All right. Good morning. 10 Thank you for having me. Okay. So I'm here today to 11 present the results of this demographic survey of the 12 lottery players. The survey was run between the 23rd 13 of August, 2018 and the 24th of September, 2018. We 14 had a sample size of about 1700 people. Let me just -- 15 the survey was conducted through random digit dialing 16 and we had about a 60/40 split between cell phones and 17 land lines to account for the increasing number of 18 people that are exclusive cell phone users. We had a 19 margin of error of 2.4 percent for the result and this 20 is at a 95 percent confidence level. 21 So I'm going to present some general 22 findings about demographic differences, the 23 participation and median dollars spent. We looked at a 24 number of different categories, in terms of 25 demographics; income, employment, gender, occupation, 0009 1 whether people rent or own their homes, marital status, 2 and so forth. Of those -- the statistically different 3 -- those categories that are statistically different 4 for players versus non-players were income, employment 5 status, own or rent a home, children living under 18 in 6 the household, and finally, gender. So those are the 7 categories of all the categories we looked at that had 8 statistically different outcomes for both players and 9 non-players. Overall, the participation rate for the 10 -- among respondents was 42 percent, and this is a 11 statistically significant increase from the 2016 survey 12 and we saw a seven point increase in the participation 13 rate across these two surveys. 14 Finally, we also saw an increase in the 15 median dollars spent for players. This year it was $25 16 in the 2018 survey and that's up from $13 in 2016 and 17 $10 in 2015. 18 From the results of the survey, we found 19 that the top three sales in 2018 were Waco, followed by 20 McAllen and then El Paso, and this was by participation 21 rates. The highest average expenditure per month was 22 reported to be El Paso with $101 per month. The 23 highest median expenditure, as opposed to the average, 24 was found in the Dallas South sales district, with $50 25 per -- per month. 0010 1 And here we have the specific games; 2 Lotto Texas was reported to be the highest -- or had 3 the highest participation rate among all the games with 4 71 percent of players reporting to have played that 5 game. This was followed by scratch with 64 percent and 6 Mega Millions with 60. And this was -- you see a 7 number of these same games in the top in 2016, just the 8 sort of numbering or particular ordering has switched. 9 The highest average expenditure per play was for All or 10 Nothing at $14. 11 And the highest average number of times 12 played was scratch, on a weekly basis, people reported 13 playing scratch about two times per week. And for 14 monthly play, it was Daily Four and respondents who 15 reported playing Daily Four said they played about six 16 times per -- per month, on average. 17 So, in terms of the comparison from 18 2016, we found stable or increase in the participation 19 or in the average time played for Lotto Texas, Mega 20 Millions, Extra and Texas Two Step. Results for Mega 21 Millions were either stable or down slightly between 22 2016 and 2018 and there was mixed results, so you maybe 23 saw an increase in weekly, but not monthly, and so on 24 for Powerball, Cash Five, Mega Player -- sorry, 25 Megaplier, Power Play and All or Nothing. The average 0011 1 dollars per spent, in terms of whether they increased 2 or decreased from 2016, it was stable or up for Lotto 3 Texas, scratch, Mega Millions, Powerball, Cash Five, 4 Megaplier, Power Play, and All or Nothing, and we saw 5 stable or down for Extra and Texas Two Step. 6 Here in Figure 1, you can see the 7 overall participation rates from 1993-2018 and although 8 we've seen a, in the last two decades, an overall 9 decrease in the participation rates for those reporting 10 to play any lottery game, in the last four years, we 11 have seen a steady increase from 25 percent in 2014 to 12 now, 42 percent in 2018. So we see somewhat of a 13 reversal of this downward trend in participation in the 14 last few years. 15 Table 1 presents a brief summary of some 16 of the key findings, in terms of participation rates, 17 frequency of purchase, as well as the average number of 18 times played. As previously mentioned, Lotto Texas had 19 the highest participation rate this year at 71 percent. 20 We saw the biggest change in 21 participation rate for the scratch games, from 2016, 22 which increased in participation by 21.6 percent. In 23 terms of the frequency of purchase, of those playing 24 Texas Two Step, 42 percent reported playing this at 25 least once a week and the highest participation rate 0012 1 for the monthly frequency of purchase was Sum It Up! 2 feature with Pick Three, which players who reported 3 playing Sum It Up! feature three said they purchased -- 4 or 31 percent of the players playing this feature 5 played it at least once a month. 6 Finally, we have the average number of 7 times played per month. This was a lotto -- the 8 scratch games for two times per week and for the month 9 it was Daily Four with six times on average per week 10 for those players playing Daily Four and the average 11 spent per player was highest for All or Nothing 12 players. 13 And that concludes the presentation. 14 I'd be happy to take any questions or comments you -- 15 you may have. 16 CHAIRMAN KRAUSE: Commissioners? 17 COMMISSIONER LOWE: Can you scroll back 18 to your first slide -- 19 MS. BUTTORFF: Sure. 20 COMMISSIONER LOWE: -- with the -- 21 MS. BUTTORFF: This? 22 COMMISSIONER LOWE: No, the one that had 23 the numbers there. Okay. So the median dollar spent, 24 is that per month or year that -- the bottom, 2015 is 25 $10, 2016, is that per month or per year? 0013 1 MS. BUTTORFF: I think it was for the 2 survey or just for the year, but let me check that for 3 sure. 4 COMMISSIONER LOWE: Because the reason I 5 ask, well, based on last month, we had Kathy, our great 6 controller, gave us some numbers that showed that our 7 average per capita spending in the State of Texas was 8 about $121 or something like that. Does that sound 9 right? So that would go -- that -- if that's -- if -- 10 that number, we know that number, and so the survey, if 11 that's per year, that's pretty close to what we're 12 coming at, right? That's what you came up with, wasn't 13 it, Kathy? 14 MR. MINDELL: And Commissioner, I think 15 one thing to keep in mind with this number, this is a 16 small sample and we have the sales numbers, that's, you 17 know, what we call the accurate data across the entire 18 state. When you're taking a sample, there's always 19 going to be the, you know, possibility of getting some 20 data that doesn't match up to the full sample. 21 COMMISSIONER LOWE: What I'm saying if 22 that's per month, it matches up pretty well to what's 23 going on. Of course, I'm still amazed that the State 24 of Massachusetts, the average is over $800 a year per 25 every man, woman, and child in that state, but, anyway, 0014 1 it's just interesting that -- I think I -- I'm guessing 2 that's because your other statistic from Dallas County 3 was $100 a month or something like that? 4 MS. BUTTORFF: Yeah, the average. 5 COMMISSIONER LOWE: The Valley -- the 6 Valley -- 7 MS. BUTTORFF: No, I'm sorry. Dallas 8 was 50 and El Paso was 100. I think the average versus 9 median. 10 COMMISSIONER LOWE: So that's $1200 a 11 year and those areas, which is pretty striking. 12 MS. BUTTORFF: Yeah, these results would 13 be -- 14 COMMISSIONER LOWE: Based on your 15 survey? 16 MS. BUTTORFF: They're all for the year. 17 COMMISSIONER LOWE: Right. But, I guess 18 -- well, if they're -- what I'm saying is the survey is 19 accurate based on what we're getting from our numbers, 20 they jive. 21 MS. BUTTORFF: Okay. 22 COMMISSIONER LOWE: What -- which I 23 would say validates -- you're fine. 24 MS. BUTTORFF: Our survey methodology. 25 CHAIRMAN KRAUSE: Do you have a 0015 1 question, comment? 2 COMMISSIONER ARRIETA-CANDELARIA: Yeah, 3 I do. Can I -- can you go to the last -- the second to 4 the last slide, please? 5 MS. BUTTORFF: This one or this one? 6 COMMISSIONER ARIETTA-CANDELARIA: The 7 one before. So here on the average number of times 8 played on the Daily Four, would you say that that's 9 more the reason it's 6.21, is that because of the type 10 of game, since it's a daily game or is that because -- 11 is that just the frequency of what, I guess that was 12 the response? I'm thinking it's more of the game -- 13 the game is driving that participation, as opposed to 14 maybe something else, would you agree? 15 MS. BUTTORFF: For this, it's of those 16 respondents who said they played Daily Four. 17 COMMISSIONER ARIETTA-CANDELARIA: Uh-huh 18 (affirmative). 19 MS. BUTTORFF: Those people said they 20 played on average about six times per -- per month. 21 MR. MINDELL: And Commissioner, I would 22 say, if you look at the data, the games that had the 23 potential for more opportunity to play are the ones 24 that kind of, you know, it's consistent with the way 25 it's -- you see scratch games -- 0016 1 COMMISSIONER ARIETTA-CANDELARIA: Right. 2 MR. MINDELL: -- which obviously you can 3 play when you want to and Daily Four, which you can 4 play on a daily basis, versus something like Power 5 Ball, Mega Millions, where you might see a player step 6 out when the jackpot's lower and step back in when the 7 jackpot's higher, it only has two draws a week. I 8 think that's pretty consistent with what we'd expect. 9 COMMISSIONER ARIETTA-CANDELARIA: Yeah, 10 I mean, I think that -- that I'm interpreting that the 11 reason it's higher is because we have more 12 opportunities to play. 13 MS. BUTTORFF: Yes, right. 14 COMMISSIONER ARIETTA-CANDELARIA: So, 15 okay. And then the other question that I had, so 16 there's a page in your report, it's Page 14, that talks 17 about the largest occupational categories related to 18 professional specialty, executive, administrative, and 19 managerial and sales, so that's 58 percent. So would 20 that mean -- would there be some correlation to that 21 with the -- the cell phone survey that -- your people 22 would have, is there any kind of correlation with like 23 having a cell phone, would that be a certain type of 24 individual or are you seeing some of that change? 25 Because more people are moving from land lines to cell 0017 1 phones and so, you know, the cost of a cell phone, I 2 can tell you, like for me and my children is 3 astronomical, so is there maybe some kind of 4 correlation there with income and having a cell phone 5 and then you're seeing the type of demographics? I 6 mean, the type of occupations that you're generating 7 from your survey? I notice that it was consistent with 8 the last time, but some of the -- if they don't have a 9 cell phone and they don't have a land line, are we 10 picking up the -- a broad enough survey? 11 MS. BUTTORFF: Right. 12 COMMISSIONER ARIETTA-CANDELARIA: Does 13 that make sense? 