0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 7 WEDNESDAY, JULY 25, 2007 § 8 9 COMMISSION MEETING 10 WEDNESDAY, JULY 25, 2007 11 12 BE IT REMEMBERED THAT on Wednesday, 13 the 25th day of July 2007, the Texas Lottery 14 Commission meeting was held from 9:00 a.m. to 15 1:11 p.m., at the Offices of the Texas Lottery 16 Commission, 611 East 6th Street, Austin, Texas 78701, 17 before CHAIRMAN JAMES A. COX, JR., and COMMISSIONER 18 C. TOM CLOWE, JR. The following proceedings were 19 reported via machine shorthand by Kim Pence, a 20 Certified Shorthand Reporter of the State of Texas, 21 and the following proceedings were had: 22 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONER: Mr. C. Tom Clowe, Jr. 5 GENERAL COUNSEL SECTION CHIEF: 6 Mr. Edward A. Marker 7 EXECUTIVE DIRECTOR: Mr. Anthony J. Sadberry 8 CHARITABLE BINGO ASSISTANT DIRECTOR: 9 Mr. Philip D. Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS PAGE 2 3 AGENDA ITEM NO. I - Meeting Called to Order....... 8 4 AGENDA ITEM NO. II - Report, possible discussion and/or action on the 5 implementation of recommendations contained in the Internal Audit Report on bingo audit 6 services, including development of rules.......... 8 7 AGENDA ITEM NO. III - Report, possible discussion and/or action on Internal 8 Control Guidelines for licensed authorized organizations.......................... 13 9 AGENDA ITEM NO. IV - Consideration of and 10 possible discussion and/or action, including proposal of repeal, on 16 TAC §402.500 11 relating to General Audit......................... 38 12 AGENDA ITEM NO. V - Consideration of and possible discussion and/or action, including 13 proposal, on new 16 TAC §402.715 relating to Compliance Audit.................................. 38 14 AGENDA ITEM NO. VI - Consideration of and 15 possible discussion and/or action, including proposal, on new 16 TAC §402.708 relating to 16 Dispute Resolution................................ 42 17 AGENDA ITEM NO. VII - Report by the Charitable Bingo Operations Director and possible 18 discussion and/or action on the Charitable Bingo Operations Division’s activities, 19 including follow up actions as a result of the November 15, 2006 House Licensing and 20 Administrative Procedures Committee hearing....... 45 21 AGENDA ITEM NO. VIII - Report, possible discussion and/or action on lottery sales and 22 revenue, game performance, new game opportunities, market research, and trends........ 48 23 AGENDA ITEM NO. IX - Report, possible 24 discussion and/or action on transfers to the State and the agency budget................ 55 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. X - Report, possible discussion and/or action on Lottery 4 Operations and Services Contract Amendment No. 8 credit calculation................ 57 5 AGENDA ITEM NO. XI - Report, possible 6 discussion and/or action on Bingo indirect and administrative expenses.............. 59 7 AGENDA ITEM NO. XII - Report, possible 8 discussion and/or action on the 80th Legislature....................................... 64 9 AGENDA ITEM NO. XIII - Report, possible 10 discussion and/or action on the agency’s contracts......................................... 66 11 AGENDA ITEM NO. XIV - Report, possible 12 discussion and/or action on the agency's instant ticket manufacturing and 13 services contract(s), including proposed amendments............................... 67 14 AGENDA ITEM NO. XV - Report and possible 15 discussion and/or action on the agency's HUB program and/or minority business 16 participation, including the agency's Mentor Protégé Program............................ 69 17 AGENDA ITEM NO. XVI - Consideration of and 18 possible discussion and/or action on external and internal audits and/or reviews relating 19 to the Texas Lottery Commission and/or on the Internal Audit Department’s activities............ 70 20 AGENDA ITEM NO. XVII - Report by the Texas 21 Lottery Commission Ombuds and possible discussion and/or action on the Ombuds 22 activities for August 2006 through July 2007...... 72 23 AGENDA ITEM NO. XVIII - Report, possible discussion and/or action on the Mega 24 Millions game and/or contract..................... 79 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XIX - Report, possible discussion and/or action on GTECH 4 Corporation....................................... 80 5 AGENDA ITEM NO. XX - Report, possible discussion and/or action on retailers 6 and the processing of prize claims at retail locations.................................. 81 7 AGENDA ITEM NO. XXI - Report, possible 8 discussion and/or action on Scientific Games Corporation's (SGC) acquisition of 9 Oberthur Gaming Technologies (OGT)................ 126 10 AGENDA ITEM NO. XXII - Report, possible discussion and/or action regarding agency 11 action in response to allegations of possible misconduct............................... 127 12 AGENDA ITEM NO. XXIII - Report, possible 13 discussion and/or action on Stansell et al. v. New Mexico Lottery............................. 133 14 AGENDA ITEM NO. XXIV - Consideration of the 15 status and possible entry of orders in: A. Docket No. 362-07-2497 – Box Car Drive-In 16 B. Docket No. 362-07-2581 – Kwik Stop Conoco C. Docket No. 362-07-2580 – Horton’s Quik Stop 17 D. Docket No. 362-07-0675 – Aldine Express E. Docket No. 362-07-0676 – Ace Cash Express 18 F. Docket No. 362-07-0677 – Beltway Express G. Docket No. 362-07-0678 – Hardy Express 19 H. Docket No. 362-07-0679 – Alvin Express I. Docket No. 362-07-990424AM.B – Removal 20 of Person’s Name from Registry of Bingo Workers: Christy A. Garcia, Delores 21 Holliday, Rayfield Latson, Cassandra Martin, Jacky W. Moore, Robert F. Moos, 22 Justin Rohrer, Ashton T. Sheffield, and Kimberly G. Sorensen 23 J. Docket No. 362-07-2747.B – Jackie Cory Simpson 24 K. Case No. 2006-771 – In the Matter of GameTech International, Inc............... 135 25 0006 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXV - Report by the Executive Director and/or possible 4 discussion and/or action on the agency’s operational status, activities relating 5 to the Charitable Bingo Operations Division, agency procedures, and FTE status....... 165 6 AGENDA ITEM NO. XXVI - Public comment............. 166 7 AGENDA ITEM NO. XXVII - Commission may meet in 8 Executive Session: A. To deliberate the duties and evaluation 9 of the Executive Director pursuant to Section 551.074 of the Texas Government 10 Code B. To deliberate the duties and evaluation 11 of the Deputy Executive Director pursuant to Section 551.074 of the Texas Government 12 Code C. To deliberate the duties and evaluation 13 of the Internal Audit Director pursuant to Section 551.074 of the Texas Government 14 Code D. To deliberate the duties and evaluation 15 of the Charitable Bingo Operations Director pursuant to Section 551.074 of the Texas 16 Government Code E. To deliberate the duties of the General 17 Counsel pursuant to Section 551.074 of the Texas Government Code 18 F. To receive legal advice regarding pending or contemplated litigation pursuant to 19 Section 551.071(1)(A) and/or to receive legal advice regarding settlement offers 20 pursuant to Section 551.071(1)(B) of the Texas Government Code and/or to receive 21 legal advice pursuant to Section 551.071(2) of the Texas Government Code, including but 22 not limited to: 23 24 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE 3 Cynthia Suarez v. Texas Lottery Commission 4 Shelton Charles v. Texas Lottery and Gary Grief 5 First State Bank of DeQueen et al. v. Texas Lottery Commission 6 Stansell et al. v. New Mexico Lottery 7 Employment law, personnel law, procurement and contract law, 8 evidentiary and procedural law, and general government law 9 Lottery Operations and Services contract 10 Mega Millions game and/or contract Attorney General Opinion Request re 11 recent amendment to 16 TAC §402.300 relating to pull-tab bingo........... 166 12 AGENDA ITEM NO. XXVIII - Return to open session 13 for further deliberation and possible action on any matter discussed in Executive Session......... 168 14 AGENDA ITEM NO. XXIX - Adjournment................ 168 15 REPORTER'S CERTIFICATE............................ 169 16 17 18 19 20 21 22 23 24 25 0008 1 P R O C E E D I N G S 2 WEDNESDAY, JULY 25, 2007 3 (9:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. It's nine 6 o'clock. Today is July 25, 2007. Chairman Clowe is 7 here. I'm Jim Cox. Let's call this meeting of the 8 Texas Lottery Commission to order. 9 AGENDA ITEM NO. II 10 CHAIRMAN COX: Item II on the agenda, 11 report, possible discussion and/or action on the 12 implementation of recommendations contained in the 13 Internal Audit Report on bingo audit services, 14 including development of rules. 15 Mr. Sanderson. 16 MR. SANDERSON: Good morning, 17 Commissioners. For the record, Phil Sanderson, 18 Director of the Charitable Bingo Operations Division. 19 In your notebook is an updated 20 spreadsheet on the progress of implementing the 21 recommendations of the Internal Audit on the Audit 22 Services Department, as well as the Gantt chart 23 requested by you, Chairman Cox. 24 The regulatory objective has been 25 adopted and posted on the website. The risk analysis 0009 1 program has been developed by Information Resource 2 staff, and the audit coordinators and the audit 3 manager are meeting and assessing the risk values for 4 each organization. The desk review procedure will be 5 finalized once the rule development is complete. 6 The development of rules is progressing 7 will. One rule has been adopted. That is permissible 8 expenses, which addresses the issue of reasonable or 9 necessary. Two rules, the compliance audit rule and 10 dispute resolution rule, are on the agenda today for 11 your consideration to be published in the Texas 12 Register. The minimum internal control guidelines are 13 also on the agenda today for your discussion and 14 consideration. 15 Additional rules defining books and 16 recordkeeping requirements, fair conduct of bingo, 17 house rules and corrective actions have been developed 18 and were presented to the BAC last week at their 19 meeting. The BAC has requested a workgroup be formed 20 to discuss these four rules, and the workgroup is 21 scheduled to meet this afternoon. At this time we are 22 still working on these rules with the goal of having 23 them ready for your consideration at the next 24 Commission meeting. 25 The draft final audit report and the 0010 1 audit completion letter have been submitted to Legal 2 for review. The quality review procedure has been 3 developed to include a final review by the audit 4 manager. We've also acquired licenses for TeamMate, 5 which is a powerful electronic workpaper package that 6 will increase the efficiency and productivity of the 7 entire audit process, including risk assessment, 8 scheduling, preparation, review, report generation and 9 global issue tracking. We are working closely with 10 the State Auditor's office to schedule training for 11 our auditors. 12 Letters were mailed out on June the 20th 13 to 242 organizations which were identified as those 14 organizations who should be allowed to have their 15 audits reexamined. This is part of the lookback that 16 we discussed in the early stages of the audit. As of 17 Friday last week, we received 41 responses to these 18 letters, with only six requesting a reexamination. 19 The organizations have until August the 20 6th to respond. The written audit program has been 21 revised and is currently being utilized in the current 22 audit activities that are being conducted. The Audit 23 Services Department has developed an audit charter 24 which has been placed on the website. 25 Additionally, the Department has adopted 0011 1 the standards and guidance contained in the Generally 2 Accepted Government Auditing Standards or yellow book. 3 The restructuring of the division to address the 4 recommendation to allow for greater independence of 5 the Audit Services Department has been submitted to 6 HR, and I'm working closely with the HR division 7 manager to move forward on implementing this 8 recommendation. 9 That is all I have for this agenda item, 10 and I'll be glad to answer any questions. 11 COMM. CLOWE: No questions. 12 CHAIRMAN COX: Phil, that's an excellent 13 report. As I see this chart, you're on schedule or 14 ahead of schedule on everything you're doing. Is that 15 correct? 16 MR. SANDERSON: For the most part, yes, 17 sir. 18 CHAIRMAN COX: Excellent. You say now 19 "for the most part." 20 MR. SANDERSON: The four rules that I 21 discussed earlier, depending on how the workgroups 22 progress, they may be -- could be postponed a month, 23 but we're still working on trying to get those for the 24 August meeting. 25 CHAIRMAN COX: Okay. Good. And the 0012 1 process that you've set up is the usual one and a good 2 one, I think. And we want a good look at those before 3 we put them out there. 4 Now, you indicated that you sent out 250 5 letters. Was that the case? 6 MR. SANDERSON: 242. 7 CHAIRMAN COX: 242 letters to people who 8 had audits that might not have been up to the 9 standards that we would like, and we've offered them 10 an opportunity for a relook at those. And you said 11 you've gotten back 40 something of those? 12 MR. SANDERSON: There were 41 responses. 13 CHAIRMAN COX: Six people want a 14 lookback? 15 MR. SANDERSON: Yes, sir. 16 CHAIRMAN COX: Now, the lookback will be 17 done by your people, or will it be done by 18 Ms. Melvin's people? 