14 MS. BUTTORFF: I think so. So in terms 15 of the first part about correlation between occupation 16 and cell phone usage, I don't have the answer. This 17 particular survey couldn't answer that question for 18 you. It seems, in terms -- the one correlation we do 19 know is that it tends to go with age, so that's why 20 there's been a bigger shift, or you've seen the 21 proportion of cell phone users in these types of 22 surveys increase is because younger people tend to be 23 exclusive cell phone users. In terms of land lines, it 24 doesn't mean that they don't necessarily have cell 25 phones, it's just they were contacted by a land line. 0018 1 COMMISSIONER ARIETTA-CANDELARIA: Okay. 2 MS. BUTTORFF: Or that the cell phone 3 users don't have a land line, it's just they were 4 contacted with cell phones and the reason we use a 5 higher percentage of cell phone users is to account for 6 the -- the correlation with age, but for occupation or 7 income, I don't have the answer to that. 8 COMMISSIONER ARIETTA-CANDELARIA: Okay. 9 MS. BUTTORFF: And this survey, in 10 particular, couldn't -- 11 COMMISSIONER ARIETTA-CANDELARIA: Okay. 12 MS. BUTTORFF: -- we couldn't find the 13 answer about them. 14 COMMISSIONER ARIETTA-CANDELARIA: All 15 right. Good enough. 16 CHAIRMAN KRAUSE: Professor, thank you 17 for coming up and -- 18 MS. BUTTORFF: Okay. 19 CHAIRMAN KRAUSE: -- visiting with us 20 about this. 21 MR. MINDELL: Thank you, Commissioners. 22 COMMISSIONER ARIETTA-CANDELARIA: Thank 23 you. 24 AGENDA ITEM NO. III 25 COMMISSIONER KRAUSE: Our biennial 0019 1 security study is up for a briefing. 2 MS. ERICKSON: Good morning, Chairman, 3 members of the commission. For the record, my name is 4 Toni Erickson, I'm the support services manager. Our 5 governing statute requires the executive director to 6 conduct a security study every two years. The results 7 of this study have been provided to the Commission, in 8 tab three of your notebook. In accordance with the 9 statute, a summary of the report will also be provided 10 to the legislature and the governor. This year, the 11 security study was conducted by Barry Dunn, and with me 12 this morning to present that is Mark Caiazzo, I told 13 him I was going to ruin his name, a partner with Barry 14 Dunn, and also Chris Ellingwood, the project manager. 15 So with that, I'm going to turn it over to Mark. 16 MR. CAIAZZO: Thank you very much. Good 17 morning. We appreciate the opportunity to present our 18 final report to the commission today. My name is Mark 19 Caiazzo and I'm a principle at Barry Dunn, we're a 20 management consulting and certified public accounting 21 firm, headquartered in the northeast, with offices 22 throughout the country. And myself, Chris, Josh behind 23 me, we've been doing work in the lottery industry since 24 1995, and we were just in the hallway a minute ago 25 counting up our hours and it's probably about 50 or 0020 1 60,000 hours in the last ten years, just on lotteries 2 and lottery vendors, and we were invited also to 3 conduct the 2016 security study, which we presented on 4 a couple of years ago, and as I said, we appreciated 5 the opportunity to work with you again. I'm going to 6 turn things over to Josh Clark, he is a senior, soon to 7 be manager, he doesn't know that, yet, but, in our 8 firm, he led a lot of our day-to-day activities and the 9 three of us, and there are about three others that did 10 the work this year for you. So, I will turn it over to 11 Josh. 12 MR. CLARK: Thank you. Hello. As Mark 13 said, my name is Josh Clark, I'm currently a senior 14 consultant with Barry Dunn. So this -- this project 15 really took on three phases to complete. The first 16 phase was -- was planning that occurred in May, 2018. 17 The planning was -- worked pretty closely with the 18 team, in order to call out all policies and procedures 19 that we would request and also to create a 20 communication plan and set milestones for the project. 21 At the conclusion of phase one, we came in, I believe, 22 May 22nd and provided a presentation to the Texas 23 Lottery, of our milestones and goals for the project. 24 Phase two, which was the risk assessment, started in 25 June and completed on-site work in July. That risk 0021 1 assessment, we worked with a team of about five to six 2 of our Barry Dunn consultants. 3 We worked to not only observe processes, 4 but also inspect policies and procedures and to have 5 interviews with the majority of the departments of the 6 Texas Lottery. With -- with that process, we 7 identified over 150 risks that are impacting the Texas 8 Lottery and the lottery industry, in general. Through 9 those 150 risks, we also worked to identify what would 10 be considered a high risk, a medium risk, and a low 11 risk, which led to our phase three. 12 At the conclusion of phase two, we 13 worked to identify controls that are in place that 14 would help mitigate potential risks, which then we 15 provided in a phase two risk assessment report. Phase 16 three, again, five or six team members from Barry Dunn 17 came onsite in August. The focus of that was to take 18 those controls that were identified in the risk 19 assessment and to test them to make sure that through 20 the period of September 2016 to August 2018, that those 21 controls were in place and operating effectively. 22 Those testings were conducted based on the 23 level of risks that we identified, high, medium, and 24 low, so those came through in population selections and 25 through more interviews, observations, and testing 0022 1 documentation. Within that phase, we also conducted 2 walk-thrus, not only here in Austin, but also in 3 Houston for the lottery and also the vendor IGT. 4 We also included other vendors in that 5 assessment as well, such as Scientific Games. With 6 that, we've provided the security study report, which 7 I'll now turn over to Chris and he can talk a little 8 bit more about the recommendations and findings. 9 MR. ELLINGWOOD: Okay. Thank you. Good 10 morning, thank you for having us. I'm Chris 11 Ellingwood, I'm a senior manager. I was in Josh's 12 shoes in 2016 as a day-to-day, for this engagement, I 13 was a project manager and I was on site throughout all 14 of our visits and oversaw all of this and, in general, 15 I oversee all of our lottery work at the firm. 16 Overall, our conclusion with the lottery has a very 17 strong security posture. 18 The operations are very detailed, they 19 consider risk and they're mature. The lottery has been 20 around a while, management has been around a while, 21 they're experienced, they know what they're doing and 22 there's an agency-wide commitment overall to security 23 and to game integrity. 24 As Josh mentioned, we tested out the 25 200-plus controls to verify that they operated as they 0023 1 were designed, based on our risk assessment. From 2 those controls, we did identify four findings that were 3 -- the findings that were new from 2016 that the result 4 of the control did not agree to what it was intended. 5 But of those findings, there was nothing that would 6 impact the accuracy, fairness, integrity or security of 7 the game. 8 And of those four findings as well, most 9 of those had seemed to be a known issue with the 10 lottery and were already in the process of being 11 addressed. As many of you know, technology, you know, 12 you buy a new cell phone, you walk out of the store and 13 it's outdated, so along with the findings, we've 14 provided the lottery with about 38 risk and 15 opportunities for improvement, based on just emerging 16 technology in our experience of what we see in the 17 other lottery. 18 Again, these are related to best 19 practices, technology and I think with our experience 20 of conducting the exam in 2016, we were able to dig 21 really deep in the technology and provide some value 22 for some emerging risks in the back end of the systems. 23 And so there was a little more focus on the back end of 24 the configuration of the systems. 25 You know, as I said, overall there was 0024 1 many strengths. The compliance program that the 2 lottery has in place overseeing IGT and their major 3 contracts is very strong, very thorough. All of your 4 draws are overseen by independent auditors, and again, 5 a strong culture just within the organization. 6 We'd like to thank everyone here for 7 having us. I'd have to say everyone was incredibly 8 cooperative and helpful and in many cases went out of 9 their way to provide us with our documentation. Our 10 team, we hit the ground running, we swarmed, we were 11 here for two weeks and we have a team just going 12 meeting to meeting and everyone provided us with the 13 information as requested. 14 Are there any questions for us? 15 CHAIRMAN KRAUSE: Commissioners? We're 16 really proud of our staff. We think that they're 17 great. I'll take from what you said that you agree 18 with me. 19 MR. ELLINGWOOD: They're very wonderful, 20 yes. 21 CHAIRMAN KRAUSE: Thank you. 22 MS. ERICKSON: Thank you very much, 23 Commissioners. 24 CHAIRMAN KRAUSE: Thank you. And then 25 don't you have the next item as well? 0025 1 MS. ERICKSON: I do. I have the next 2 two. 3 AGENDA ITEM NO. IV 4 MS. ERICKSON: So Commissioners, Item 5 Four in your notebook is a briefing item and it's to 6 advise the Commission of staff's intent to amend 7 contracts for instant ticket manufacturing and services 8 and drawing studio and production services. 9 The instant ticket manufacturing 10 contracts with Pollard Banknote, IGT Solutions, and 11 Scientific Games are being amended to modify the 12 pricing structure for ticket add-on features and 13 additional product quantities and sizes. 14 The drawing studio and production 15 services contract with Elephant Productions is being 16 amended to include the new add-on feature for Fireball. 17 Commissioners have independently confirmed that they do 18 not have any financial interest in these contracts. 19 That is all I have for this item. I'd be happy to 20 answer any questions. 21 COMMISSIONER ARRIETA-CANDELARIA: No 22 questions. 23 COMMISSIONER LOWE: No. 24 CHAIRMAN KRAUSE: Let's do your last 25 item and then we'll go out of order. 0026 1 AGENDA ITEM NO. V 2 MS. ERICKSON: Okay. Thank you. On 3 number five in your notebook again is a briefing item 4 and it's to advise the Commission of staff's intent to 5 exercise the third of four renewal options for the 6 trademark license and promotional agreement with the 7 Houston Texans, and to amend the contract for lottery 8 drawings CPA services with Weaver and Tidwell, to 9 include the new add-on feature for Fireball and revise 10 existing contract provisions. Again, Commissioners 11 have independently confirmed that they do not have any 12 financial interest in these contracts. Any questions? 13 No Discussion. 14 CHAIRMAN KRAUSE: Thank you, ma'am. 15 MS. ERICKSON: Thank you. 16 AGENDA ITEM NO. X 17 CHAIRMAN KRAUSE: We're now going to 18 skip over and hear about the Bingo Advisory Committee 19 and we have Trace Smith or Kimberly Rogers, or both. 20 MR. SMITH: I think it's just me today. 21 CHAIRMAN KRAUSE: All right. We're 22 happy to have you. 23 MR. SMITH: Pleasure to be here. We had 24 our last meeting on November the 15th of 2018, it was a 25 good meeting. I was not there for the meeting, I was 0027 1 ill. We also had two other members that were unable to 2 attend and we put forth a motion inside the BAC that if 3 you miss two consecutive meetings for no reason at all 4 that we would ask you to either resign or we will 5 replace you. 6 So we've got two open spots. We will 7 have some applications sent out to people that request 8 to be on the BAC and then submit them to you for the 9 February meeting to either approve or disapprove. I'll 10 give those to Michael and we can go through the 11 background process. 12 I'd like to report to you that the BAC 13 is getting their sea legs, if you will, we're having 14 work group meetings around the state trying to get 15 together a comprehensive plan to go forward. 16 You have a handout titled Highlights of 17 the November 15th Bingo Advisory Committee meeting. At 18 the top, there's four items there for rulemaking 19 recommendations and we would, as the BAC, we would like 20 to ask that you would direct the staff to start 21 rulemaking on those four items. The first one being 22 the collection of deferred rent, the second one of net 23 proceeds, the third one, temporary licenses on demand 24 and the fourth one is paperwork. And I'd like to 25 answer any questions that you have at this time. 0028 1 CHAIRMAN KRAUSE: Bingo Commissioner, do 2 you have any comments, questions, et cetera? 3 COMMISSIONER LOWE: So Trace, I do 4 appreciate your work on this and as soon as you get 5 those names to us, we'll check them out and then we'll 6 look at them, the replacement members. And I'm 7 comfortable that if they're not showing up for meetings 8 that they need to be replaced, because it's too 9 important what work you're doing is. 10 And then I -- and then lastly, I 11 appreciate you taking my issue up about the deferred 12 rent. I think that's a real critical to know what 13 we're doing with the charities, if they're being 14 treated fairly and I appreciate you taking -- taking 15 the initiative to push us to do that and so thanks to 16 the Committee. I know there's a couple other folks 17 here today and I appreciate you all's work on the 18 committee. 19 MR. SMITH: Absolutely. Thank you, sir. 20 CHAIRMAN KRAUSE: Yes, sir, thank you, 21 sir. Now, we're going to hear from Mr. Biard. We have 22 some Powerball and Mega Millions rules. 23 AGENDA ITEM NO. VI 24 MR. BIARD: Thank you, Mr. Chairman. 25 Chairman and Commissioners, for the record, I'm Bob 0029 1 Biard, general counsel. Item 6 contains a proposal to 2 amend the Mega Millions and Powerball draw game rules. 3 The purpose of these amendments is to 4 facilitate the potential future sale of Mega Millions 5 and Powerball tickets using what we refer to in our 6 rules as Commission-approved third-party point-of-sale 7 systems, which is a reference to what in the industry 8 is called in-lane sales of lottery tickets. And this 9 is where lottery draw game tickets can be sold at a 10 cash register without an IGT terminal. 11 The changes would remove the requirement 12 that the drawing date be printed on the ticket, update 13 language regarding the players selection of a quick 14 pick, and make other conforming and non-substantive 15 changes. 16 These changes complement rule amendments 17 that were adopted by the Commission back in December of 18 2017 that also facilitated in-lane sales, but ongoing 19 product development has necessitated these small 20 additional updates to the rule language. 21 For the record, I also wanted to say 22 that the December 2017 rule amendment order noted that 23 the term third-party point-of-sale systems refers to 24 the industry terminology used by traditional brick and 25 mortar retailers, such as grocery stores and retail 0030 1 chain stores, to describe their self-contained 2 equipment that performs sales-related tasks at the 3 in-lane checkout counter. 4 So these point-of-sale systems are 5 basically cash registers at the checkout counter that 6 are used by the retailer sales clerks, or they could be 7 self-checkout terminals. A definition of third-party 8 point-of-sale systems is already included in the 9 Commissions rules and states that these systems do not 10 include any gambling device. 11 The proposed amendments also delete, to 12 Powerball, the Powerball amendments also delete 13 references to Winner Take All, a promotional play 14 option adopted in 2017 by the Multi-State Lottery 15 Association and reflected in the Commission’s current 16 Powerball rule which MUSL declined to implement. 17 There's one minor change in each of the 18 proposals in your notebook. At Commissioner 19 Arietta-Candelaria's suggestion, in the first section 20 of each rule we defined executive director to mean the 21 Commission's Executive Director to avoid any confusion 22 that we meant the Executive Director of the Multi-State 23 Lottery Association. 24 So we recommend the Commission initiate 25 the rulemaking process by publishing these proposals in 0031 1 the Texas Register to receive public comment for a 2 period of 30 days. I'm happy to answer any questions. 3 CHAIRMAN KRAUSE: Questions, comments? 4 Motion? 5 COMMISSIONER ARIETTA-CANDELARIA: So 6 move. 7 COMMISSIONER RIVERA: Second. 8 CHAIRMAN KRAUSE: All in favor of 9 beginning the rule-making process, say aye. 10 (Chorus of "ayes") 11 CHAIRMAN KRAUSE: Done. 12 MR. BIARD: Thank you, Commissioners. I 13 have a t-bar memo for you to initial. 14 CHAIRMAN KRAUSE: And then the next item 15 is yours as well. 16 AGENDA ITEM NO. VII 17 MR. BIARD: Yes. This next item, Item 18 7, is a policy statement and this is required by the 19 Commission's 2013 Sunset Legislation and it delineates 20 the policy making responsibilities of the Commission 21 and the management responsibilities of the Executive 22 Director and Commission Staff. 23 You approved revisions to this procedure 24 in July 2016 and it's time again to review and update 25 the procedure. 0032 1 The Sunset Commission recommends a 2 policy like this for all state agencies. This policy 3 was first adopted in December 2013 and is on the 4 Agency's schedule for review this year. With several 5 minor changes, primarily to state that the Commission 6 may contract for internal audit services, as it 7 currently does, and to clarify the support services 8 that the lottery provides to the Bingo Division. 9 This policy is intended to be 10 descriptive of existing practice and it is not adding 11 anything new in that respect. One interesting thing 12 about this agency is that under the State Lottery Act, 13 both the Commission and the Executive Director have 14 broad authority and are required to exercise strict 15 control and close supervision over all lottery games. 16 Also, in all procurement decisions, both 17 the Commission and the Executive Director must take 18 into account the particularly sensitive nature of the 19 lottery and act to promote and ensure integrity, 20 security, honesty, and fairness in the operation and 21 administration of the lottery, and the objective of 22 producing revenues for the State Treasury. 23 So recognizing the statutes say the 24 Commissioner and Executive Director share these 25 responsibilities, this policy states the Executive 0033 1 Director has broad authority to implement the 2 Commission’s general policies by establishing specific 3 policies, procedures, and practices governing the 4 day-to-day operation and administration of the lottery, 5 and these are always subject to the Commission's 6 review. 7 So, I recommend the Commission adopt the 8 revised Policy P-002, effective with today's date, 9 December 13, 2018. Happy to answer any questions. 10 CHAIRMAN KRAUSE: Questions, comments? 11 COMMISSIONER ARIETTA-CANDELARIA: I have 12 a comment. 13 MR. BIARD: Okay. 14 COMMISSIONER ARIETTA-CANDELARIA: Thank 15 you so much, Mr. Biard, for bringing this forward. I 16 think it's an important policy to implement and I think 17 it's important to clear -- to make clear that the -- 18 particularly on the third page, on the Division 19 responsibilities and the fact that there is -- or it's 20 important to recognize that there are some 21 administrative expenses or duties that are shared by 22 both agencies that are borne on the lottery side, and I 23 just think it's important to recognize that so we all 24 understand that while it is two separate divisions, 25 there is, by the nature of them existing in one 0034 1 location, that they share activities and we may or may 2 not cost them out or allocate costs to the -- to one or 3 the other agency. It's at least important to recognize 4 in a policy that we are doing it and I think that 5 that's important to note today. So that's my take 6 away. 7 MR. BIARD: Thank you. 8 COMMISSIONER ARRIETA-CANDELARIA: Uh- 9 huh. 10 CHAIRMAN KRAUSE: Thank you, ma'am. Any 11 other comments, questions? Do we need a motion for 12 this? 13 MR. BIARD: Yes, sir. 14 CHAIRMAN KRAUSE: All right. Motion to 15 approve the revised policy. 16 COMMISSIONER RIVERA: Move for approval. 17 COMMISSIONER ARIETTA-CANDELARIA: 18 Second. 19 CHAIRMAN KRAUSE: All in favor, say aye. 20 (Chorus of "ayes") 21 MR. BIARD: Thank you, Commissioners. I 22 have a t-bar memo for that item, too. 23 CHAIRMAN KRAUSE: Ms. Pyka, we are ready 24 for you. 25 AGENDA ITEM NO. VIII 0035 1 MS. PYKA: Good morning, Commissioners, 2 my name is Kathy Pyka, the Controller for the Agency. 3 And with me, to my right, is the Commission’s Products 4 Manager, Robert Tirloni. 5 Our first chart that we have for you 6 this morning reflects comparative sales for the week 7 ending December 8th of 2018. Our total fiscal year 8 2019 sales through this 15-week period are 9 $1,719,000,000, which is an increase of $331,000,000 or 10 almost 24 percent, as compared to sales for the same 11 period last fiscal year. 12 Fiscal year 2019 scratch ticket sales, 13 which are reflected on the second orange bar are 14 $1,218,000,000, which is a $111,000,000 increase over 15 fiscal year 2018. 16 With a growth rate of over ten percent 17 over last fiscal year on scratch ticket sales, we've 18 reported sales growth in every week of the fiscal year, 19 continuing with the record setting trend that we had in 20 fiscal year 2018. 21 And Commissioners, I want to note that 22 our most three recent weeks of the fiscal year have 23 reported over $90,000,000 in weekly sales for the 24 scratch ticket product. Through this period, our 25 scratch ticket sales amount to 70.8 percent of total 0036 1 sales. 2 Our fiscal year 2018 draw sales, which 3 are reflected on the second blue bar, are $501,000,000, 4 which is a $220,000,000 increase or 78 percent over 5 last fiscal year. 6 The draw game sales growth is attributed 7 to both the Powerball and Mega Millions jackpot rolls 8 that occurred in October of this year and we'll provide 9 an overview of these jackpot rolls towards the end of 10 our presentation. So with that, Robert will now 11 provide an overview of additional sales information. 12 MR. TIRLONI: Thanks, Kathy. Good 13 morning, Commissioners. So this is the fiscal '19, 14 compared to fiscal '18 chart and this is through last 15 Saturday, December 8th, so we can start at the top with 16 the Jackpot games. 17 The Jackpot games are up $223,000,000, 18 most of that gain is coming from the multi-state 19 jackpot games, Mega Millions and Powerball. Mega 20 Millions is up $154.3 million dollars, of course, 21 that's due to the advertised $1.6 billion dollar 22 jackpot on -- in late October, on the 23rd. 23 Mega Millions and Powerball were both 24 rolling up to very large jackpots through October and 25 so you also see a gain of almost $44,000,000 from the 0037 1 Powerball products. That game had an advertised 2 $750,000,000 jackpot on October 27th. So huge gains 3 coming from those two products. You can see the add-on 4 games are also up, Megaplier is up 18,000,000, and 5 Power Play is up 6,000,000. 