19 MR. SANDERSON: I will probably take the 20 first look at it itself. I will review the first 21 go-through. 22 CHAIRMAN COX: You personally? 23 MR. SANDERSON: Yes, sir. 24 CHAIRMAN COX: Okay. Now, we've got 25 some 180 of those we haven't heard back from. On the 0013 1 ones that you don't hear back from, you're just going 2 to assume they're okay? That's really about all you 3 can do, isn't it? 4 MR. SANDERSON: Yes, sir. 5 CHAIRMAN COX: Okay. Good. Thank you, 6 Phil. 7 AGENDA ITEM NO. III 8 CHAIRMAN COX: Item III, report, 9 possible discussion and/or action on Internal Control 10 Guidelines for licensed authorized organizations. 11 Mr. Sanderson. 12 MR. SANDERSON: Commissioners, one of 13 the recommendations of the Internal Audit was for the 14 Bingo Division to establish minimum Internal Control 15 Standards for licensees. Staff has chosen to 16 recommend these Internal Control Standards as a 17 guideline instead of a regulation, to allow the 18 organizations the greatest flexibility to adequately 19 address their size and their type of bingo operation. 20 While there's no specific action that is necessary 21 from the Commission on this item, I wanted to place 22 the item on the agenda to allow you, Chairman Cox, and 23 Commissioner Clowe, or the general public the 24 opportunity to provide any input. 25 Once these guidelines are finalized, 0014 1 they will be placed on our website in a conspicuous 2 place as well as included in the next Bingo Bulletin. 3 We did have this as an agenda item on the BAC last 4 week, and they have formed a workgroup to make 5 additional recommendations to these guidelines. 6 And that is all I have on this agenda 7 item, and I'll be glad to answer any questions. 8 COMM. CLOWE: No questions. 9 CHAIRMAN COX: Okay. Mr. Fenoglio, you 10 would like to make public comment on this agenda item, 11 and the next two as well. Is that correct? 12 MR. FENOGLIO: Yes. Yes, Mr. Chairman, 13 Commissioner Clowe. Stephen Fenoglio for the record. 14 And we do appreciate Phil's openness to work with us, 15 and we will be providing further written comment. I 16 have a handout, but I'm not going to belabor the 17 issues. 18 Our only concern on the guidelines is 19 they're designed for government accounting internal 20 controls where you have sophisticated organizations, 21 and many charitable organizations don't meet this 22 sophisticated standard. And, in fact, the VFW post 23 that I represent statewide, many of them may have just 24 a post that conducts once a week or twice a week, and 25 one person does all of that. 0015 1 And under the guidelines -- and it's not 2 a rule. We recognize that, but it's a guideline -- 3 they would fail the guideline. And that takes me into 4 the next issue is, in litigation, if there is a 5 problem -- and not litigation at the Lottery 6 Commission -- but if there's a problem where money is 7 missing from a bingo account and a lawsuit has been 8 filed against, let's say, one or more board members, 9 and one of the issues is what's the industry standard 10 to ensure internal controls, I can see a plaintiff's 11 lawyer pointing to this guideline saying, "That's it." 12 CHAIRMAN COX: Sure. 13 MR. FENOGLIO: And that's a concern 14 that's not directly affected -- the Lottery Commission 15 doesn't control that, but you're, in effect, 16 establishing that type of guideline. 17 Nonetheless, I've got some detailed 18 comments I've already made to Mr. Sanderson separately 19 and to the BAC, and we'll be continuing to work with 20 the staff on that. 21 And the other two rules, I understand 22 the following two rules, Commissioner Clowe and 23 Chairman Cox, we'll just make our comments at the -- 24 or at least I will make comments at the properly 25 noticed hearing, assuming y'all decide to publish for 0016 1 public comment. 2 CHAIRMAN COX: Okay. 3 MR. FENOGLIO: I don't want to belabor 4 those issues. 5 CHAIRMAN COX: So you don't have 6 anything further then on Item IV or Item V? 7 MR. FENOGLIO: No. We'll make those 8 comments later. Again, that's assuming that y'all 9 decide to publish for public comment. 10 CHAIRMAN COX: Okay. 11 COMM. CLOWE: Chairman Cox, I was 12 present at the BAC meeting this past week when this 13 subject was discussed at some length, and it was a 14 very beneficial discussion where Mr. Fenoglio and I 15 believe Mr. Bresnen came and commented on it as well. 16 Chairwoman Taylor conducted a good 17 roundtable discussion on this subject among the BAC 18 members, and they're going forward with their study. 19 And Phil and his staff are involved in it, properly 20 so, in studying this difficult subject. 21 A guideline is intended to be a 22 guideline, but it can become something more. And I 23 think that's something that this Commission ought to 24 take into consideration in considering the adoption of 25 these guidelines. Sometimes it's better not to have 0017 1 guidelines, it's better to have rules. 2 But I think a joint effort will bring us 3 to the point where when this Commission makes some 4 decisions in regard to this, we have everybody's 5 input, we have the best balance of all viewpoints, and 6 we hopefully come up with the right decision. 7 There's one comment that was in my mind 8 at the meeting, and I didn't make it because I thought 9 the discussion was going so well I didn't want to 10 influence the conversations at any point in time, but 11 I would like to make it now, simply as an observation. 12 Regulation of any activity by a 13 government is, at its best, extremely difficult. And 14 I've pointed out that I have that knowledge and that 15 experience from the being-regulated side more than I 16 have the regulator side. And I heard mention numerous 17 times, "We have certain operations that are big and 18 sophisticated and they have full-time employees. We 19 have people who are professionals. But then on the 20 other hand, we have these little-bitty organizations 21 that have volunteers. And, you know, they really 22 aren't up on everything." And there's a hope, maybe 23 an inference that, "Well, maybe they shouldn't be held 24 to the same standards that these big, good 25 organizations" -- if "good" is a correct 0018 1 description -- "should be held to." 2 Now, the problem that Phil and his staff 3 have and the problem that the Commission has is, if 4 you take a license, if you take a permit to do 5 something from the state, there is no implied 6 difference in the rules that you have to comply to. 7 That's true with driving an automobile, conducting 8 business, paying your taxes. You know, ignorance of 9 the law is no defense. I've tried to use it, and I 10 found out it doesn't work. 11 (Laughter) 12 COMM. CLOWE: And I want to make the 13 comment to all of you who are participating in this 14 process. If we come up with the best product, it will 15 be a product that will apply properly to the entire 16 spectrum of those who take licenses from the state to 17 conduct bingo. Now, that's tough, but that's the job 18 as I see that you-all are tackling. 19 And I will tell you that I would not, as 20 a Commissioner at all, ever consider voting for a 21 guideline or a rule that didn't apply equally to 22 everybody. I mean, that's just got to be the way the 23 law is. It is very difficult. It throws a terrible 24 burden on the enforcers, but that's the way it is when 25 you take a license from a government entity. 0019 1 So I would like to make that comment at 2 this point in time, to make your job more difficult 3 rather than easier, keep that degree of challenge in 4 mind and try to come up with a product that you bring 5 to this Commission, if we go forward with this, that 6 we can resolve so that it applies equally and properly 7 to everybody who is conducting bingo. 8 Thank you, Mr. Chairman. 9 CHAIRMAN COX: Chairman Clowe, thank you 10 for attending that meeting, and I really appreciate 11 your thoughts on that. I received a call yesterday 12 from Larry Whittington, a member of the Bingo Advisory 13 Committee, who was expressing some of the same 14 concerns that you have expressed and that Mr. Fenoglio 15 has expressed. And I called Larry back this morning 16 and told him that I would certainly have some 17 discussions on this. 18 Let me ask you one question, Chairman 19 Clowe. In Nevada, the casino regulatory agencies 20 recognize the difficulty of compliance with minimum 21 standards for very small organizations, and they had 22 two classes of licensees. One class of licensee was 23 one that had revenue under -- I think at that time it 24 was a million dollars -- or had fewer than 15 slot 25 machines. And there was a minimum set of standards 0020 1 for those, and then there was a whole different set of 2 standards for those who were in Class I. Do you think 3 something like that might be workable? 4 COMM. CLOWE: Well, it might be, 5 Mr. Chairman, but I think that's within the statute, 6 and that's something that the Legislature would have 7 to decisionmake on and give us a statute that would 8 allow for that. 9 CHAIRMAN COX: Okay. 10 COMM. CLOWE: And I think that that 11 falls back in the hands of the industry and 12 individuals like Mr. Fenoglio and Mr. Bresnen who 13 represent members of the industry. And, again, this 14 agency would be a resource, I think, if such 15 legislation were proposed at some point in time. 16 I would say to you -- and I want to be 17 responsive to your question -- when I was regulated 18 and operating a business, the big truck lines had the 19 same rules that the little truck lines had. Probably 20 as a matter of practicality, the big truck lines did a 21 better job generally than the little truck lines. But 22 when an auditor came in to audit -- and I ran both big 23 ones and little ones at various times -- I think the 24 auditor always had one set of guidelines mentally and 25 then one set of rules on the book that he followed -- 0021 1 or she followed. 2 So you've asked a very poignant 3 question, and it's one that I think maybe the industry 4 ought to ponder and see where they'd like to take your 5 idea. And it is interesting. They've done it in 6 Nevada. Let me ask you, does it work well there? 7 CHAIRMAN COX: Well, it does, because 8 the -- they're basically for a small organization 9 keeping a whole bunch of books and having 16 employees 10 watching each other doesn't make any sense. For the 11 big ones, nothing else makes sense. So they're really 12 running two different kinds of businesses. 13 COMM. CLOWE: Yes. 14 CHAIRMAN COX: And I wonder whether that 15 might be the case here as well. From what Larry was 16 telling me, he seemed to be speaking of the very small 17 ones; and, yet, I know we have big ones, publicly 18 owned ones that hold themselves to much higher 19 standards. And their auditors, their independent 20 auditors probably hold them to much higher standards. 21 Most of these organizations I'm certain 22 don't have an independent audit. And so their 23 requirements for internal control are really whatever 24 we say they are, not some higher standard that a 25 public accountant might impose on them. So we are in 0022 1 effect the standard-setter for all of those that don't 2 have public accountants auditing their financial 3 statements. 4 COMM. CLOWE: I think that's true. And 5 I think that one thing that I noticed over the years 6 is that the better educated all of the operating 7 entities are, the more compliance we have. 8 CHAIRMAN COX: Sure. 9 COMM. CLOWE: And I think the bingo 10 operator training program has made a tremendous 11 contribution towards educating large and small, 12 probably more of the small. We don't have near the 13 cases of revocation of licenses where somebody failed 14 to file a form and, you know, they lost track of their 15 authorized person, they moved from the community or 16 perhaps they died and nobody realized that they had to 17 take some action. 18 We used to have a lot of those kinds of 19 cases, and I credit -- I hope correctly -- the 20 operator training program with making a general 21 awareness in the smaller entities where you do have 22 these volunteers that don't have the full-time 23 professional training more aware of what the 24 requirements are. 25 We're doing, I think, a much better 0023 1 job -- and by that, I mean the agency, the industry, 2 everybody -- of trying to comply, and I think 3 education has been a big part of that. 4 I would be interested to hear how 5 Mr. Fenoglio feels about your question. 6 CHAIRMAN COX: Okay. Steve, do you want 7 to say something about that? 8 MR. FENOGLIO: I do, and it's something 9 that actually Phil and I have talked about, as having 10 two different regulatory standards for a Class A 11 through G or H licensed conductor that conducts not 12 every day, or is the maximum allowed by law, versus a 13 Class I and J, which are conducting usually three 14 times a week. 15 And I know there's a yin and a yang, 16 because on one hand, the agency wants to be perceived 17 as being fair and impartial to every licensee. And I 18 respect your comment, Comm. Clowe, in that regard. 19 But where the rubber meets the road, I think the 20 Nevada experience is the better way to go on detailed 21 accounting standards that y'all are moving to that are 22 dramatically different than what the industry has 23 faced, and they're reflected first in these internal 24 control standards. And so, yes, I think you should 25 consider that. 0024 1 I believe, Commissioner Clowe -- and I 2 made a note -- that I'm going to go do significant 3 research. I think I can convince your legal staff 4 that you have adequate authority to make a 5 distinction. 6 COMM. CLOWE: That would be necessary. 7 MR. FENOGLIO: And I was looking at the 8 Nevada standards when I was dealing with this. And 9 I've looked at the regs briefly that Nevada has that 10 Chairman Cox alluded to. I haven't looked at the 11 statute in a while, but I think the statute is generic 12 enough that the agency decided it made sense, good 13 sense, to have two different standards. 14 The Public Utility Commission -- I 15 haven't practiced there in quite a while -- but they 16 used to have different standards for small utility 17 companies versus Texas Utilities standard or -- 18 they've all changed their names now because of all the 19 mergers -- but the PUC had different rulemaking 20 standards for the size of the utility, and there was 21 no legislation that gave them that authority. So I 22 think we can get there. 23 And, Commissioner Cox, I agree with you 24 generally that if you're a publicly traded company, 25 you're used to having different standards because of 0025 1 the SEC requirements. And there are no publicly 2 traded charities, but any charity that's funded by 3 United Way and conducts bingo is required to have an 4 independent audit. 5 And in the case of three of the 6 charities at River City at I-35 and Braker Lane in 7 Austin that I'm very close to, we actually have our 8 entire bingo operation, we conduct through the unit 9 accounting program. Our entire bingo operation is 10 audited independently. It costs us about $8,000 a 11 year for an outside auditor to come in. And so we do 12 have some of those standards. 13 And they have, quite frankly, raised our 14 level of awareness on internal controls. We've made 15 significant changes based on some of those 16 recommendations. But I'm not sure that if the 17 standards -- I know that the standards that are 18 embodied in this internal control standard document, 19 River City would not meet, their charities. And so 20 that's why we want to work with the staff to make sure 21 hopefully we can get it right. 22 I hope I answered your questions. 23 COMM. CLOWE: Well, I would just like to 24 add this, Steve: You know, convincing would have to 25 be very convincing because you would surely anticipate 0026 1 a lawsuit from some entity against this type of 2 action, and it would have to be such that it could be 3 defended. This is a serious move that we're 4 discussing in a very informal way. 5 MR. FENOGLIO: Sure. 6 COMM. CLOWE: But you would anticipate, 7 I would think, litigation, that there would be those 8 who would be opposed to something like this, and you 9 would need to feel very strongly that the statute 10 provided for consideration before the Commission 11 considered it. Don't take that lightly. 12 MR. FENOGLIO: No. 13 MR. SANDERSON: May I make one comment? 14 CHAIRMAN COX: Please, Phil. 15 MR. SANDERSON: We do have statutory 16 authority. At Section 2001.414, it says, "The 17 commission by rule may provide for different 18 recordkeeping procedures for licensed authorized 19 organizations by class based on the amount of gross 20 receipts of the organization." And while it deals 21 with just -- it deals with the recordkeeping 22 procedures, and I believe we have incorporated in the 23 books and records rule that's being drafted right now 24 a few requirements that are different for the lower 25 class than the higher class organizations. I think 0027 1 that we could incorporate that into other areas of 2 rules, but I'll have to check with Legal on that. 3 COMM. CLOWE: You certainly will. 4 (Laughter) 5 COMM. CLOWE: You're not a lawyer. 6 (Laughter) 7 COMM. CLOWE: Just quoting a rule or a 8 statute doesn't convince me. I want the lawyers to 9 research it and come up with a very firm legal opinion 10 before this Commission says, "Oh, yeah, that's a great 11 idea. Let's do this" or "Let's do that" because there 12 are people who don't want this kind of thing happening 13 in this state, and we must be respectful of that 14 position, and we must consider it. Be careful about 15 saying we can do this or that off the top of your 16 head. 17 CHAIRMAN COX: So Phil will quit 18 practicing law. That will work out well. 19 (Laughter) 20 COMM. CLOWE: You can't practice law, 21 and we can't grant divorces. 22 CHAIRMAN COX: There you go. 23 (Laughter) 24 MR. FENOGLIO: Let me just say that when 25 I agree with Phil Sanderson, I think he does an 0028 1 excellent job of practicing law. And when I disagree 2 with him, then I use the same comment Commissioner 3 Clowe just made. 4 (Laughter) 5 COMM. CLOWE: I have seen you do that. 6 CHAIRMAN COX: Okay. Phil, now help me 7 with where we are on this one. I know that you've -- 8 the BAC has set up a subcommittee for some of the 9 rules. This isn't a rule; these are guidelines. Have 10 you asked them to set up a subcommittee to look at 11 this? 12 MR. SANDERSON: They have formed a 13 subcommittee to look at internal controls. I believe 14 Knowles Cornwell is the chair of that subcommittee. 15 And according to an e-mail I believe I received the 16 last couple of days from him, they're looking at 17 having a meeting on the 31st or August 1st. 18 CHAIRMAN COX: Okay. Great. Now, I 19 feel some ownership of this because if this wasn't my 20 idea, I bought into it completely, because I think 21 that we should have a minimum standard that is a safe 22 harbor for the organizations. And I think it really 23 needs to be not only a minimum standard but a minimal 24 standard. 25 And what I'm hearing here is, this one 0029 1 is not minimal. And it needs to be something that 2 the -- I'll make up a legal term here and somebody 3 will probably correct me for it -- the average 4 diligent small charity would be in compliance with -- 5 not everybody, but somebody that's doing things right 6 now would be in compliance with whatever minimum 7 standard I envision. And if the proper work is done 8 and the proper buy-in is found for multiple standards, 9 then we've told you we're prepared to listen, but 10 we're going to move very slowly in that direction. 11 MR. SANDERSON: Yes, sir. 12 COMM. CLOWE: I think you're right on 13 target. 14 CHAIRMAN COX: Okay. Very good. 15 Anything else on that, Phil? 16 MR. SANDERSON: And we'll work closely 17 with the workgroup and come up with some good minimal 18 standards. 19 CHAIRMAN COX: Good. Okay. 20 Item IV, consideration of -- 21 MR. MARKER: Excuse me, Mr. Chairman. 22 CHAIRMAN COX: Yes? 23 MR. MARKER: I believe we have received 24 additional witness affirmation forms. 25 CHAIRMAN COX: Oh, okay. I'm sorry. 0030 1 Suzanne Taylor would like to speak on this, and then 2 Kimberly Rogers. Y'all can come together if you would 3 like. 4 MS. TAYLOR: Good morning, 5 Commissioners. Suzanne Taylor. I'm here representing 6 All Saints Bingo from Corpus Christi. 7 MS. ROGERS: Good morning, 8 Commissioners. For the record, my name is Kimberly 9 Rogers. I'm here representing Fuerza Unida out of San 10 Antonio. 11 MS. TAYLOR: I think with both of us, 12 our concern isn't that we need to have some minimal 13 internal controls; our concern more is some of the 14 items that are on here. For instance, for a small 15 organization or for a large organization, odds are 16 that whoever keeps the check register is going to be 17 the one that balances the check register. And we're 18 concerned with things that -- you know, this person 19 should not do this job and this person should not do 20 this job. Having somebody else sign it or review it, 21 that's not a problem, but we're just worried that down 22 the road this will become a rule that if you're the 23 one -- and if you have a bookkeeper -- for instance, 24 David Heinlein -- I'm sure he not only writes the 25 checks, but he balances the check register. So, I 0031 1 mean, in the future, even though you've got an 2 accountant doing it, now it's become -- I don't know 3 who you would give it to to balance. 4 Some of the smaller -- if you've ever 5 been to a bingo occasion, we got occasions that we run 6 with four people, and there's no way we could run an 7 occasion with four people if the person that's -- you 8 have to have two people verifying the petty and a 9 different person has to get the deposit ready as to 10 the person that actually did the paperwork. 11 I mean, there's two floor workers and 12 two other people, and it would make it very difficult 13 to run some occasions. You know, right now this is a 14 suggestion, but what worries me is that in the future 15 it could become a rule so easily, and that would make 16 it very difficult for some organizations that run 17 smaller bingo sessions to be able to comply if it 18 becomes a rule. 19 CHAIRMAN COX: And let me address that, 20 Suzanne. You've got a very good point; and, yet, when 21 you get auditors writing guidelines, they can't forget 22 the basic principles of internal control. You know, 23 they can't forget the fact that the person who writes 24 the checks shouldn't reconcile the bank account. They 25 can't forget the fact that you should -- the person 0032 1 who writes the checks shouldn't sign the checks 2 because those are things that they're taught in 3 school. And to write a standard that said that those 4 things aren't necessary would be very difficult. 5 Now, what I've challenged Phil to do is 6 to do that. I don't know whether we'll be able to 7 because when you go to saying minimum internal control 8 standards don't include those things that every 9 auditor would say minimum internal control standards 10 include, you get on a very slippery slope. 11 So what we're trying to do here has a 12 very high degree of difficulty. I think we erred in 13 the beginning in making it too difficult. But there's 14 another side to that, too. We can't make it so easy 15 that we're condoning sloppy procedures. And whether 16 there's a middle ground there or not, we'll just have 17 to see. 18 But we're very cognizant of what you're 19 saying, that no amount of our writing rules or 20 guidelines is going to help a small organization 21 afford to have the number of people that would be 22 necessary to have what Catherine Melvin would consider 23 to be adequate internal controls. 24 MS. ROGERS: Commissioners, I have the 25 same concerns that Suzanne does. In here it states -- 0033 1 I know in the hall where we play, there is an 2 individual who keeps records of the paper that comes 3 in: Serial numbers, where it came from, the date it 4 came in, what invoice it goes to, et cetera. He is 5 also the individual that orders the paper because he 6 knows what was played, what needs to be played, when 7 it was played and how much more we need of that. 8 When you start putting so many hands in 9 something, I think it -- I understand the aspect of 10 internal controls, and I understand bookkeeping with 11 the guidelines of who should do -- you know, what 12 records you should keep. I have no problem with that. 13 But I think it becomes a problem when we forget about 14 the little guys, which I know y'all are aware of. I 15 would just like to reiterate to you that in here it 16 says there should be no single person doing more than 17 two procedures. In a perfect world, that's all well 18 and great, but we don't live in a perfect world. 19 CHAIRMAN COX: That's right. 20 MS. ROGERS: So I think there has to be 21 some give and take. I am on the workgroup and look 22 forward to working with that to see if we can maybe 23 make this to where it comes out better because I'm 24 sure this will become a rule one day, and I would hate 25 to see charities be penalized for an individual 0034 1 inventorying the paper and ordering the paper -- 2 CHAIRMAN COX: Sure. 3 MS. ROGERS: -- inventorying the 4 pull-tabs and ordering the pull-tabs. That's not 5 really something that charities need to be penalized 6 for, you know. And if their records are kept 7 immaculate and they're legible and when an auditor 8 comes in and he can read where the paper came from, 9 what paper was played, you know, that's what he really 10 needs to pay attention to and know. 11 MR. MARKER: Excuse me, Mr. Chairman. 12 If I could ask if the witnesses would please identify 13 themselves for the record, please. 14 MS. ROGERS: Oh, I'm sorry. My name is 15 Kimberly Rogers. 16 CHAIRMAN COX: Sorry, Andy. I thought 17 they did. 18 MS. TAYLOR: She did. 19 CHAIRMAN COX: Okay. Anything? 20 COMM. CLOWE: He's just being mean. 21 (Laughter) 22 COMM. CLOWE: This is difficult. And 23 you've got a tough job because what it will come down 24 to is -- let me give you the other side of the coin, 25 just to kind of broaden the discussion and make it 0035 1 tougher for you. There will be some large 2 organizations, if you come up with relaxed rules for 3 small organizations, they'll say, "That's not fair. 4 You know, we're paying the money. We're standing the 5 expense, and you're letting these little guys off 6 easy. It's not fair." You keep that in mind. 7 Another other side of the coin is, not 8 necessarily the paper, but the writing of checks and 9 then not having another person sign or verify. What 10 will transpire sooner or later is, there will be a 11 check written for a questionable disbursement, 12 unauthorized use, improper use. And then it comes to 13 the Commission and you've got a revocation of a 14 license issue, "Well, you know, the same person that 15 wrote the check signed it, verified the bank book," 16 and that person didn't know it was an unauthorized use 17 of funds. 