6 The only game in decline in the jackpot 7 category is Lotto Texas, it's down slightly, 1.6 8 million, of course, that's jackpot related. 9 If we look at the daily games in the 10 middle of the slide in blue, the daily games are down, 11 3.6, most of that deficit is the cause of the closing 12 of Texas Triple Chance. So, you know, we're going to 13 see declines on this line through the whole year now 14 that we're not selling Texas Triple Chance anymore. 15 The good news here is that our new Cash 5 16 game, which we launched in September of this year is 17 seeing good gain, so it's up $1.2 million, that change 18 has been positively received. 19 We've already had 41 winners of the top 20 prize, so that's been a good change for that game and 21 we're pleased with those results. Pick 3 is down 22 slightly, $1.9 million dollars. So overall, if you 23 look at the daily games, they're down about 3.6 24 million, but as a whole, the draw game product category 25 is up $220,000,000. 0038 1 As Kathy mentioned, we're having 2 fantastic sales weeks for scratch, we are up 3 $111,000,000 for the scratch portion of the product 4 portfolio. So all totaled, we're up $331,000,000 5 through last Saturday, the 8th. 6 I have a brief update for you on a new 7 family that we're doing and this slide doesn't really 8 do the tickets justice, so I'm giving you actual 9 samples. They are holographic, with fluorescent ink, 10 they're really sharp looking tickets, they really stand 11 out at retail. 12 Two games have started, the 10X game, 13 which is the $1 game and the 200X, which is the $20 14 game, those started last Monday, on the 3rd. The $20 15 game soared to be the number one selling game last 16 week, it sold over $5,000,000 and it's been the number 17 one selling game every day this week. 18 So those are off to a great start. The 19 30X starts on Monday, the 17th, and then the rest of 20 the family starts right at the beginning of January, so 21 the five, the ten, and the thirty will start in early 22 January. So this is an important family for us, the 23 December, January family really helps carry us through 24 the beginning of the calendar year. 25 We have high hopes for this family, it 0039 1 is getting full advertising support or it will be 2 getting full advertising support here in the next few 3 weeks, as soon as the holiday season ends. And there 4 is one other special thing about this family, we worked 5 with Scientific Games to create a special second chance 6 promotion, so if you have a non-winning ticket, you can 7 enter it for a chance to win a trip to Vegas and play 8 in the $5,000,000 Vegas Challenge. 9 So, if you remember a couple years ago, 10 we had the Willy Wonka game with the billion dollar 11 challenge, that was a -- kind of a -- that was a 12 multi-state effort, so this is Texas only. We're 13 really pleased with the way the promotion comes out. 14 Twenty people will end up going to Vegas and one of 15 those winners will definitely walk away with 16 $1,000,000, at a minimum, so we're -- we think it's an 17 exciting promotion, we think the tickets look great and 18 we think it's going to position us well for our sales 19 through the rest of this fiscal year. 20 And Kathy has some updates for you now 21 on the two multi-jurisdictional jackpots that we 22 experienced two months ago. 23 MS. PYKA: Thanks, Robert. So, the 24 first slide that we have for you provides an overview 25 of Texas data for the Mega Millions jackpot that was 0040 1 advertised at $1.6 billion and ultimately sales 2 supported at $1,537,000,000, and there was one winning 3 ticket sold for this jackpot in the state of South 4 Carolina. 5 So, the jackpot was an accumulation of 6 25 consecutive drawings without a prize winner, 7 beginning with the first draw on July 27th and the 8 final draw on October 23rd. Total sales in Texas for 9 Mega Millions were $181,000,000, our sales were the 10 third highest in the country, behind California and New 11 York. And with the addition of Megaplier in just 12 jackpot, our total sales were $206,000,000. 13 A few other facts related to sales from 14 Saturday to Tuesday of the final jackpot run, we had 15 $62,000,000 in total sales and our Mega Millions sales 16 on the day of the jackpot were $42,000,000. The six to 17 six fifty-nine hour, having the highest sales value 18 with $5.8 million dollars in tickets sold during that 19 one hour. 20 So let's now move on to revenue. There 21 was more than $82,000,000 in revenue generated for the 22 Foundation School Fund during the entire jackpot run. 23 The last draw of the roll generated more than 24 $28,000,000 alone and we generated $19,000,000 on the 25 day of the draw. 0041 1 Our Texas players won more than 3.9 2 million prizes, which were valued at $34.1 million 3 dollars, over the entire run. And as a result, we had 4 four new millionaires in Texas with Mega Millions 5 prizes valued at $1,000,000, $2,000,000, and 6 $3,000,000, as well as a $5,000,000-prize winner. 7 And last but not least, our retailers 8 earned more than $10.3 million in compensation for this 9 Mega Millions jackpot run. 10 So now let's move on to the Powerball 11 jackpot. That jackpot was advertised at $750,000,000 12 and ultimately, sales supported a jackpot of 13 $688,000,000. There were two winning tickets sold in 14 Iowa and New York for the Powerball jackpot, and just 15 as a note, this was the fourth highest jackpot in U.S. 16 history. 17 The specifics for this jackpot, there 18 were 21 consecutive drawings and the first draw 19 occurred August 15th, with the final draw occurring on 20 October 27th, just after the Mega Millions win. 21 Our total Powerball sales here in Texas 22 were $83,000,000. On this one, we ranked fourth in the 23 country, behind California, Florida, and New York. 24 With the addition of Power Play sales, we ended up with 25 $95,000,000 in total sales for the entire run. Other 0042 1 facts related to this one, from Thursday to Saturday of 2 the final run or the final roll, we had $11,000,000 in 3 total sales. The day of the draw, Texas generated 4 $6,000,000 in sales and on this one, our highest hour 5 was the 7:00 hour, in which we sold $786,000 for that 6 one hour. 7 With regard to revenue on the Powerball 8 run, we generated $32,000,000 in revenue for the 9 Foundation School Fund, for the entire jackpot run, 10 with the last roll generating $4.9 million, and the day 11 of the draw, $2.7 million for the Foundation School 12 Fund. 13 Our Texas players won 1.6 million prizes 14 in this run and that was valued at $21.5 million 15 dollars. We had -- while we had fewer prizes in the 16 Mega Millions jackpot run, we did have one more 17 millionaire on this one with five millionaires in 18 Texas, with three of those winning $1,000,000 and two 19 winning $2,000,000. And then finally, our retailers 20 earned $4.8 million in compensation from Powerball. 21 So Commissioners, the final slide that 22 we have for you compares the recent jackpots that we 23 had in October to the Powerball jackpot that we had in 24 January of 2016. And whether we want to define this as 25 jackpot fatigue or our Texas players or our players 0043 1 just reaching their maximum spending authority, the 2 table clearly reflects a decline in sales when 3 comparing the two recent jackpots to the January of 4 2016 jackpot of Powerball. 5 So let's first focus on the number of 6 rolls each jackpot took to reach their maximum jackpot 7 and we'll set the bar with the $1.5 million jackpot in 8 January of 2016. It took us 20 draws to get to that 9 jackpot, while the October Powerball jackpot took 22 10 draws, only reaching an advertised $750,000,000, while 11 it took Mega Millions 26 roll -- or draws, to reach an 12 advertised jackpot of $1.6 billion. 13 Now, let's move on to sales and again, 14 we're going to set the bar with the January 2016 15 jackpot that had total sales for all jurisdictions of 16 $3,183,000,000. Our jackpot for Mega, which had a 17 similar advertised jackpot, had cumulative sales of 18 $2.3 billion, which was a sales decline of 27 percent 19 comparing the two jackpots. 20 That sales decline was further evident 21 in the very last draw, again, comparing the $1.5 22 billion of Powerball, to the $1.6 million of Mega 23 Millions, Powerball had $1.27 billion in its last draw, 24 while Mega Millions generated $739,000,000, that was a 25 decline of 42 percent. 0044 1 This trend was also consistent for our 2 Texas sales, we had total Powerball sales of 3 $244,000,000 for the January 2016 jackpot, with sales 4 of $181,000,000 for the October 2018 Mega jackpot, 5 which was a decline of 26 percent. 6 Again, the last draw for each of the 7 respective jackpots experienced a 43 percent decline in 8 Texas when we compared the $109,000,000 for Powerball 9 to the $62,000,000, for the recent Mega Millions 10 jackpot. 11 And then, we've included on the table 12 the $750,000,000 October jackpot for Powerball. While 13 the jackpots aren't similar, the sales figures for the 14 jackpot certainly shows a significant decline from what 15 we would've expected for a $750,000,000 advertised 16 jackpot. 17 Commissioners, in closing, the recent 18 jackpots have certainly generated exceptional sales and 19 revenue in our state for the Foundation School Fund, 20 but we felt it important to provide awareness of the 21 decline in sales when we're reaching these 22 record-setting jackpot levels and just making certain 23 that we're sharing the current information of the state 24 of these large jackpots. We'd be happy to answer any 25 questions. 0045 1 CHAIRMAN KRAUSE: Please, go. 2 COMMISSIONER LOWE: Robert's got a 3 question. 4 CHAIRMAN KRAUSE: Oh, well, maybe 5 whoever asks for questions gets to go first. 6 COMMISSIONER RIVERA: Okay. Awesome. 7 All right. Thank you for the presentation. Two 8 questions, the first, the bottom part, sales for last 9 draw; can you explain that item? If you did, I missed 10 it. 11 MS. PYKA: No, that's fine. So 12 certainly. 13 So the last draw would've been the last 14 period in which we were selling tickets for that 15 advertised jackpot. So in the case of Mega Millions, 16 that one was a -- was it a Tuesday? I'm looking for 17 it, trying to remember if that one was a Tuesday, but 18 it would've been -- if it was a Tuesday draw, it 19 would've been sales for the Saturday, Sunday, Monday, 20 Tuesday of that draw and while Powerball is drawn on 21 Wednesdays and Saturdays, it would've been the sales 22 from the most recent jackpot to that -- the final 23 jackpot. 24 COMMISSIONER RIVERA: Okay. 25 MS. PYKA: I'm probably not explaining 0046 1 that very well. 2 COMMISSIONER RIVERA: Do you think that 3 the reason why that -- that you have the disparity 4 between these two really large jackpots, compared to 5 2016, is that they both came about the same time? 6 MS. PYKA: It very much could've been. 7 I mean, when you look at the two of them together, that 8 was the point of did our players simply run out and 9 exhaust -- run out of funds, did they exhaust all the 10 resources that they had to play the jackpots? 