18 Those are the kinds of problems that 19 you've got to face right now and come up with a 20 solution for. That's the hard part of enforcement, so 21 it's a tough job. 22 MS. ROGERS: Yes, sir. 23 CHAIRMAN COX: The idea here was to, 24 rather than subject every charity to a determination 25 based on the facts and circumstances as to whether 0036 1 they had an adequate control system, to provide 2 something that was a safe harbor for everybody. It 3 may be that -- what I'm hearing here is -- I think we 4 need to keep in mind, Phil, that it may be that what 5 we're trying to do here can't be done and that we have 6 to stay with facts and circumstances on each 7 individual case. I hope we can do it. 8 But what I'm hearing here is, it's going 9 to be awfully difficult because I know the standards 10 that Catherine is going to have to recommend, and I 11 know what y'all are talking about. Since I'm an 12 accountant, when my partners and I form a partnership, 13 I get to do the stuff. And, man, I do it all. And 14 the Controller's Office takes my sales tax returns and 15 they take my franchise tax returns just like they take 16 Dell Computers', and my internal control standards are 17 nowhere near what Dell Computers' are. So we may just 18 end up in that kind of situation. 19 Okay. Knowles, you want to join the 20 party? 21 Suzanne, stay there if you want to until 22 we're through with these items. And Sandy will let 23 Knowles have a place to sit. 24 MR. CORNWELL: Thank you, Sandy. 25 For the record, my name is Knowles 0037 1 Cornwell. I'm here representing Good Time Action 2 Games. I've been appointed the subcommittee chairman 3 of this rule. 4 Chairman Cox, internal controls are 5 great, but they're not totally bound by segregation of 6 duties, which this thing is focused on. And we've got 7 to work with Phil in coming up with some good criteria 8 that does a better job of risk assessment than just 9 segregation of duties, and we look forward to working 10 with Phil on that. For example, to answer the 11 questions that maybe a distributor can provide all the 12 records of what was purchased from the distributor to 13 that charity and matched against their purchase 14 registry. 15 CHAIRMAN COX: Sure. 16 MR. CORNWELL: But we can achieve some 17 of this segregation of duty. But when we look just to 18 the -- within the organization itself, I agree with 19 them, it's going to be -- you're going to come back 20 with the same risk assessment for 95 percent of the 21 charities operating out there today. 22 So we look forward to working with Phil 23 and hope to have something ready for your review in 24 the next Lottery meeting. 25 CHAIRMAN COX: Well, Knowles, I know 0038 1 you're a CPA, and I'm very pleased that you've taken 2 on this assignment. If it can be done, I think you'll 3 be guiding us in that direction. Thank you very much. 4 MR. CORNWELL: We may have some very 5 creative things for you, Mr. Chair. 6 CHAIRMAN COX: Good. 7 MR. CORNWELL: Thank you. 8 MS. ROGERS: Thank you. 9 CHAIRMAN COX: Now, let's see. Suzanne, 10 I think you wanted to stay on for IV and V. Or was it 11 Kimberly? 12 MS. TAYLOR: At this time I only put 13 Item No. IV. 14 CHAIRMAN COX: Kimberly put III through 15 V. 16 MS. ROGERS: Actually, I meant just III 17 and V. 18 CHAIRMAN COX: Okay. III and V. Okay. 19 Well, we're going to take IV and V together, so you're 20 welcome to stay there if you want to. 21 Sandy, are you going to do IV and V? 22 Okay. 23 AGENDA ITEM NOS. IV AND V 24 CHAIRMAN COX: Item No. IV, 25 consideration of and possible discussion and/or 0039 1 action, including proposal of repeal, on 16 TAC 2 §402.500 relating to General Audit. And then Item V 3 is consideration of and possible discussion and/or 4 action, including proposal, on new 16 TAC §402.715 5 relating to Compliance Audit. 6 Ms. Joseph. 7 MS. JOSEPH: Thank you. For the record, 8 my name is Sandra Joseph, Assistant General Counsel. 9 Item IV is the proposed repeal of 10 Charitable Bingo Administrative Rule 16 TAC §402.500 11 relating to General Audit. Item V is a draft proposed 12 new rule 16 TAC §402.715 relating to Compliance Audit. 13 It's appropriate to propose the repeal 14 of 402.500 and the adoption of a proposed new rule 15 rather than an amendment of the existing rule because 16 the format and substantive provisions of the new rule 17 differ significantly from the existing rule. 18 The new rule is being proposed to 19 provide clarification and guidance to licensees 20 regarding the audit process. It's written in a 21 question and answer format. The submissions prepared 22 for the Texas Register include notice of a public 23 hearing to be held on the proposed repeal and the 24 proposed draft new rule on August 21, 2007 at 11:00 25 a.m. The staff recommends that the Commission 0040 1 initiate the rulemaking process by publishing the 2 proposed rule repeal and the proposed adoption of a 3 new rule in the Texas Register in order to receive 4 public comments for a period of 30 days. 5 I would be happy to answer any 6 questions. 7 CHAIRMAN COX: Commissioner Clowe? 8 COMM. CLOWE: The question I have is to 9 procedure. Is it clear that what the staff is 10 proposing is consideration of repeal and consideration 11 of adoption only? 12 MS. JOSEPH: I believe it is. 13 COMM. CLOWE: There's no definitive 14 action included in either of these recommendations? 15 MS. JOSEPH: That's correct. 16 CHAIRMAN COX: So what you're asking us 17 for is approval to expose for public comment the new 18 rule and the repeal of the old rule? 19 MS. JOSEPH: That's correct. 20 CHAIRMAN COX: Okay. 21 COMM. CLOWE: And hold a public hearing. 22 MS. JOSEPH: Yes. 23 CHAIRMAN COX: Okay. Now, Kimberly, did 24 you have a comment on that one? 25 MS. ROGERS: I have a comment on -- for 0041 1 the record, my name is Kimberly Rogers. I have a 2 comment on No. V. 3 CHAIRMAN COX: Okay. 4 MS. ROGERS: Are you still on IV or -- 5 CHAIRMAN COX: We're on IV and V. 6 MS. ROGERS: Okay. 402.715, my only 7 comment would be, I would be very concerned with, on 8 Page 6, just for instance, Line 8, "The following 9 individuals for the organization are required to 10 attend . . ." The word -- 11 CHAIRMAN COX: Okay. Now, are you ahead 12 of us? 13 MS. ROGERS: Maybe so. I'm on V. 14 CHAIRMAN COX: We haven't exposed this 15 yet. 16 MS. ROGERS: Okay. 17 CHAIRMAN COX: Is she ahead of us, 18 Sandy? 19 MS. JOSEPH: Well, I believe she is 20 talking about the draft proposed rule that you are 21 considering for publication for public comment. 22 CHAIRMAN COX: Okay. And she'll have an 23 opportunity to comment on that either by e-mail or in 24 person at such time as we have a hearing? 25 MS. JOSEPH: That's correct. 0042 1 MS. ROGERS: Okay. That will be fine. 2 Thank you. 3 CHAIRMAN COX: That will be okay, 4 Kimberly? 5 MS. ROGERS: Yes, sir. Thank you. 6 COMM. CLOWE: That's correct. 7 CHAIRMAN COX: Okay. So you need a 8 motion to approve the public hearings on taking down 9 the old rule and bringing in the new rule? 10 MS. JOSEPH: That's correct. 11 COMM. CLOWE: Move the adoption of the 12 staff recommendation on Agenda Items IV and V. 13 CHAIRMAN COX: Second. 14 All in favor, say "Aye." 15 COMM. CLOWE: Aye. 16 CHAIRMAN COX: Aye. 17 The motions pass 2-0. 18 Do you have something for us to sign? 19 MS. JOSEPH: Yes, I do. And I would 20 like to present that to you perhaps after the next 21 item, which you may also have a desire to approve. 22 CHAIRMAN COX: Good. Okay. 23 AGENDA ITEM NO. VI 24 CHAIRMAN COX: Item VI, consideration of 25 and possible discussion and/or action, including 0043 1 proposal, on new 16 TAC §402.708 relating to dispute 2 resolution. 3 MS. JOSEPH: Item VI concerns draft 4 proposed new rule §402.708 regarding dispute 5 resolution. This new rule is drafted to be proposed 6 to provide an informal process to resolve disputed 7 issues and enforcement actions related to bingo 8 operations as an alternative to the formal process 9 described in the Bingo Enabling Act. 10 The proposed new rule is not intended to 11 supersede the formal process. Instead, it's an 12 alternative way to resolve disputed issues and 13 enforcement actions relating to the identification of 14 violations of the Bingo Enabling Act and/or the 15 administrative rules. 16 This proposed new rule is also written 17 in a question and answer format. The submission that 18 we have drafted for publication in the Texas Register 19 also includes notice of a public hearing to be held on 20 the same date as the previous two items, August 21, 21 2007, at 11:00 a.m. 22 Staff recommends that the Commission 23 initiate the rulemaking process by publishing the 24 proposed rule in the Texas Register for public comment 25 for a period of not less than 30 days. 0044 1 COMM. CLOWE: No questions. 2 CHAIRMAN COX: Okay. I move adoption of 3 the staff recommendation. 4 COMM. CLOWE: Second. 5 CHAIRMAN COX: All in favor, say "Aye." 6 COMM. CLOWE: Aye. 7 CHAIRMAN COX: Aye. 8 Motion passes 2-0. 9 MS. JOSEPH: Do you have -- 10 COMM. CLOWE: Sandy, just an informal 11 comment. You're going to have these two hearings on 12 the 21st. My understanding is the next Commission 13 meeting is August the 22nd. 14 MS. JOSEPH: Okay. I was not aware of 15 that. 16 COMM. CLOWE: Okay. So that doesn't 17 fortune your attempt to bring it before the 18 Commission? 19 MS. JOSEPH: No. We would not plan to 20 be ready at that meeting. 21 COMM. CLOWE: That's fine. I just 22 wanted to guard against -- 23 MS. JOSEPH: Okay. 24 COMM. CLOWE: -- any thought of that 25 type. 0045 1 MS. JOSEPH: All right. Okay. Thank 2 you. 3 I do have T-bar memos for you. 4 CHAIRMAN COX: Okay. 5 AGENDA ITEM NO. VII 6 CHAIRMAN COX: Item No. VII, report by 7 the Charitable Bingo Operations Director and possible 8 discussion and/or action on the Charitable Bingo 9 Operations Division activities, including follow-up 10 actions as a result of the November 15, 2006 House 11 Licensing and Administrative Procedures Committee 12 hearing. 13 Mr. Sanderson. 14 MR. SANDERSON: Commissioners, in your 15 notebook is my report on the activities of the Bingo 16 Operations Division. I would like to point out that 17 quarterly reports for conductors and lessors are due 18 today. And also we continue to update the website 19 with interactive forms that have been developed by our 20 special project team. We are currently in the final 21 stages of producing the 2006 annual report of 22 charitable bingo activities. 23 Chairman Cox, at the last Commission 24 meeting you had requested that I review the transcript 25 from the November 15th hearing of the Licensing and 0046 1 Administrative Procedures Committee to see if we 2 addressed the concerns the committee raised in that 3 particular hearing. I've included in your notebook 4 the action item tracking report for these particular 5 items. 6 As you can see, all of the committee's 7 concerns have been addressed, with the exception of 8 two: One is the implementation of the recommendations 9 of the Internal Audit, which we are currently in the 10 process of implementing. And the other is a 11 recommendation to meet with the Executive Director of 12 the Department of Licensing and Regulation, which 13 we've been in contact with that department but a 14 meeting date has not been finalized at this time. 15 One other item that I would like to 16 bring to your attention, based on the pull-tab rule 17 which became effective on July the 17th, the Bingo 18 Division mailed a letter to all licensed manufacturers 19 and distributors as well as one other manufacturer who 20 is currently not licensed in Texas, offering them an 21 opportunity to display a pull-tab deal that also 22 includes video confirmation. This presentation is 23 scheduled for 9:00 a.m. on August the 15th. 24 That concludes my report, and I'll be 25 glad to answer any questions you have. 0047 1 COMM. CLOWE: No questions. 2 CHAIRMAN COX: Okay. Mr. Bresnen wants 3 to make public comment on this item. 4 MR. BRESNEN: Mr. Chairman, my name is 5 Steve Bresnen. I'm here on behalf of the Bingo 6 Interest Group. And I just wanted to use this minute 7 in this agenda item to thank the two of y'all for 8 moving forward on the publication of the video 9 confirmation rule. 10 I know there's some controversy about 11 that. It's a very important thing, and I know it took 12 some intestinal fortitude by the staff and by y'all to 13 do that. I don't know if anybody ever thanked you for 14 it, but I'm here to do it today on behalf of a whole 15 slew of people who have worked on that. I think we 16 can help the industry with it and live within the law 17 at the same time. So I just wanted to take a second 18 to thank y'all for doing that. 19 CHAIRMAN COX: Thank you, Steve. 20 Okay. That, I believe, concludes the 21 bingo portion of the agenda. Why don't we take about 22 a five-minute break. 23 (Recess: 9:46 a.m. to 9:54 a.m.) 24 CHAIRMAN COX: Let's come back to order. 25 I was advised that there is another bingo matter later 0048 1 in the agenda related to the indirects, and we will 2 get to that at the appointed time. 3 AGENDA ITEM NO. VIII 4 CHAIRMAN COX: Item VIII, report, 5 possible discussion and/or action on lottery sales and 6 revenue, game performance, new game opportunities, 7 market research and trends. 8 Ms. Pyka and Mr. Tirloni. 9 MS. PYKA: Good morning, Commissioners. 10 My name is Kathy Pyka, Controller of the Lottery 11 Commission. And to my right is Robert Tirloni, our 12 Products Manager. 