11 COMMISSIONER RIVERA: Right. Because if 12 you combine the two, they exceed 2016, and so I think 13 that's encouraging, and then also the numbers that 14 you've showed earlier or not you, but that were shown 15 earlier regarding the increase of overall player 16 participation is increasing, so I think both of those 17 trends, you know, speak positive to what we're doing 18 and the data. So anyway, that's how I'll take it. 19 MS. PYKA: Thank you. 20 CHAIRMAN KRAUSE: Commissioner Lowe. 21 COMMISSIONER LOWE: So to follow-up on 22 that, I think if you added in -- if you had the sales 23 numbers for the Mega Millions last year when we didn't 24 have that big of jackpot, if you added those two 25 together, I bet you would be close to that -- to the -- 0047 1 to your $3.1 billion in sales, all jurisdictions. I 2 bet you'd be close or maybe -- maybe more. And then 3 also, the trend is not just in Texas, it was a trend 4 that was all jurisdictions. 5 MS. PYKA: Most definitely. It was 6 across the country and Texas followed the exact same 7 trend. 8 COMMISSIONER LOWE: Yeah, so I don't 9 know if you really have -- I think it would be 10 premature to say fatigue, I think Robert's hitting on 11 something that you probably need to consider both of 12 those happening at the same time. 13 MS. PYKA: Certainly. 14 CHAIRMAN KRAUSE: Well, I just think it 15 shows that our players are intelligent by how they 16 spend their money. All right. Next item. 17 AGENDA ITEM NO. IX 18 MS. PYKA: All right. So we'll move on 19 to our Agency's transfers to the State and our final 20 update on our fiscal year 2018 operating budget. 21 So the report in your notebook reflects 22 accrued revenue transfers and allocation to the 23 Foundation School Fund, the Texas Veteran's Commission, 24 for the two-month period ending October 31st, 2018. 25 Our total accrued transfers to the State amounted to 0048 1 $273.2 million for the first two months of the fiscal 2 year, and of that amount, we transferred $271.8-million 3 to the Foundation School Fund and $1.4-million to the 4 Texas Veteran's Commission. 5 So following the increased sales for our 6 multi-jurisdictional jackpots, this leaves us with a 57 7 percent increase or $99.6-million over where we were 8 last fiscal year for this same period. Our total 9 cumulative transfers to the Foundation School Fund 10 through October of this year totaled $22.7-billion. 11 Also included in your notebook is a 12 final expenditure and budget summary for fiscal year 13 2018. And I have nothing further to report unless you 14 have questions. 15 CHAIRMAN KRAUSE: Questions, comments? 16 I think you -- 17 MS. PYKA: Thank you. 18 CHAIRMAN KRAUSE: -- fully explained it. 19 Thank you. Darlene Brown? 20 AGENDA ITEM NO. XI 21 MS. BROWN: Good morning, Commissioners, 22 and Happy Holidays to everybody, it's the season. So 23 we have some good news to report to you again today, 24 but first, I will talk about my status report. 25 We are right now ramping up our 0049 1 observations of the drawing studios to make sure 2 everything is being followed consistently, as it was 3 with the previous independent auditors. 4 We're also going to start the audit of 5 the House Bill 2578 implementation and that's where 6 we're going to make sure that the allocations out to 7 the jurisdictions from bingo prize fees is accurate and 8 in compliance with the rule. And then, we're also 9 going to look at an audit of how making sure that the 10 game changes are in accordance with the rules that were 11 adopted. 12 So that's what we're going to be doing. 13 If you have any questions on our activities, I'd be 14 happy to answer them, otherwise, I'll move onto the 15 audit reports. 16 Okay. I have two audit reports for your 17 approval. I e-mailed these out to you earlier this 18 month, but in summary, the first one is personal 19 identifiable information handling report. As you've 20 already heard, the agency has really good processes and 21 controls in place to protect data, and so we have an 22 audit conclusion on this report of “effective” and this 23 means that the agency's processes to protect 24 everybody's personal information is good and that 25 includes your retailers, your employees, and 0050 1 yourselves, and winners. This is both electronic and 2 paper documentation of those reports; the handling. 3 And then the second audit report I have 4 is on the copy center operations and we rated that one 5 as a best practices, with effective internal controls. 6 The reason we did that is because this agency has 7 outsourced their copy center operations to a 8 third-party and we believe that that is a best practice 9 because what it's doing is it's centralizing the point 10 where all of your documents, your major documents are 11 printed in a controlled environment, both from the 12 hardcopy ones that's actually printed and plus, the 13 data that's stored on those machines, the copy 14 machines, because we all know now people are using copy 15 machines to hack into businesses, too, so the way this 16 agency has this setup on their network is very good. 17 I'd be happy to answer any questions 18 that you might have on these two reports, otherwise, 19 I'm asking for approval to submit these to the state 20 government. 21 CHAIRMAN KRAUSE: Questions, comments? 22 Motion? 23 COMMISSIONER LOWE: Motion move for 24 approval. 25 MS. BROWN: Thank you. 0051 1 COMMISSIONER ARRIETA-CANDELARIA: 2 Second. 3 CHAIRMAN KRAUSE: All right. All in 4 favor of approving these audit reports, say aye. 5 (Chorus of "ayes") 6 CHAIRMAN KRAUSE: Approved. 7 MS. BROWN: Thank you. 8 CHAIRMAN KRAUSE: Thank you, ma'am. 9 Now, we're going to hear from our Bingo Director. 10 AGENDA ITEM NO. XII 11 MR. FARRELL: Good morning, 12 Commissioners. For the record, my name is Michael 13 Farrell, Director of Charitable Bingo. I have nothing 14 to add, other than what's in your binders, at this 15 time. Are there any questions? 16 COMMISSIONER RIVERA: Nope. 17 CHAIRMAN KRAUSE: Thank you, sir. 18 MR. FARRELL: Things are rocking and 19 rolling well in the Bingo Division. 20 CHAIRMAN KRAUSE: Good, good, good, 21 good. As long as my Bingo Director and my Bingo 22 Commissioner are happy, then that makes me happy, so. 23 And now, we're going to hear from our Executive 24 Director, Mr. Grief. 25 AGENDA ITEM NO. XIII 0052 1 MR. GRIEF: Mr. Chairman, other than 2 what's in your notebook, I also have nothing further to 3 report. 4 CHAIRMAN KRAUSE: Outstanding. Mr. 5 Biard, I know you're going to be very succinct with the 6 enforcement actions. 7 MR. BIARD: Right. And it's not even 8 11:00. 9 CHAIRMAN KRAUSE: We are proud of that, 10 we like that a lot. 11 AGENDA ITEM NO. XIV 12 MR. BIARD: Chairman and Commissioners, 13 Item 14 are the enforcement orders. We have 16 cases 14 for you today, tabs A through P. In these cases, 15 Commission staff found the licensee violated a statute 16 or rule or an applicant did not qualify for a license. 17 In many cases, either the respondent 18 failed to appear at the hearing and it proceeds by 19 default or the staff and the respondent reached a 20 settlement in the form of an agreed order. I'll 21 briefly describe the cases and you can take them up in 22 a single vote, if you'd like. 23 There's one case I'm going to spend a 24 little more time on and that's Tab L. Tabs A through D 25 are the non-sufficient fund lottery retailer license 0053 1 revocations, handled in a single order. Each of these 2 cases was presented to the State Offices of 3 Administrative Hearings for revocation of the retailer 4 license on the grounds the licensee failed to have 5 sufficient funds in their bank account to cover 6 electronic fund transfers to the Commission’s account. 7 In each case, the licensee failed to appear and the 8 judge remanded the case to the Commission to handle as 9 a default matter. Your notebook contains a single 10 order to revoke each of these four licenses. 11 Tabs E through K are lottery agreed 12 orders. Tab E is 100 Shady Oaks Food in Center, which 13 is Shelby County. In this case, one of the owners of 14 the retail licensee had claimed prizes totaling $8,250 15 for eight lottery tickets since January 2013. This 16 prompted a Commission investigator to travel undercover 17 to the store and present a ticket with a $1,000 prize 18 payment -- prize for payment. Under our statutes and 19 rules, retailers can only pay prizes under $600. 20 One of the owners of the store offered 21 to buy the ticket from the investigator for $850. The 22 violation is paying a prize of $600 or more and failing 23 to follow the Commission's ticket validation 24 procedures. The retailer agreed to surrender its 25 license and not to reapply for one year following the 0054 1 date the order was signed. 2 Tab F is Kingsland Food Mart in Katy. 3 In this case, the Commission received a complaint that 4 the retailer charged a fee for lottery ticket purchases 5 with a debit card. The complaint included a photo from 6 the store of a sign that read, “Lotto purchases on 7 debit card will be extra charged.” 8 A Commission investigator visited the 9 store and the clerk told the investigator he could not 10 purchase lottery tickets with a debit card. When 11 asked, the clerk said the policy had changed after a 12 customer complained. The clerk said, however, that the 13 store owner had told employees to continue accepting 14 debit cards and to charge the fee. The investigator 15 talked to the owner, who denied any knowledge of this. 16 The violation is knowingly selling a lottery ticket at 17 a price greater than the price fixed by the Commission 18 and the retailer agreed to a ten-day suspension. 19 Tab G is Lockhart Grocery in Lockhart. 20 In this case, a retailer employee tried to claim a 21 $1,000 prize on a scratch ticket. The ticket had been 22 torn in half, so the claim center staff referred the 23 claim for investigation. The employee said he 24 mistakenly validated the ticket as a non-winner and 25 tore it in half. He said he felt sorry for the 0055 1 customer so he paid the customer $600 cash, and $100 2 worth of scratch off tickets for a $1,000 prize. The 3 customer corroborated this is what occurred. 4 The violations here are, a retailer 5 paying a prize of $600 or more, which is not allowed, 6 inducing another person to transfer a right to claim a 7 prize, and purchasing a ticket from a person who is not 8 a licensed retailer. The retailer agreed to a 30-day 9 suspension and to limit the employee's interest in the 10 store and prohibit the employee's involvement in 11 managing any lottery ticket sales. 12 Tab H is Jiffy Mart #3, in Liberty Hill, 13 which is Williamson County. In this case, in response 14 to complaint, a Commission Investigator visited the 15 store and found scratch tickets that had micro 16 scratches in the bonus play area. 17 During the investigation, the store 18 clerk said that there were a few regular customers who 19 ask for several tickets at once, then hand back ones 20 that they did not want. Because they're regular 21 customers, the clerks didn't always closely watch how 22 the customers handled the tickets before giving them 23 back. 24 The main violation here is failure to 25 maintain reasonable security precautions and attempting 0056 1 to influence the selection of a lottery game winner. 