13 The first chart that we have for you 14 this morning includes revenue from sales and net 15 revenue to the state through the week ending July 14th 16 of 2007. Total sales through this 46-week period 17 amounted to $3.3 billion, while estimated net revenue 18 to the state for this period was $871.5 million. 19 Net revenue of the state does reflect a 20 2.7 percent decline from this same period last year. 21 And our prize expense as a percentage of sales does 22 reflect a slight increase to 62.9 percent. 23 Our next slide for you summarizes the 24 change in sales by game from fiscal year 2006 to 2007. 25 The overall $52.6 million decline for fiscal year 2006 0049 1 sales represents 1.6 percent, and it includes a 2 $24.8 million decline for our instant ticket product, 3 or just right at 1 percent from fiscal year '06 sales. 4 And our on-line product reflects a $27.8 million, or 5 3.4 percent decline for fiscal year 2006 sales. I 6 would like to note also our Pick 3 game as well as our 7 Texas Two Step game continue to reflect positive gain 8 over fiscal year 2006 sales. 9 Our next slide includes fiscal year 2007 10 year-to-date sales by product. As noted on this 11 slide, 76 percent of sales, or $2.5 billion, are from 12 instant tickets, with 8.3 percent of sales, or 13 $272.5 million, from Pick 3, followed by 6.3 percent 14 of sales, or $205.9 million, from Lotto Texas and 15 4.6 percent of sales, or $152.5 million from Mega 16 Millions. 17 And then the next slide is a graphical 18 presentation of the $3.3 million sales by game. 19 And Robert will now go over sales by 20 price point. 21 MR. TIRLONI: Good morning, 22 Commissioners. For the record, my name is Robert 23 Tirloni. I am the Products Manager for the 24 Commission. 25 As Kathy said, this next pie chart shows 0050 1 us year-to-date instant ticket sales. This represents 2 $2.5 billion worth of sales broken down by price 3 point. We've not realized any change in the past 4 month. The five continues to be our leading price 5 point, followed by the two, then by the ten and then 6 by the one. That's the top -- that's the sequence of 7 the top four price points. So, again, not much change 8 in that information for you. 9 CHAIRMAN COX: That's fiscal year to 10 date. If we were to look at the period of time since 11 the $50 ticket has come out, would it have a 12 significantly bigger slice? 13 MR. TIRLONI: The 50 would have a bigger 14 slice, yes. 15 CHAIRMAN COX: Why don't we see that one 16 next time. 17 MR. TIRLONI: We can do that. Last 18 week, for the week ending July 21st, the 50 was the 19 number one ranked ticket for the week, and that's been 20 true in previous weeks. So we'll do that chart so you 21 have a better representation of that. 22 CHAIRMAN COX: Good. 23 MR. TIRLONI: I do have a brief update 24 for you on Mega Millions. Since the last Commission 25 meeting, we did sell a jackpot ticket in Texas. It 0051 1 was for the Friday, July 6th drawing. The ticket was 2 sold in Dallas. 3 That Friday, July 6th drawing was 4 advertised as an estimated annuitized jackpot of 5 $126 million. When all of the sales were compiled 6 from all of the states, the jackpot that was actually 7 supported was a $128 million jackpot. 8 This prize has already been claimed. 9 The ticket was an annual payment ticket. It was an 10 annuity ticket, and the winner actually selected their 11 own numbers. So we usually see cash value option 12 selected in quick pick. So I thought I would mention 13 that for you-all. 14 CHAIRMAN COX: Now, they get the higher 15 of estimated or sales supported? 16 MR. TIRLONI: Yes. Mega Millions rounds 17 up to the nearest whole million. So, you know, in 18 this case, if sales supported 128.4, they still would 19 have received 128. So they go up to the next whole 20 million, the funded whole million. 21 CHAIRMAN COX: Okay. 22 MR. TIRLONI: And the retailer that sold 23 this ticket is eligible for a $1 million bonus. 24 CHAIRMAN COX: And I would bet Director 25 Sadberry is probably going to present that. 0052 1 MR. SADBERRY: Mr. Chairman, having 2 heard that, I think you're probably correct, if at all 3 possible. 4 CHAIRMAN COX: That's a big one, isn't 5 it? 6 MR. SADBERRY: Yes, sir. 7 MR. TIRLONI: And we've also here 8 recently, a few days after selling that Mega Millions 9 ticket, we did sell a Lotto Texas winning jackpot 10 ticket on Wednesday the 11th. That was sold in Allen. 11 This prize has also been claimed already. It was an 12 estimated annuitized jackpot advertised at 13 $18 million. The winner did choose cash value option 14 at the time of purchase. And that CVO is 15 approximately $11.3 million. And that retailer is 16 eligible for a bonus of slightly over $189,000. 17 And that concludes our report for today, 18 but we would be happy to answer any questions for you. 19 COMM. CLOWE: Kathy, what would your 20 current estimate be for the fiscal year total revenue 21 and total contribution to the state? 22 MS. PYKA: It's just over $1 billion, 23 Chairman Clowe. 24 COMM. CLOWE: Sorry? 25 MS. PYKA: It will be just over one 0053 1 $1 million for fiscal year 2007, based on our current 2 sales. 3 COMM. CLOWE: Thank you. 4 CHAIRMAN COX: And what do you see the 5 total revenues has been, Kathy? 6 MS. PYKA: Just over $1 billion 7 cumulative revenue. 8 CHAIRMAN COX: Oh, I'm sorry. The top 9 line. What do you call that, sales? 10 MS. PYKA: Transfers to the state would 11 be -- 12 CHAIRMAN COX: I think Chairman Clowe 13 also asked, what do you see our sales being? 14 MS. PYKA: Sales will not, definitely 15 not reach the target that we had. And fiscal year 16 2007 will be slightly under that. We will be over on 17 our instant ticket product, but we are running a 18 decline on the on-line games. 19 CHAIRMAN COX: Okay. Do you have a 20 number for us? 21 MS. PYKA: It's definitely going to be 22 in the $3.7 million range but not as high as we were 23 last year. 24 CHAIRMAN COX: Okay. 25 COMM. CLOWE: It was 3.8 the prior 0054 1 fiscal, wasn't it? 2 MS. PYKA: Rounded up, uh-huh. 3 COMM. CLOWE: But still a billion in the 4 contribution? 5 MS. PYKA: Still a billion in the 6 contribution. 7 CHAIRMAN COX: Thank you. 8 MS. PYKA: You're welcome. 9 CHAIRMAN COX: Item No. IX -- oh, let 10 me -- is this the appropriate time to ask about where 11 we are with the Pick 4 game? 12 MR. MARKER: Yes, sir. 13 CHAIRMAN COX: Is that okay in this 14 agenda item, Andy? 15 MR. MARKER: Yes, sir, I believe it is, 16 the item that includes new game opportunities. 17 CHAIRMAN COX: Okay. 18 MR. TIRLONI: Staff is currently working 19 on the launch of that game. Sales are scheduled to 20 start on Sunday, September 30th. And the first 21 drawings -- the first day and night drawing would be 22 the following day, on Monday October 1. And Daily 4 23 will launch with the add-on feature sum It Up. 24 CHAIRMAN COX: So both features will be 25 introduced at the same time? 0055 1 MR. TIRLONI: That's correct. And then 2 we'll come back about seven weeks after that in 3 mid-November, and we're going to add the Sum It Up 4 feature to Pick 3. 5 CHAIRMAN COX: Okay. And I saw that we 6 had some press coverage on the request for an Attorney 7 General's opinion on the possible raffle. And I 8 wanted to point out that -- I don't see Bobby 9 around -- but the coverage last night on KVUE was very 10 positive, and I was very pleased to see a positive 11 article on television about the lottery. 12 AGENDA ITEM NO. IX 13 CHAIRMAN COX: Okay. Item IX, report, 14 possible discussion and/or action on transfers to the 15 State and the agency budget. 16 Ms. Pyka. 17 MS. PYKA: Good morning, Commissioners. 18 For the record, again Kathy Pyka, Controller for the 19 Lottery Commission. 20 Tab 9 includes information on the 21 agency's financial status. The first report reflects 22 transfers and allocations to the Foundation School 23 Fund and the allocation of unclaimed prizes as of June 24 2007. Total transfers through this period amount to 25 $885 million, and this represents just a slight 0056 1 decline from where we were in fiscal year 2006 at this 2 point. 3 The second page in your notebook 4 includes the detailed information for the transfers. 5 Of the $885 million transfer to the state, 6 $839.8 million was the amount transferred to the 7 Foundation School Fund, with a balance of 8 $45.7 million transferred from unclaimed prizes. 9 We also included in your notebook a 10 document that includes a report of lottery sales, 11 expenditures and transfers from fiscal year 1992 to 12 date. And our total cumulative transfers to the 13 Foundation School Fund through May of this year 14 totaled $9.5 billion. 15 And then the last item in your notebook 16 includes the fiscal year 2007 method of finance 17 summary through the third quarter, or May 31st of 18 2007. Our Commission's lottery account budget for 19 fiscal year 2007 is $180.4 million. Of this amount, 20 67.1 percent has been expended through the first three 21 quarters. 22 And our bingo operations budget funded 23 by general revenue is at $13.5 million. And as of 24 May 31, the Division has expended 67 -- or excuse 25 me -- 76.3 percent of their annual budget, just 0057 1 slightly over the 75 percent threshold, but that's 2 because of our bingo allocations for the third 3 quarter. Everything else is where it should be. 4 And I would be happy to answer any 5 questions. 6 COMM. CLOWE: No questions. 7 MS. PYKA: Thank you. 8 CHAIRMAN COX: Thank you, Kathy. 9 AGENDA ITEM NO. X 10 CHAIRMAN COX: Item X, report, possible 11 discussion and/or action on Lottery Operations and 12 Services Contract Amendment No. 8 credit calculation. 13 Ms. Pyka. 14 MS. PYKA: Good morning, Commissioners. 15 Again, Kathy Pyka, Controller of the Lottery 16 Commission. 17 I would like to provide you an update on 18 Amendment No. 8 of the Lottery Operations and Services 19 contract and the amount due to the Commission for the 20 third quarter of fiscal year 2007. 21 The first provision of the contract is 22 our top section, which notes -- actually, it's not 23 this one on the screen, but Section 10.3.3 of the 24 amendment is the section that provides the annual 25 credit equal to 12 percent of GTECH's annual 0058 1 incremental revenue from sales over the previous year 2 for every .1 percent in increase of overall prize 3 payout percentage. 4 CHAIRMAN COX: Would you say that one 5 more time? 6 MS. PYKA: Certainly. It's a credit 7 equal to 12 percent of GTECH's annual incremental 8 revenue for every .1 percent increase in the overall 9 prize payout percentage. Under that provision of the 10 contract, we will not receive a credit this quarter 11 and have not year-to-date, as in this case our prize 12 payout percentage is flat when you look at fiscal year 13 2006 as compared to fiscal year 2007. 14 And then the second provision of the 15 contract is Section 10.3.4 of the contract, and that's 16 the provision that's on the screen before you. This 17 provision of the contract allows for a credit equal to 18 4.5 percent of year-over-year decline in dollar 19 returns to the state if sales remain flat, and the 20 weighted prize payout increase increases by 21 .1 percent. 22 The third quarter does reflect an 23 increase of sales of $9 million over the prior quarter 24 of -- or the prior fiscal year, and so there's not a 25 credit due under this provision of the contract this 0059 1 fiscal year either. 2 And I wanted to note that cumulative 3 credits under this section of the contract to date for 4 the first two quarters were $983,388. But we expect 5 that we'll be returning those credits back to GTECH as 6 GTECH's revenue provision under this provision of the 7 contract does not allow their revenue to go below 8 prior year revenue, and that's a cap on the fiscal 9 year 2007 portion of the contract only. 10 This concludes my presentation. I would 11 be happy to answer any questions. 12 COMM. CLOWE: No questions. 13 AGENDA ITEM NO. XI 14 CHAIRMAN COX: Okay. Item XI, report, 15 possible discussion and/or action on Bingo indirect 16 and administrative expenses. 17 Ms. Pyka. 18 MS. PYKA: Again, for the record, Kathy 19 Pyka, Controller of the Lottery Commission. 20 Commissioners, to provide clarity 21 regarding the funding mechanism for bingo indirect and 22 administrative expenses, the Commission -- 23 COMM. CLOWE: Kathy, would you move that 24 mic a little closer to your mouth, please, ma'am? 25 MS. PYKA: Certainly; certainly. 0060 1 COMM. CLOWE: Thank you. 2 MS. PYKA: To restate, to provide 3 clarity regarding the funding mechanism for bingo 4 indirect and administrative expenses, the Commission 5 included a provision in our legislative appropriations 6 request for fiscal year 2008-2009 that included a 7 rider request that provided for funding of certain 8 bingo indirect and administrative overhead expenses 9 through the sale of lottery tickets. 10 The lottery request was contingent upon 11 the passage of legislation, specifically an amendment 12 to the State Lottery Act which would clarify the 13 authority for the money in the state lottery account 14 be used to pay for costs incurred in the 15 administration of the entire Commission, including 16 bingo indirect. 17 House Bill 3350 was introduced during 18 the 80th legislative session, and it would have 19 amended the State Lottery Act to allow for funding of 20 bingo indirect from the state lottery account. Your 21 notebooks include a summary of the history on House 22 Bill 3350, noting that while the bill did not pass -- 23 or did pass the House and the Senate, there was a 24 point of order sustained in the House on May 23, and 25 the bill failed to pass to enactment. 0061 1 I wanted to note that the estimated 2 amount of bingo indirect and administrative cost per 3 year is $1.4 million. Since the legislation did not 4 pass to enactment and the rider did not pass in our 5 appropriations bill, we have addressed several 6 different options to move forward on this bingo 7 indirect and administrative provision. 8 The first area that we have looked at 9 and researched is a letter of intent. And a letter of 10 intent is something that is initiated by the chairs of 11 both Senate Finance and House Appropriations, directed 12 to the Comptroller of Public Accounts outlining 13 funding provisions. 14 We have been working with the 15 Lt. Governor's office, and including the bingo 16 indirect and administrative issue, within the letter 17 of intent that is currently being drafted. And I'll 18 share with you the language that has been shared with 19 the Lt. Governor's office that's been included in this 20 draft letter. And the language states, 21 "For clarification, our intent, absent 22 the specific statutory authorization in the State 23 Lottery Act, is to use the state lottery dedicated 24 account for payment of bingo indirect and 25 administrative expenses as currently practiced and 0062 1 reflected in the General Appropriations Act adopted by 2 the 80th Legislature." 3 So this language is currently in this 4 draft letter of intent, but the letter has not been 5 routed through for final signature at this point in 6 time. So I wanted to share, that is one issue or one 7 practice that we have researched in order to address 8 the bingo indirect issue. 9 There are also a couple of other areas 10 that we've researched and reached out on, and the 11 first being seeking approval from the Governor's 12 Office to use their emergency deficiency grant 13 provision outlined in Rider 2 of their appropriation 14 bill. In this case, the Governor may provide a grant 15 for emergency deficiency or disaster situations, but 16 the Governor may also require repayment of funds in 17 that scenario. 18 And then the third scenario that we've 19 researched is the utilization of a budget execution 20 process. In that case, it's initiated by other -- 21 either the Governor's Office or the Legislative Budget 22 Board. But for a budget execution to work in this 23 scenario, the LBB would require a reduction of general 24 revenue somewhere in the current bill that has been 25 adopted in order to provide us general revenue funds 0063 1 to fund the current bingo indirect costs that are 2 currently appropriated out of the Lottery dedicated 3 account. 4 So those are the three areas that we've 5 researched. The letter of intent is still in the 6 works, and I wanted to provide you an update on that 7 matter. If we're not able to, you know, address the 8 funding issue of bingo indirect, we recognize that 9 we'll need to look at additional scenarios, which 10 might include possibly funding the bingo indirect out 11 of their current appropriation today. 12 I would be happy to answer any 13 questions. 14 COMM. CLOWE: Do you have questions? 15 CHAIRMAN COX: No, sir, I do not. 16 COMM. CLOWE: Kathy, I understand your 17 explanation of the options. I'm not quite clear on 18 what the action plan is. 19 MS. PYKA: At this point, Commissioner 20 Cox -- or Commission Clowe -- I'm sorry -- we have 21 been working with the Lt. Governor's Office to include 22 a provision in the letter of intent that is being 23 currently worked on by the Lt. Governor's office. 24 There is language in the letter of intent that is 25 being drafted -- or that has been drafted that would 0064 1 provide for clarification, allowing us to continue the 2 current funding structure, absent specific statutory 3 authority. 4 The letter has been routed, but I 5 understand that they are currently possibly removing 6 some provisions in the letter that don't relate to the 7 Lottery Commission from the letter, and so I 8 understand that that's being addressed right now. 9 COMM. CLOWE: Well, the letter of intent 10 is what you're doing to achieve a satisfactory result 11 in regard to this matter at this time? 12 MS. PYKA: Yes, sir. 13 COMM. CLOWE: Thank you. 14 MS. PYKA: Uh-huh. 15 CHAIRMAN COX: Thank you, Ms. Pyka. 16 MS. PYKA: Thank you. 17 AGENDA ITEM NO. XII 18 CHAIRMAN COX: Item XII, report, 19 possible discussion and/or action on the 80th 20 Legislature. 21 Ms. Trevino. 22 MS. TREVINO: Good morning, 23 Commissioners. For the record, I'm Nelda Trevino, the 24 Director of Governmental Affairs. 25 As I reported at the last Commission 0065 1 meeting, at the conclusion of the legislative session, 2 we identified 28 bills for the agency's legislative 3 implementation project. The identified bills were 4 assigned to division directors based on subject matter 5 for a review and determination of any action the 6 agency may need to take to implement provisions of the 7 bill. 8 Division directors are providing Melissa 9 Villasenor, the project coordinator, with progress 10 reports. And included in your notebook, Melissa has 11 provided you a brief summary on the status of the 12 implementation project. 13 Also included in your notebook materials 14 is the project tracking report that provides more 15 detail on the implementation status of each identified 16 bill. Based on the progress reports that have been 17 provided by division directors, it has been determined 18 17 bills required no agency action. The remaining 11 19 bills either require some action by the agency or our 20 agency is waiting for information or notification from 21 another state agency on any steps the agency may need 22 to take to be in compliance with the bill. 23 Division directors will continue 24 providing Melissa with progress reports on these 25 remaining bills, our updated -- and an undated project 0066 1 report will be provided and reviewed with executive 2 management. 3 Additionally, we will continue to report 4 any updates on this project at future Commission 5 meetings. And this concludes my report, and I'll be 6 happy to answer any questions. 7 COMM. CLOWE: No questions. 8 CHAIRMAN COX: Nelda, this is an 9 excellent report, and I'm very confident that we're 10 right on top of this. This is very nicely laid out. 11 MS. TREVINO: Thank you, Chairman Cox. 12 I would like to recognize Melissa as the project 13 coordinator who worked very closely with the IR 14 Department to develop a database to give us a good 15 tracking and monitoring method of -- for this 16 implementation project. So thank you for your 17 comments. 18 CHAIRMAN COX: Thank you. 19 AGENDA ITEM NO. XIII 20 CHAIRMAN COX: Okay. Item XIII, report, 21 possible discussion and/or action on the agency's 22 contracts. 23 Mr. Jackson. 24 MR. JACKSON: Good morning, 25 Commissioners. For the record, my name is Tom 0067 1 Jackson. I'm the purchasing and contracts manager for 2 the Commission. 3 Commissioners, in your notebook under 4 Tab No. XIII is a report on prime contracts that has 5 been updated for your review. I would be happy to 6 answer any questions you may have. 7 CHAIRMAN COX: No questions. Thank you, 8 Tom. 9 AGENDA ITEM NO. XIV 10 CHAIRMAN COX: And Item No. XIV, report, 11 possible discussion and/or action on the agency's 12 instant ticket manufacturing and services contract(s), 13 including proposed amendments. 14 Mr. Jackson. 15 MR. JACKSON: Commissioners, in your 16 notebooks is a memo which describes the proposed 17 amendments to our instant ticket manufacturing and 18 services contracts. This will be Amendment No. 3 to 19 this SGI contract and Amendment No. 4 to the Pollard 20 Bank Note contract. 21 Each amendment will contain the 22 following three provisions: The first two provisions 23 deal with PDF417 barcodes. The first is to include 24 the requirement to print barcodes under the overprint 25 area on the instant tickets. This barcode will enable 0068 1 players to scan their instant game tickets using 2 Express Point Check-A-Ticket terminals that are being 3 obtained through the previous GTECH contract 4 amendment. 5 Secondly, the amendments will 6 incorporate new and amend the existing ticket testing 7 criteria specific to the PDF barcodes. 8 The third provision deals with 9 quantities and pricing for handout coupons. The 10 current contract pricing will be amended and 11 additional print quantities added. This will allow 12 for larger print runs at a reduced cost compared to 13 the current pricing structure. 14 In addition, the SGI contract amendment 15 will include a fourth provision. New pricing will be 16 added for three instant ticket production options, two 17 of which are now available because of SGI's 18 acquisition of Oberthur Gaming Technologies. All 19 these changes will enhance the services provided to 20 the Commission, increase the level of security and 21 integrity of the games and improve player experiences 22 at licensed retail locations, or resulting in a better 23 value to the Commission. 24 If you have any questions, I would be 25 happy to respond. 0069 1 COMM. CLOWE: No questions. 2 CHAIRMAN COX: No questions, Tom. Thank 3 you. 4 AGENDA ITEM NO. XV 5 CHAIRMAN COX: Item No. XV, report and 6 possible discussion and/or action on the agency's HUB 7 program and/or minority business participation, 8 including the agency's Mentor Protégé Program. 9 Ms. Bertolacini. 10 MS. BERTOLACINI: Good morning, 11 Chairman Cox and Commissioner Clowe. For the record, 12 my name is Joyce Bertolacini, Coordinator of the TLC's 13 Historically Underutilized Business Program. 14 A copy of the agency's May HUB Minority 15 Contracting Activity Report has been provided in your 16 notebooks today. The report includes all fiscal year 17 2007 expenditures paid from September 1st of 2006 18 through May 31, 2007. 19 Our total qualifying expenditures as of 20 May 31st were approximately $111.2 million, and our 21 estimated HUB minority utilization was $30.7 million, 22 which equates to 27.66 percent. 23 Regarding the agency's Mentor Protégé 24 Program, on June 27th and 28th, a group of approved 25 protégé applications was sent out to our mentor 0070 1 companies. I have followed up with the mentors 2 recently, and I'm happy to report that they are 3 engaged in communications with potential protégés. 4 Although we do not yet have any 5 paperwork in hand, Scientific Games has indicated a -- 6 has identified a firm that they would like to assist. 7 Also, GTECH is currently in the process of setting up 8 discussions with potential protégés and have scheduled 9 interviews to occur in early August. I will keep you 10 informed for the progress as it develops. 11 In addition, plans for our annual HUB 12 forum, which will take place next Tuesday, are being 13 finalized, and we currently have 62 vendors registered 14 to attend. As I have mentioned at previous meetings, 15 our four mentor companies are scheduled to attend and 16 make remarks at the forum. 17 And I would be happy to answer any 18 questions that you may have. 19 CHAIRMAN COX: Excellent. 20 COMM. CLOWE: Very good. 21 MS. BERTOLACINI: Thank you. 22 CHAIRMAN COX: Thank you very much, 23 Joyce. 24 AGENDA ITEM NO. XVI 25 CHAIRMAN COX: Item XVI, consideration 0071 1 of and possible discussion and/or action on external 2 and internal audits and/or reviews relating to the 3 Texas Lottery Commission and/or on the Internal Audit 4 Department's activities. 5 Ms. Melvin. 6 MS. MELVIN: Good morning, 7 Commissioners. For the record, my name is Catherine 8 Melvin, Director of the Internal Audit Division. 9 Commissioners, this month the Internal 10 Audit Division launched its annual risk assessment 11 efforts. We are working closely with management and 12 surveying responsible staff to gather information 13 about key agency processes. As in previous years, as 14 you're familiar, the annual risk assessment process 15 leads to the development of the annual internal audit 16 plan. And we will be presenting that for your 17 approval at a later Commission meeting. 18 That concludes my comments. I'm happy 19 to answer any questions. 20 COMM. CLOWE: No questions. 21 CHAIRMAN COX: Okay. Help me remember 22 what role the Commissioners play in the risk 23 assessment process. 24 MS. MELVIN: Internal Audit members will 25 survey the Commissioners as to your desires and your 0072 1 considerations of risks, but ultimately your role will 2 be to approve or make any changes to the proposed 3 audit plan. 4 CHAIRMAN COX: Okay. 5 MS. MELVIN: That is an item of approval 6 for you. 7 CHAIRMAN COX: So you will contact us as 8 you're contacting members of management as you assess 9 risks, and then ultimately we will be asked to approve 10 the audit plan, which is based on the risk assessment? 11 MS. MELVIN: Yes, sir. 12 CHAIRMAN COX: Okay. Thank you. 13 AGENDA ITEM NO. XVII 14 CHAIRMAN COX: Item XVII, report by the 15 Texas Lottery Commission Ombuds and possible 16 discussion and/or action on the Ombuds activities for 17 August 2006 through July 2007. 18 Ms. Hernandez. 19 MS. HERNANDEZ: Good morning, 20 Commissioners. For the record, my name is Dale 21 Hernandez, and I'm the agency ombudsman. 