2 The retailer agreed to a 30-day suspension. 3 Tab I is Tip Top Food Mart 1, in 4 Victoria. In this case, the Commission received a 5 complaint of micro-scratching. The customer had bought 6 one ticket that had been scratched in the bonus play 7 area. He returned the ticket for another and the new 8 ticket in the same game had the same issue, it was 9 pre-scratched in the bonus play area. 10 The next time the customer went to the 11 store, the clerk said there was a problem with the 12 game, so they stopped selling it. A Commission 13 investigator visited the store and found other 14 micro-scratched tickets. The store manager admitted 15 that he made the scratches. 16 The main violations here, again, are 17 failure to maintain reasonable security precautions and 18 attempting to influence the selection of a lottery game 19 winner. The retailer fired the offending employee and 20 agreed to a 30-day suspension. 21 Tab J is another micro-scratching case. 22 In this case, this is Stripes #2406 in Lubbock. A 23 customer complained to the Commission about 24 pre-scratched tickets. An investigator visited the 25 store and found several pre-scratched tickets for sale. 0057 1 He inspected the entire inventory and reviewed store 2 video of the previous night. The videos identified a 3 clerk scratching the bonus play area of the tickets. 4 The employee was terminated thereafter for 5 stealing kitchen food, but it was the same employee 6 that was scratching tickets. The main violation is 7 attempting to influence the selection of a lottery game 8 winner and the retailer agreed to a 30-day suspension. 9 Tab K is Fuel Max 14, in Huffman, which 10 is Harris County. And this is another, our fourth 11 micro-scratching case, today. Very similar to the last 12 case; a customer complained to the Commission about 13 pre-scratched tickets. An investigator visited the 14 store and found several pre-scratched tickets for sale. 15 The surveillance video identified a clerk who was doing 16 the micro-scratching. The clerk denied it and was 17 terminated. 18 And again, the main violation is 19 attempting to influence the selection of a lottery game 20 winner. The retailer agreed to a 30-day suspension. 21 So that takes us to Tab L, which is a 22 litigated lottery case involving a retailer called 23 Coyote Den, located in Anna, which is in Collin County. 24 I'm going to spend a little more time on this one 25 because we're recommending that the Commission change 0058 1 the SOAH Judge's recommendation. 2 The fact pattern of this case is 3 familiar. It's a retailer employee, not the owner, 4 claiming -- had claimed 11 high-tier prizes over a 5 two-year period, which prompted an investigation. The 6 employee was buying winning tickets and claiming them 7 as his own. 8 As in all these types of cases, the 9 employee committed the violations while he was 10 performing lottery related duties assigned to him, such 11 as validating lottery tickets and paying lottery prize 12 claims. In virtually all these cases, the retailer 13 settles and we agree to a 30-day suspension. 14 In this case, the retailer would not 15 settle. He claimed he had no knowledge of the 16 violations, so we went to hearing. The judge concluded 17 the retailer was not responsible because the employee 18 was not acting within the scope of his employment when 19 he committed the violations. The judge's rationale was 20 the retailer did not hire the employee to commit 21 violations. 22 The practical implications of this 23 recommendation are huge. So we are recommending 24 changing part of the recommendation because we believe 25 it's based on an incorrect view of the law, when an 0059 1 employer, here a corporate retailer, is legally 2 responsible for violations committed by their employee. 3 So I'd like to go into a little more detail. 4 This employee had claimed 11 high-tier 5 prizes over a two-year period. When our security team 6 sees a pattern like that, it suggests someone at the 7 store may be buying prize winning tickets from a 8 customer and claiming them for themselves, which is not 9 allowed. 10 So the investigator went to the store 11 and found the employee, who admitted that on multiple 12 occasions he had paid lottery prizes of $600 or more 13 and on some occasions, he would claim another person's 14 prize for compensation. 15 The Commission asked for a 30-day 16 suspension. The judge agreed there were violations, but 17 citing no case law or prior SOAH decisions, ruled 18 against the Commission, stating that the employee did 19 not commit these violations in the scope of his 20 employment. 21 To quote from the Judge's proposal: 22 "There is no evidence the respondent hired Mr. Babu to 23 fraudulently claim winning tickets or to pay lottery 24 tickets in an amount of $600 or more. That had nothing 25 to do with his duties. Mr. Babu did that on his own 0060 1 and for his own profit. Accordingly, the ALJ, the 2 Judge, does not find that Mr. Babu's misconduct, 3 knowledge, and intent are attributable to the 4 respondent." That's the end of the quote. 5 So, the Judge recommended that you 6 dismiss the case with prejudice, meaning that the 7 Commission could not re-file any charges against this 8 retailer. 9 So, working with the Lottery Operations 10 Division, we recommend that you change certain 11 conclusions of law and the Judge's recommendation, as 12 you are allowed to do in limited circumstances, 13 provided that you state in writing the specific reason 14 and legal basis for the change. We also recommend a 15 30-day suspension, as we argued at the hearing. 16 We recommend this because the proposal 17 for decision is based on an incorrect legal standard. 18 The Judge did not properly apply and interpret 19 applicable law. It is important to correct this 20 recommendation now because of the very real impact this 21 decision would have on our lottery enforcement efforts. 22 And, I wanted to explain the legal 23 standard and policy reasons supporting the change. As 24 the proposed order in your notebook explains, no 25 employer ever hires an employee for the purpose of 0061 1 breaking the rules of their employment, and so neither 2 does a licensed Texas Lottery Sales Agent hire a sales 3 clerk to violate the State Lottery Act or Commission 4 Rules when performing assigned lottery related duties. 5 Yet, the Judge's determination that violations 6 committed by the employee during the course of his 7 employment were not within the scope of his employment 8 and thus, are not attributable to the retailer, means 9 the Commission could rarely, if ever, determine 10 violations through the enforcement process. 11 A corporate licensee would be shielded 12 from most, if not all, responsibility for violations. 13 That would be the result because over 94 percent of the 14 Commission's licensed sales agents are legal entities; 15 that is, they are not individual human beings. These 16 legal entities, mostly corporations, can only take 17 actions through the acts of their employees who are not 18 required to be licensed by the Commission. A 19 corporation cannot sell or redeem lottery tickets or 20 commit violations, except through the acts of an 21 employee who has been assigned lottery related duties. 22 And indeed, there are five provisions in the State 23 Lottery Act that show the Legislature expressly 24 recognized that a sales agent's unlicensed employees 25 may lawfully perform lottery related duties of their 0062 1 licensee employers, including selling and handling 2 lottery tickets and handling the revenue generated from 3 ticket sales. 4 So if the legal analysis defines any 5 violation not to be within the employee's scope of 6 employment, then it would be an exceptional case where 7 the Commission could find a violation by a sales agent, 8 and that can't be what the Legislature intended. 9 The actual standard for employer liability in 10 Texas is this: An employer is liable for the acts of 11 its servants, committed in the course and the scope of 12 their employment. An employee is acting within the 13 scope of their employment, if they are performing 14 duties generally assigned to them, regardless of 15 whether the employee acted intentionally and 16 unlawfully. 17 Significantly, under the correct legal 18 standard, the employees -- the employer's knowledge of 19 or participation in the violations is not a factor in 20 determining whether the employer is responsible for the 21 violations. 22 The record in this case establishes that 23 the employee was performing duties generally assigned 24 to him when he committed the violations. The facts are 25 undisputed and are succinctly summarized in the PFD. 0063 1 Now, an additional reason and legal basis 2 supporting the Commission's changes for the proposal is 3 that the Commission has what the law calls implied 4 authority, under the State Lottery Act, to hold 5 licensees responsible for violations an employee 6 commits within the course of the scope of their 7 employment. 8 When the legislature expressly confers a 9 power on an agency, it also impliedly intends that the 10 agency have whatever powers are reasonably necessary to 11 fulfill its express functions or duties. 12 Here, the Legislature has expressly 13 mandated that the Commission exercise strict control 14 and close supervision over all lottery games conducted 15 in the state, to promote and ensure integrity, 16 security, honesty, and fairness in the operation and 17 administration of the lottery. Exercising strict 18 control and close supervision requires that the 19 Commission ensure that Texas Lottery licensees operate 20 in a manner consistent with the State Lottery Act, 21 Commission Rules, and the terms and conditions of their 22 license. 23 The Lottery Act provisions that refer to 24 employees show that the Legislature expressly 25 recognized that a sale agent's unlicensed employees may 0064 1 lawfully perform certain lottery related duties of 2 their employers, since the Legislature intended for 3 employees to be able to sell tickets, pay prizes, and 4 handle ticket proceeds under the authority of a 5 licensed Texas Lottery Sales Agent without being 6 licensed themselves. 7 We believe it would be absurd to think 8 the Legislature did not also intend for the Commission 9 to have authority to suspend or revoke a sales agent's 10 license based on an employee's violations of the 11 Lottery Act or Commission rules. Otherwise, the 12 Commission would only have such authority if a licensed 13 entity personally committed the violation, which in the 14 case of a corporation or partnership is impossible. 15 If the Commission did not have authority 16 to hold a licensee responsible for its employees' 17 violations, corporate or partnership licensees, that is 18 94 percent of all licensees, could avoid suspension or 19 revocation of their license in almost every instance 20 because, as I said earlier, a corporation or 21 partnership cannot operate a lottery terminal or cash 22 register, or redeem a ticket, or pay a prize, except 23 through an employee. The Legislature, we believe, 24 could not have intended this result. 