22 Included in your notebook is the report 23 of the Texas Lottery Commission ombudsman for the 24 period August 2006 through July 2007. During this 25 first year, 15 separate issues were brought to me, and 0073 1 these 15 issues covered a range of concerns, but 2 operating policies and procedures, work assignments or 3 schedules and parking have been of major importance to 4 the individuals that have contacted me. Of these 15 5 issues, 13 have been resolved and closed. 6 At this time I would also like to 7 express my appreciation for the opportunity to serve 8 as ombudsman. I would also like to thank Catherine 9 Melvin, Director of the Internal Audit Division, and 10 Janine Mays, Human Resources Director, for their 11 support and assistance. 12 And this concludes my presentation, and 13 I would be happy to answer any questions. 14 COMM. CLOWE: I assume the two 15 unresolved issues are still being considered or in 16 process? 17 MS. HERNANDEZ: Yes, they are. There 18 are two issues that are sort of ongoing that the 19 people involved wanted me to keep open. So it's 20 something we're monitoring with the people that have 21 come to me. 22 COMM. CLOWE: So you are working on 23 those? 24 MS. HERNANDEZ: Yes, I am. 25 COMM. CLOWE: Great. Thank you. 0074 1 CHAIRMAN COX: Dale, let's talk a little 2 bit in detail about how you handle the matters that 3 come to you. 4 MS. HERNANDEZ: Okay. 5 CHAIRMAN COX: And I realize that some 6 of them are, "Hey, I'm supposed to have that parking 7 place and somebody else has it." And some of them may 8 involve, "Hey, I'm not being treated fairly" or "I'm 9 being harassed," or whatever kinds of things might 10 come your way. 11 Now, is the resolution of those 12 something that you actually do yourself, or do you 13 refer it to people and oversee the fact that it gets 14 done? How do you work with these various kinds of 15 things? 16 MS. HERNANDEZ: Well, when someone comes 17 to me, normally they're not sure where to go. They 18 might have a concern like the parking issues that 19 maybe they've brought up before, but it's still 20 important to them. And I don't -- I'll work with the 21 person to try to find the right path for them to 22 follow, whether it be to visit with their supervisor 23 or for me to facilitate some sort of meeting with 24 their supervisor, which I have done in the past, or to 25 discuss it with Human Resources. 0075 1 But I'm not the person that ultimately 2 resolves the issue. That's something that kind of 3 comes about between the employee and their management 4 or agency division directors that might be involved in 5 the process that they're concerned about. But I 6 guide -- I attempt to guide the process down the path 7 that will best suit the employee's needs. 8 CHAIRMAN COX: So would it be fair to 9 describe that as a facilitator role? 10 MS. HERNANDEZ: Yes, I think you could. 11 Yes. 12 CHAIRMAN COX: Okay. Now, we have quite 13 an elaborate complaint resolution process. Do some of 14 the people who come to you, do their complaints get 15 fed into that process and really then become resolved 16 totally separate from what you're doing? 17 MS. HERNANDEZ: That's correct. That 18 could happen. There's been one instance where that 19 has happened. Some people may also have gone that 20 route and not been satisfied and maybe thought that 21 coming to me, I could bring the issue forward to 22 Mr. Sadberry and kind of elevate it a little that way. 23 So it's a mixture. But anything that comes to me that 24 is of the nature of maybe a personnel complaint or 25 something such as that would go down that process if 0076 1 it was appropriate. 2 CHAIRMAN COX: Okay. We created the 3 Office of the Ombudsman at the recommendation of the 4 State Auditor. Have you had any discussions with the 5 State Auditor as to whether that recommendation was 6 one that they felt was a permanent need or whether it 7 was a temporary need? And, if so, what have you 8 learned from that? 9 MS. HERNANDEZ: I personally haven't had 10 any specific conversations on whether they think it 11 should be maintained permanently or not. But when we 12 were working on the survey of organizational 13 excellence, I did speak with Christine Bailey at the 14 State Auditor's office, and she did express her 15 satisfaction that the ombudsman was in place and seems 16 to be working. But we did not discuss the length of 17 time this position would be necessary, no. 18 CHAIRMAN COX: Okay. 19 MS. HERNANDEZ: I haven't done that. 20 Perhaps it's occurred elsewhere, but it's not been 21 through me. 22 CHAIRMAN COX: And I think I heard you 23 say yesterday that you have had 15 people come to you, 24 and nine of those were in the first month of your 25 tenure. 0077 1 MS. HERNANDEZ: We had six, actually six 2 in August of '06 that came to me. 3 CHAIRMAN COX: Six in the first month? 4 MS. HERNANDEZ: Right. 5 CHAIRMAN COX: So nine in the remaining 6 period? 7 MS. HERNANDEZ: Correct. Yes. 8 CHAIRMAN COX: So in about nine months 9 or ten months, you've had about one per month on 10 average? 11 MS. HERNANDEZ: That's right. 12 CHAIRMAN COX: And do you think that 13 those are people who would not have found their way to 14 one of the other outlets, the General Counsel, any 15 member of management, the Internal Auditor through 16 Ethics Point, the State Auditor? Are there some lost 17 sheep there that you gathered in that would not have 18 found a home otherwise? 19 MS. HERNANDEZ: I think by and large the 20 people that have come to me were not sure how to 21 proceed through the various other options available to 22 them. So I really don't think -- there might be one 23 or two that might have pursued another avenue on their 24 own. But I think the majority of people that have 25 come to me were not sure where to go or how to 0078 1 proceed, or if they even should say anything. So I 2 think they that have -- 3 CHAIRMAN COX: So there were a 4 meaningful number of folks, you think, who found this 5 to be a safe place to go -- 6 MS. HERNANDEZ: Yes. 7 CHAIRMAN COX: -- and might not have 8 sought relief from one of the other sources? 9 MS. HERNANDEZ: I think -- in my 10 opinion, it would be the majority of the people that 11 have come to me. Maybe one or two, like I said, might 12 have on their own progressed down a different path. 13 But the majority of people were not sure how to 14 proceed or if -- you know, if they should say anything 15 or if it was even something important that they should 16 bring up, but it was important to them. 17 CHAIRMAN COX: Good. Well, I know that 18 you're going to be going back to your position full 19 time in Internal Audit -- 20 MS. HERNANDEZ: Yes. 21 CHAIRMAN COX: -- as we bring on a new 22 ombudsman. 23 MS. HERNANDEZ: That's correct. 24 CHAIRMAN COX: We want to thank you for 25 the work you've done here. 0079 1 MS. HERNANDEZ: Well, I appreciate the 2 opportunity. I've learned a lot. Thank you. 3 CHAIRMAN COX: Thank you, Dale. 4 AGENDA ITEM NO. XVIII 5 CHAIRMAN COX: Item XVIII, report, 6 possible discussion and/or action on the Mega Millions 7 game and/or contract. 8 Director Sadberry. 9 MR. SADBERRY: Chairman, Commissioner, 10 for the record, my name is Anthony Sadberry, Executive 11 Director. 12 You have a general memo in your folder 13 which I think outlines the basic update on the Mega 14 Millions activities, one issue being the California 15 situation as we've described it, which is currently in 16 status quo. And the other is what we see as a 17 possibility of the discussions of substitute or 18 successor in interest parties participating in the 19 Mega Millions game in lieu of the original stake 20 members. At this point, the matter that is addressed 21 in the memo is considered moot, but in my mind, it 22 continues to be a possible item of discussion in 23 future meetings. 24 This basically concludes the update on 25 the Mega Millions game and the contract. I'll be 0080 1 happy to answer any questions. 2 COMM. CLOWE: No questions. 3 CHAIRMAN COX: No questions. Thank you, 4 Director Sadberry. 5 AGENDA ITEM NO. XIX 6 CHAIRMAN COX: Item XIX, report, 7 possible discussion and/or action on GTECH 8 Corporation. 9 Director Sadberry. 10 MR. SADBERRY: Chairman, Commissioner, 11 again Anthony Sadberry, Executive Director. 12 I will go into some detail on the GTECH 13 Report, although you have it in your folder. GTECH 14 reduced its Texas consultant firm's compensation by 15 25 percent due to the fact of the Texas Legislature no 16 longer being in session. 17 One of GTECH's international consultants 18 now provides his services to GTECH in two separate 19 contracts, one for European Union and one for the 20 United Kingdom. GTECH notified the Lottery Commission 21 that Lottomatica is currently being investigated by a 22 prosecutor for Italy's Court of Accounts for 23 wrongdoing. The issue is reportedly civil and not 24 criminal. 25 Specifically, the prosecutor is 0081 1 investigating Lottomatica's videolot Rete Unit and 2 nine other companies that have concessions for the 3 management of a computerized network for gaming 4 machines. Lottomatica Videolot Rete operates by 5 connecting the network of machines, reading the 6 betting and wins information and monitoring that 7 information, complies with the law, reporting and 8 paying the related taxes to the government. 9 It is alleged that Lottomatica and nine 10 other companies did not completely disclose all the 11 bets placed on the terminals, resulting in lower 12 tax revenue for the state. The court implied 13 that Videolot Rete could not be liable for 14 penalties calculated -- I'm sorry -- could be liable 15 for penalties calculated to be in the range of 16 $4 billion Euros, which would equate to around 17 $5.38 billion. 18 Lottomatica denies any wrongdoing and 19 will provide its formal written response to the court 20 within 30 days. According to GTECH, Lottomatica has 21 had the matter reviewed by outside legal counsel who 22 has advised the company that it has acted 23 appropriately and within the guidelines of its 24 concession and should not be subject to any penalties. 25 The GTECH oversight committee members 0082 1 have been made aware of the current investigation of 2 Lottomatica. And I'll remind you that that 3 membership, at your request and direction, includes 4 the Department of Public Safety and the Office of the 5 Attorney General and members of the Lottery Commission 6 staff. 7 That concludes the report that I have 8 prepared for you on GTECH. I would be happy to answer 9 any questions 10 COMM. CLOWE: No questions. 11 CHAIRMAN COX: Thank you, Director 12 Sadberry. 13 AGENDA ITEM NO. XX 14 CHAIRMAN COX: Item XX, report, possible 15 discussion and/or action on retailers and the 16 processing of prize claims at retail locations. 17 Mr. Grief and Mr. Riviera. And let's 18 see. Mr. Anger, Mr. Rogers and Mr. Lapinski. That's 19 quite a crowd. 20 MR. GRIEF: Good morning, Commissioners. 21 For the record, my name is Gary Grief, and I'm the 22 Deputy Executive Director for the agency. 23 On October 25, 2006, the Canadian 24 Broadcast Corporation televised a new story on the 25 Canadian television documentary program called "The 0083 1 Fifth Estate." This was regarding the British 2 Columbia Lottery Corporation, or BCLC as it's known. 3 The story entitled "The Luck of the Draw" concerned a 4 lottery player in Canada who was allegedly cheated of 5 his lottery winnings by a lottery ticket retailer and 6 his subsequent experience going through a three-year 7 legal dispute with the BCLC after the allegation was 8 made. 9 Since that broadcast, the ombudsman of 10 Ontario investigated the situation and issued a report 11 in March of 2007 containing 23 recommendations for the 12 BCLC for the purpose of addressing the issues that 13 were found in the investigation. GTECH Corporation 14 brought this Canadian issue to our attention. And as 15 globally requested by Chairman Cox on a go-forward 16 basis to GTECH, they have developed a list of 17 suggestions for our agency to consider in our 18 relationships with retailers to mitigate the risks of 19 similar problems here in Texas. 20 This morning Ramon Rivera and Joe 21 Lipinski from GTECH are here to present those 22 suggestions to the Commission. I've also asked 23 Michael Anger and Ed Rogers to be here from the agency 24 to comment on each suggestion and answer any questions 25 that the Commission may have. 0084 1 With that, I will turn it over to 2 Mr. Rivera. 3 MR. RIVERA: Good morning, Chairman Cox 4 and Commissioner Clowe. My name is Ramon Riviera. 5 I'm the Account General Manager for GTECH in Texas. 6 Commissioners, our Chief Executive 7 Officer, Bruce Turner, and Jaymin Patel made a 8 commitment to this agency to keep you informed of 9 significant developments in the industry on a global 10 basis. Within the backdrop of that charter, GTECH 11 brought this matter before the Commission and your 12 staff. 13 Subsequent to providing this 14 information, we also augmented the information that we 15 provided with a list of best practices designed to 16 mitigate circumstances such as those Mr. Grief just 17 described. I would like to describe for you for just 18 a minute how these best practices were developed. 19 And due to our participation with 20 various entities such as the World Lottery Association 21 at meetings in Singapore and Budapest, discussions 22 with leaders within the North American Association of 23 State and Provincial Lotteries, and most recently at 24 GTECH's World Leaders Conference 2007 meeting, these 25 issues were thoroughly discussed, and ways and methods 0085 1 by which other lotteries were dealing with this were 2 identified. 