25 Accordingly, the Commission's ability to 0065 1 attribute employee violations committed within the 2 scope of their employment to their licensee employer is 3 reasonably necessary to fulfill the Commission's 4 express duty to exercise strict control and close 5 supervision over the lottery, and thus, is within the 6 Commission's implied authority. 7 Commissioners, the order in your 8 notebooks spells this out and proposes new conclusions 9 of law to replace several conclusions of law that the 10 Judge recommended. I'm happy to answer any questions. 11 CHAIRMAN KRAUSE: You go first. 12 COMMISSIONER LOWE: Yes, I did the last 13 time. 14 CHAIRMAN KRAUSE: I don't know. I've 15 got some thoughts. 16 COMMISSIONER LOWE: So It's been four 17 years since I've been in the courtroom as a prosecutor, 18 but part of -- part of my -- because I've done it -- 19 did it for so long, I guess my unconscious brain goes 20 back to these kind of fact patterns and so this 21 morning, I woke up really early thinking about this 22 case. 23 Well, the reason I woke up is not 24 because of the case, it was because my daughter's 25 stupid Pomeranian was barking at the cat. Anyway, so 0066 1 -- so let's think about this; eleven times, and what 2 that means, what was going on in that store. So it was 3 a clerk that did it and so the clerk, you think the 4 clerk had $800, $900 cash on him to pay that -- to pay 5 that -- to pay that winner? No. So where'd he get the 6 money? He got the money out of the till and to make 7 the till right, he had to go cash the check and bring 8 it back or had to go to the payment center and bring 9 the money cash and make the till right, so who was 10 minding the store during that period of time? 11 There's no doubt in my mind -- well, I 12 say the state can't say that, but I suspect that the 13 owner had to know what was going on. He -- 11 times 14 where the till was not right, something was going on 15 and he knows about it. And I don't know if the guy 16 testified at the hearing, but I suspect he might've not 17 been truthful. So that's my point about that case. 18 But -- but the thing that keeps 19 troubling me or has started to troubling me is that we 20 hear two kinds of cases over and over again, in the 21 lottery sales. We hear cases where clerks are doing 22 this pin-prick scratching or somebody's store scratches 23 the -- the micro-scratch, they're taking the -- they're 24 taking the tickets and figuring out if there's a 25 winner. We keep having that over and over again. 0067 1 Plus, we have essentially the store owner or somebody 2 in the store that's engaging in money laundering. 3 So my -- so I've got a question; so who 4 bears the loss for that roll of tickets when somebody, 5 first of all, scratches that -- figures out who the 6 winner is, who bears the loss? 7 MR. BIARD: Probably ought to defer to 8 our lottery director, Ryan Mindell. 9 MR. MINDELL: For the record, Ryan 10 Mindell, the Director of Lottery Operations. In a case 11 where we go in and we find micro-scratching and we 12 confiscate those tickets or, I mean, they don't get 13 reimbursed for those tickets. 14 In most, 99 percent of the cases, the 15 retailer is bearing the cost of any pack that's in 16 their store. And we hold them to that standard because 17 they're holding those tickets in trust, they're holding 18 the money in trust, and so the retailer is almost 19 always the person that we look to. There's one small 20 exception to where if a pack is reported stolen and 21 they can pay a small fee instead of the cost of the 22 pack and we will deactivate those prizes on the back 23 end so that they can't be paid. But, if a prize is 24 paid on a ticket, then the retailer is held responsible 25 for the cost of that ticket. 0068 1 COMMISSIONER LOWE: Okay. So that's 2 exactly my point, is that -- my point is that this is 3 like an iceberg, in my experience, you only take -- 4 catch about ten percent of the criminal conduct that's 5 committed in -- out there in the world, so that means 6 that 90 percent of the tickets that already are altered 7 are going out to our players who -- right? Whose 8 chances -- so if somebody pulled that ticket out in 9 advance, they didn't get a chance to win because they 10 bought a ticket that they already knew was lost and so 11 I guess we're not catching a lot of this kind of 12 activity. 13 And the same goes with the -- the people 14 at the stores, they're probably complicit with the 15 player -- the player probably has a reason why he 16 didn't want to go -- he may owe money on child support 17 or he may owe money to the State of Texas, because if 18 he went to the payment center, he'd get -- he'd have to 19 pay his -- what he owes to the State of Texas, so there 20 may be some complicity, but we're having -- we keep 21 having those two problems over and over and over again. 22 And so -- so -- and those are -- some of those are 23 felonies. 24 I think that what's going on, so if you 25 -- so this is probably a government document and if you 0069 1 alter a government document, that's a felony in the 2 state of Texas. And so we're giving somebody a 30-day 3 suspension from selling lottery tickets for a felony. 4 And I don't know if Mario's sending those cases to 5 prosecutors or not, but -- and I know prosecutors, 6 we're a pretty lazy bunch sometimes, it's more fun to 7 try a murder case than it is a good theft, but I think 8 we have to take a really -- at this -- take a stronger 9 stance on what's going on, because I think it not only 10 cheats the players, it goes to the integrity of what 11 we're doing. 12 Does it -- is it rip -- and we're 13 allowing -- if we don't do something about it, we're 14 allowing our players to get ripped off because -- 15 because we're not -- obviously, the message, and I'm 16 not going to oppose the -- I'm going to go with your 17 recommendation, Bob, on this particular sanction and to 18 do what you want, but I think we've got to take a hard 19 look at this and -- and if -- and if we -- and 20 referring more cases for prosecution, if the 21 prosecution -- the prosecutors are not doing their job, 22 then we need to raise some sand and I'll be the first 23 one up there raising some sand about them not doing 24 their job, if we're sending them criminal cases that 25 are not getting prosecuted. 0070 1 So anyway, that was my early morning 2 thought, Chair, and I appreciate you letting me vent a 3 little bit about that. 4 CHAIRMAN KRAUSE: Well, not a problem. 5 You know, the integrity of our games is critical to 6 what we do and, you know, it's very important that our 7 licensees do the right thing. And Robert, do you have 8 a question or comment? 9 COMMISSIONER RIVERA: Comment. 10 CHAIRMAN KRAUSE: Okay. Let's go ahead 11 and hear yours. 12 COMMISSIONER RIVERA: So and actually, 13 Doug, we shared the exact same thoughts and this is, 14 you know, very frustrating that a big chunk of what we 15 do whenever we meet, you know, are having to deal with 16 these type of cases and the micro-scratching is hyper 17 frustrating, and so, you know, again it is a -- it's a 18 state document. 19 You know, our number one, I have a few 20 questions; first, is that are we forwarding this on for 21 criminal action or looking at and what kind of results 22 are you getting, that's my first question? I have some 23 others right after that. 24 MR. MINDELL: Commissioner, when we have 25 evidence either, you know, it'll come through either a 0071 1 complaint where we'll get a player that comes to the 2 retailer services and we have a communications division 3 there and that will be forwarded to our enforcement 4 director and they will investigate that; and then, the 5 regulatory part, that's the piece that comes back to 6 you for license revocation, that decision comes back to 7 me and I make that decision, I refer those cases to Bob 8 for regulatory purposes. 9 For criminal purposes, then our 10 Enforcement Director, Mario Valdez, makes the decision 11 about whether to refer that to local law enforcement. 12 If you have any questions for him, I'm sure he's happy 13 to answer. I would say that when I've been interested 14 in following, asked and followed-up on those, we just 15 find such a vast discrepancy in the local law 16 enforcement. 17 Like, as you said, Commissioner Lowe, 18 what one local DA might be interested in, another might 19 not, and we'll see the same facts, we'll get to one 20 local law enforcement that'll have a completely 21 different result from the other. We encourage that, 22 and I know that we take this all very seriously, and I 23 know that Mario is referring all of those that we think 24 that have even a remote chance of being picked up by 25 those local law enforcement. 0072 1 What we're doing on our side, from a 2 regulatory perspective, is to make sure that we can do 3 as much as we can do, we're taking this case and we're 4 enforcing them as we can. 5 COMMISSIONER RIVERA: Are there things 6 that the Legislature can do to help with this? Is our 7 Governor's representative here in the room? 8 MR. GRIEF: I don't believe so. 9 COMMISIONER RIVERA: Okay. Gary, 10 thoughts? 11 MR. GRIEF: I have several. So, one, as 12 you know, I've been looking at these issues, these 13 cases, for 26 years and there's no uptick in this 14 behavior. This is part of what's inherent when you have 15 a paper product that is subject to tampering that is 16 being handled in a convenience store scenario. 17 I've often -- the zealousness by which 18 past commissions have dealt with this, it ebbs and 19 flows over time. And ultimately what we've come down 20 to is the Legislature by vote of the people has chosen 21 to have a lottery in this state and they've allowed us 22 to do scratch products and draw games. As long as we 23 have scratch products in their form today, these -- 24 these problems will never go away. They will always be 25 part and parcel of what we deal with. 0073 1 To put it more in perspective, the 2 Commission only meets once every two months. If you 3 look at the number of these cases that come before you, 4 it's less than 1/10th of one percent of our entire 5 retailer base, it is, in the accounting world, it's 6 immaterial. 7 Now, that said, we take every one of 8 these very, very seriously. As Ryan said, Mario and 9 his team, they're very zealous investigators, they want 10 the crooks in jail on this, and they refer each and 11 every one of them, if there's criminal behavior, in 12 their opinion, they refer those to whatever 13 jurisdiction that goes to. It is vastly different in 14 how those referrals are received across the state. 15 COMMISSIONER RIVERA: Okay. 16 MR. GRIEF: Some are ignored, flat out 17 ignored, some are taken more seriously and then there's 18 everything else in between. But I can assure you and 19 the rest of the Board, we do everything within our 20 authority to both refer those criminally and take care 21 of them administratively here at the commission. 22 COMMISSIONER RIVERA: Okay. Last 23 question is, and I know that we will suspend a license 24 for a period of time, is there any way to do a monetary 25 damages? 0074 1 MR. BIARD: Not at the commission, we 2 don't have the authority -- 3 COMMISSIONER RIVERA: How could we get 4 that authority? 5 MR. BIARD: That would be the 6 Legislature's decision. 7 COMMISSIONER RIVERA: Okay. 8 MR. BIARD: We can do that on the bingo 9 side. You can do that on the bingo side, but not on 10 the lottery side. 11 COMMISSIONER RIVERA: So is that 12 something that I guess would be a commission decision, 13 but is that something that we would want to open up and 14 ask for a legislative discussion on the topic? 15 MR. GRIEF: And Commissioner Rivera, if 16 I could just add some color to that discussion, that's 17 been talked about before. I think it's important that 18 as you deliberate this issue, that you remember these 19 retailers are voluntarily selling our game for us. 20 COMMISSIONER RIVERA: Right. 21 MR. GRIEF: We actively recruit them. 22 Without them, we don't have a lottery. So we try to 23 make sure that every aspect of fairness and -- and a 24 collaborative approach is made on selling these 25 tickets. 0075 1 I've seen other lotteries in other 2 jurisdictions who have gone a little bit far to the -- 3 to the, I guess, the zealous side of this enforcement, 4 retailers say, no, thank you. We don't want -- we 5 don't want to participate anymore. We don't want to 6 carry your products. Because, quite frankly, it's the 7 lowest margin profit item in their store. 8 The only reason many, many of our 9 retailers carry the product is because their 10 competition across the street is carrying it. The 11 scratch tickets in particular are a manually accounted 12 for product, they're not within their cash register 13 system, they have to keep a separate set of books, if 14 you will, for them, it's very problematic. Hence, we 15 have a churn of thousands of retailers that we go 16 through all the time. You know, people are giving their 17 license up, new ones are coming on, giving them up, 18 some just wash their hands of it and take them back. 19 So I would just ask that the commission, as 20 you talk about this, just remember unlike charitable 21 bingo, which they aren't selling their product for them 22 in the bingo halls, they're their own businesses, they 23 are carrying our water for us out in the community. 24 Just a -- just a thought. 25 COMMISSIONER RIVERA: Okay. 0076 1 COMMISSIONER ARRIETA-CANDELARIA: May I? 2 CHAIRMAN KRAUSE: Yes, please. 3 COMMISSIONER ARRIETA-CANDELARIA: So I 4 think maybe also another approach that we could take in 5 what you're saying, Gary, is that we look at micro 6 proofing our bundles. So maybe a different wrap, a 7 different disbursement method, that would protect the 8 -- I was trying to see how I could do that with -- I'm 9 not sure how that works, I've never really seen that, 10 but maybe a different wrap, it would probably increase 11 our cost or something like that, but -- 12 MR. GRIEF: Commissioner, that's been a 13 -- if the vendors could do that, they would be, because 14 this is not unique to Texas. 15 COMMISSIONER ARRIETA-CANDELARIA: Yeah. 16 MR. GRIEF: This is a world-wide scratch 17 ticket lottery issue that's always been there. There 18 isn't, if you make it micro-scratching proof, then you 19 make it scratch proof, and the players can't scratch 20 the tickets off -- 21 COMMISSIONER ARRIETA-CANDELARIA: Yeah. 22 MR. GRIEF: -- easily. We have to have 23 it easily scratched off. So that's been the -- that's 24 been an age old question that all three of the biggest 25 ticket printers in the world have never been able to 0077 1 solve. 2 COMMISSIONER ARRIETA-CANDELARIA: I'm 3 talking about the bundling, so I mean, I'm very 4 familiar with the way it's -- the way that it's in 5 their case, so when they are disbursed out, that, you 6 know, they -- you could put it in a little case and 7 that case is -- is -- cannot be taken out. I mean, I'm 8 just talking about the distribution of it, the actual 9 access to that product, because right now, you can 10 handle one like this in a case, right? And they're put 11 in the case. I'm talking about like encasing that, 12 where the disbursement comes out. I mean, it's just a 13 thought. 14 That we could look at maybe innovation, 15 technology, to prevent some of that, because I agree, I 16 think that there's a balance with our retailers and 17 being sensitive to that. Many cases, I think that's 18 what draws people to the stores and so when you have 19 the lottery, they're available, then they're also going 20 to buy their other products there, their sodas, snacks, 21 whatever. And so that's a draw. 22 I think that's a benefit to the 23 retailers in having lottery is that it also produces 24 other sales when you come in, so I am -- I agree with 25 you that we want to make sure that we balance that, but 0078 1 I also think that we need to perhaps have stronger 2 enforcement. 3 I do completely agree with the case and 4 how Bob has laid that out, I do agree that the -- that 5 is the appropriate and just to wash your hands of an 6 employee is not appropriate, that they are your 7 employee, they are under your jurisdiction, if you 8 will, and I think that that extends to the owner and 9 should be held accountable for their employee's 10 actions. So those are my thoughts. 11 MR. GRIEF: If -- I appreciate that. If 12 there's any interest, we happen today to have Jay 13 Gendron from IGT who is also responsible for one of the 14 three biggest ticket printers in the world, IGT 15 printing. Jay's been around the lottery industry as 16 long as I have and he can offer more global perspective 17 on this issue, if you'd like to hear from him. 18 CHAIRMAN KRAUSE: Maybe offline. 19 COMMISSIONER LOWE: Yeah. 20 COMMISSIONER ARRIETA-CANDELARIA: Maybe 21 offline would be good. 22 COMMISSIONER LOWE: I do have one more 23 comment when it gets back to my turn, Chair. Just one 24 quick comment. 25 CHAIRMAN KRAUSE: All right. You get 0079 1 one more shot at it and then it's my turn -- 2 COMMISSIONER LOWE: Okay. So -- 3 CHAIRMAN KRAUSE: -- and I'm the last 4 one. 5 COMMISSIONER LOWE: Okay. So -- so, you 6 know, Wal-Mart is the biggest generator of revenue in 7 the world and they have an attitude that they except 8 fraud as a cost of doing business. I think there's a 9 difference with the lottery because we're the 10 government, we are -- we represent the people, we don't 11 represent shareholders, we represent the people of the 12 state of Texas, so there's a fundamental difference in 13 accepting fraud as a cost of doing business for the 14 government. And so I would like to -- I would like to 15 at least have a report from Mario about the number of 16 cases he's referring, so -- so we can see what's going 17 on. 18 I think we -- that's at a minimum of 19 what I'd like to see to do. And as far as, you know, I 20 think to make this thing happen, you have to generate 21 some interest in -- Will Martin out there, he was upset 22 at the gambling that was going on and -- in Victoria 23 and that county, and he raised enough sand to where the 24 prosecutors started paying attention and so the 25 prosecutors are elected and they'll pay attention if 0080 1 somebody's squeaking. And so, anyway, that's my -- I'd 2 like to have a report and that's all I have to say, 3 Chair. Thank you. 4 CHAIRMAN KRAUSE: All right. If we make 5 this decision today, which, you know, my sense is it's 6 going to be unanimous, then will that solve the problem 7 of no prior SOAH decision on this point? 8 MR. BIARD: Well, Commissioners -- 9 CHAIRMAN KRAUSE: Because then this will 10 now be -- this will now be corrective action, we're 11 communicating with the SOAH judges by doing this. 12 MR. BIARD: SOAH is required to consider 13 the written policies and decisions of the agency. Once 14 we have this in writing, the SOAH judges in the future 15 will be required to consider it. 16 Now, we can't mandate that they'll come 17 up with the same -- with the same recommendation that's 18 in our order, but if they -- if they come back with 19 another adverse decision, this is our template for 20 correcting it and if a retailer ever appealed one of 21 these to District Court, I think working with the 22 Lottery Operations Division, we feel -- we feel as 23 comfortable as we can that the Commission's position 24 would ultimately be upheld in court. 25 CHAIRMAN KRAUSE: Well, when you hire an 0081 1 employee, I mean, it's, you know, you never hire your 2 employee to commit a crime on your premises, you know, 3 with your -- with your money, with your inventory, and 4 that kind of thing. It is implicit that it, you know, 5 that the employee's conduct, it will be lawful, you 6 know, and so for the SOAH Judge to buy off on the 7 argument that oh, well, it wasn't within the scope or 8 course of the employee's duties to violate the law, 9 that's just simply not true, that is it is implicit 10 that the employee will follow the law and that the 11 employer's responsible for it. And so I hope that what 12 you write, that we approve today, makes that clear. 13 MR. BIARD: Thank you. 14 CHAIRMAN KRAUSE: So -- 15 MR. BIARD: I do have four bingo cases 16 to go through real quickly, before you vote. They'll 17 be really quick. 18 CHAIRMAN KRAUSE: That would be really 19 brief. 20 MR. BIARD: They're all the same. Tabs 21 M through P are bingo worker agreed orders and these 22 are four cases, each involving a person with a criminal 23 history that could prevent them from being registered 24 as a bingo worker. They've each provided letters of 25 recommendation and the Bingo Director recommends 0082 1 allowing restricted registrations for each of these 2 individuals for a period of three years and the orders 3 are in your notebook. I'd be happy to answer any 4 questions on those as well. And that concludes my 5 presentation. 6 CHAIRMAN KRAUSE: Outstanding. Well, we 7 thoroughly discussed this, so I'm looking for a motion 8 to -- 9 COMMISSIONER RIVERA: Collectively move 10 for approval. 11 CHAIRMAN KRAUSE: Absolutely. 12 COMMISSIONER ARRIETA-CANDELARIA: 13 Second. 14 CHAIRMAN KRAUSE: All in favor, say aye. 15 (Chorus of "ayes") 16 CHAIRMAN KRAUSE: Approved, including 17 Item L. 18 MR. BIARD: I have 13 orders for your 19 signature, and that concludes the enforcement cases. 20 COMMISSIONER ARRIETA-CANDELARIA: Do we 21 need an executive? 22 COMMISSIONER LOWE: I don't think so. 23 CHAIRMAN KRAUSE: Alrighty. Well, I 24 think the consensus is that we don't have a need for 25 executive session and so I guess by my own motion, I'm 0083 1 going to move that we adjourn. 2 COMMISSIONER RIVERA: Second. 3 CHAIRMAN KRAUSE: All in favor, say aye. 4 (Chorus of "ayes") 5 CHAIRMAN KRAUSE: We're adjourned. 6 (Proceedings concluded at 11:32 a.m.) 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0084 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 I, Kimberly C. McCright, Certified Vendor and 5 Notary in and for the State of Texas, do hereby certify 6 that the above-mentioned matter occurred as 7 hereinbefore set out. 8 I FURTHER CERTIFY THAT the proceedings of 9 such were reported by me or under my supervision, later 10 reduced to typewritten form under my supervision and 11 control and that the foregoing pages are a full, true 12 and correct transcription of the original notes. 13 IN WITNESS WHEREOF, I have hereunto set my hand and seal this 4th day of January, 2019. 14 /s/ Kimberly C. McCright 15 Kimberly C. McCright Certified Vendor and Notary Public 16 Verbatim Reporting & Transcription, LLC 1322 Space Park Drive, Suite C165 17 Houston, Texas 77058 281.724.8600 18 19 20 21 22 23 24 25