3 In June, representatives from your 4 operations and security staff participated in a 5 meeting with GTECH corporate and local personnel. The 6 purpose of this meeting was to review each practice, 7 best practice, that GTECH had identified and also to 8 understand the relevant policies and practices in 9 place at the Texas Lottery which addressed this issue. 10 This was a very thorough review. Each best practice 11 was thoroughly discussed to ensure understanding, and 12 each of the policies and practices currently in effect 13 at the Texas Lottery were fully disclosed. 14 I'm pleased to report to you that at the 15 conclusion of this meeting it was the assessment of 16 GTECH corporate personnel that the Texas Lottery is a 17 leader in matters relating to social responsibility 18 and integrity of the games. And, in fact, the comment 19 was made that many of the practices that are currently 20 in effect today at the Texas Lottery should serve as 21 benchmarks for other lotteries to emulate. However, 22 your staff indicated a strong desire and willingness 23 to enhance existing policies and to identify other 24 measures which could be implemented. Our report today 25 is designed to identify for you those measures which 0086 1 your staff has indicated are necessary to enhance an 2 already robust program. 3 Commissioners, unless there are any 4 questions of me, I will now ask Joe Lapinski, the 5 Assistant Account General Manager in Texas, to review 6 the best practices. 7 COMM. CLOWE: No questions. 8 CHAIRMAN COX: Good. 9 MR. LAPINSKI: Good morning, 10 Commissioners. As we go through these recommendations 11 one at a time, I believe Lottery staff is prepared to 12 review their response to each of these 13 recommendations. 14 CHAIRMAN COX: Joe, would you state your 15 name for the Court Reporter, please. 16 MR. LAPINSKI: Oh, I'm sorry. My name 17 is Joe Lapinski, Deputy Account General Manager for 18 GTECH. 19 The first recommendation is establish a 20 formal customer complaint process so players can 21 report suspicious retailer behavior directly to a 22 Texas Lottery compliance unit. 23 MR. ROGERS: Good morning, 24 Commissioners. My name is Ed Rogers. I'm the 25 Retailer Services Manager for the Lottery Operations 0087 1 Division, and I'll respond to that recommendation. 2 The staff agrees with this 3 recommendation and has already implemented systems and 4 processes to carry out this practice. Since December 5 of 2004, the Lottery has had a formal complaint 6 process in place, along with dedicated compliant 7 intake staff -- we have a compliance hotline -- and a 8 system for tracking complaints from intake to final 9 disposition. 10 This tracking system is used by the 11 Lottery Operations Security and Retailer Services 12 Department. It's also used by the Charitable Bingo 13 Operations Division, the Legal Services Division and 14 the Enforcement Division. We have notices posted in 15 Lottery retail locations and on the Lottery website 16 advising the public of the complaint process. And 17 also customer service and claim center staff, who have 18 regular interaction with the general public and 19 players, are informed on how to recognize complaints 20 that need to be referred to the compliance hotline. 21 Complaints that involve questionable 22 prize payments are referred for investigation as a 23 regular practice. And as part of the overall 24 complaint process, there are multiple levels of review 25 for complaints, the results of investigations and 0088 1 recommended administrative or criminal referrals. The 2 reviews are conducted at both the staff and the 3 executive management level. 4 Complaints that are submitted that are 5 time-sensitive may be referred directly from the 6 compliance hotline to the Enforcement Division or the 7 Lottery Security Department, while most complaints are 8 reviewed by Lottery Operations Staff prior to being 9 referred. 10 MR. LAPINSKI: Next is remind all Texas 11 Lottery players via agency website, public 12 announcements and signage at retailer locations to 13 always sign the back of their lottery tickets before 14 presenting the tickets for validation. 15 MR. ANGER: Commissioners, for the 16 record, my name is Michael Anger, and I'm the Lottery 17 Operations Director. 18 The staff agrees with this 19 recommendation and will present this message to 20 players through a variety of venues. It can be 21 presented on various portions of the agency's website 22 in forms of agency communication. Players are 23 required to sign tickets before they're accepted as a 24 claim at Lottery claim centers. Encouraging players 25 to sign tickets presented for prize payment at 0089 1 retailer locations can help reduce any uncertainty 2 about the ticket being scanned on the sales terminal 3 being the same ticket the player handed to the retail 4 clerk. 5 On a related note, the Lottery 6 investigates claims presented at claim centers 7 involving tickets that have been altered by attempts 8 to remove or cover up an original signature. These 9 types of investigations are focused on trying to 10 determine if there is any question or dispute 11 regarding the legitimate ownership of the ticket. 12 MR. LAPINSKI: The next recommendation, 13 establish administrative rules that provide for a 14 progressive disciplinary process related to consumer 15 protection concerns. Ensure that any proven cases of 16 illegal activity or fraud results in a timely and 17 consistent application of progressive disciplinary 18 remedies up to the revocation of a sales license. 19 Disciplinary remedies, such as a temporary suspension 20 or revocation, should be highlighted in the retailer 21 newsletter so that all retailers understand the 22 consequences of such actions. 23 MR. ROGERS: And the staff agrees with 24 this recommendation and has already implemented 25 systems and process to carry this out. In 2002, the 0090 1 Commission approved an administrative rule 2 establishing our standard penalty chart and a 3 progressive disciplinary process for violations of 4 Texas Lottery statutes and administrative rules. The 5 rule is Texas Administrative Code 160, Standard 6 Penalty Chart. 7 The rule has a range of administrative 8 penalties ranging from warning letters up to 9 revocation of a license. The chart contemplates a 10 progressive disciplinary action for repeat and/or 11 multiple violations. When considering the assessment 12 of a penalty for a violation, the agency may evaluate 13 mitigating circumstances per the rule. For example, 14 if a violation occurred and the first action 15 anticipated and the progressive disciplinary chart 16 called for a warning letter, but there might be 17 mitigating circumstances such that a more severe 18 penalty might be appropriate, the agency can propose 19 to move up that range of penalties, up to and 20 including the revocation of a license. 21 The staff also agrees with the 22 recommendations to make these actions -- make mention 23 of these actions in retailer news letters and ensure 24 that all retailers are aware that the Lottery pursues 25 violations of Texas Lottery statutes and rules. 0091 1 CHAIRMAN COX: I've got a question. If 2 there were revocation, it would have come to us. 3 Right? 4 MR. ROGERS: Yes, sir. 5 CHAIRMAN COX: And I don't remember any 6 coming. So is this a fairly new thing or has there 7 just not been any activity, enforcement activity 8 necessary in this area? 9 MR. ROGERS: There hasn't been to date 10 any complete process such that a revocation was 11 required and get to the point where it is brought to 12 your attention. I believe we may have one in progress 13 at this point that we're in the development stage of 14 communicating with the retailer about the problems 15 that they've had in their store. Most of the activity 16 to date has included warning letters because that is 17 the first step anticipated in the penalty chart. And 18 we've had several temporary suspensions of licenses. 19 CHAIRMAN COX: Okay. So temporary 20 suspensions do not come to this board? 21 MR. ANGER: I believe, Chairman, that 22 they have come before you in the context of agreed 23 actions with regard to the retailer. I think that's 24 the format that you've seen them in. In other words, 25 we have contacted those retailers. And in sharing the 0092 1 information that we have received as a result of our 2 investigations with them, they have voluntarily agreed 3 to act in a suspended format with regard to their 4 license for a period of time. And so we haven't been 5 in a situation where we've had a dispute with a 6 retailer in that circumstance at this time. 7 CHAIRMAN COX: Okay. Thank you. 8 MR. LAPINSKI: Monitor claims of $600 or 9 more to identify suspicious patterns of activity by 10 retailers. A database containing this information 11 will allow the Texas Lottery to identify aberrations 12 in the claims process. 13 MR. ANGER: Commissioners, the staff 14 agrees with this recommendation, and we'll work with 15 the lottery operator to create additional reports and 16 database analytical tools to enable our Security 17 Department and Lottery Operations to review these 18 types of claims and to work with staff from other 19 departments to investigate claims as necessary. 20 And by way of additional background, 21 essentially we capture information about the owners 22 and officers of our licensee locations. In addition, 23 we also capture information about claimants who submit 24 prizes to our claim centers for claiming. And we're 25 working with the lottery operator to bring those 0093 1 databases together, compare that information and be 2 able to do some analytical review of claims filed and 3 be able to do some monitoring activities beyond the 4 scope of what we've been able to do currently. 5 CHAIRMAN COX: I noticed that concern in 6 British Columbia. There's nothing inappropriate about 7 a lottery retailer licensee buying tickets, is there? 8 MR. ANGER: Absolutely not. 9 CHAIRMAN COX: So the mere fact that the 10 owner or operator of one of our licensees was 11 redeeming tickets is not an indication of anything 12 inappropriate? 13 MR. ANGER: No, sir. 14 CHAIRMAN COX: So what you'll be looking 15 for is something that's just out of the ordinary, 16 really big, or just something that caught -- cries out 17 for being looked into? 18 MR. ANGER: We're essentially going to 19 be monitoring and looking for patterns of activity 20 that might give us some indication of concern. At 21 this time, we have not seen anything that would lead 22 us to any conclusion of any type of concern in that 23 regard. 24 And as you point out, our retailers are 25 also in many cases players, and they need to be 0094 1 treated as such. As with any claims that we receive, 2 only if there's a reason to have a concern with regard 3 to the security and integrity of the Lottery should we 4 pursue further action. 5 MR. LAPINSKI: Ensure that regularly 6 scheduled security audits are conducted by an external 7 auditor and that the Texas Lottery compliance 8 activities are included in the audit. 9 MR. ROGERS: The staff agrees with this 10 recommendation also. Texas Government Code 466.020(e) 11 requires that, "At least once every two years, the 12 executive director...employ an independent firm that 13 is experienced in security, including computer...and 14 systems security, to conduct a comprehensive study of 15 all aspects of lottery security, including: 16 "(2) sales agent security; and 17 "(4) security against ticket 18 counterfeiting and alteration and other means of 19 fraudulent winning." 20 These audits have and will continue to 21 be conducted as described in the statute or as 22 circumstances require. 23 MR. LAPINSKI: Deploy a self-service 24 ticket inquiry process that is player-controlled and 25 informs players that they have a winning ticket before 0095 1 it is presented to a clerk for validation. When 2 located in view of a player, ISYS terminals equipped 3 with a transaction display could notify players that 4 they have validated a winning ticket with a visual 5 message. This existing functionality can be enhanced 6 by adding the prize amount to this message and/or a 7 unique terminal sound to signal players that they have 8 validated a winning ticket. 9 MR. ANGER: Commissioners, the staff 10 agrees with this recommendation and has already 11 initiated actions related to these recommendations. 12 The agency currently has approximately 1,000 SSTs 13 deployed across the state. These self-service kiosk 14 type terminals that allow players to purchase on-line 15 tickets also are capable of allowing players to check 16 their own tickets to verify whether they're winning 17 tickets or not. 18 The agency has also contracted with the 19 lottery operator for 10,200 Check-A-Ticket terminals 20 to be deployed next year. These terminals allow 21 players, similar to the SST, to check their own 22 tickets to determine whether they're winners or not 23 and will also allow the players to determine the 24 amount of the prize that they've won. 25 These terminals will be deployed at 0096 1 retailers across the state based on a variety of 2 criteria. The criteria will be based on the volume of 3 prize validations and sales at retail locations. Some 4 terminals will be deployed based on the geographic 5 location of retailers in an attempt to make sure that 6 equipment is available across the state for all 7 players' use. 8 Additionally, staff has had initial 9 meetings with Lottery operator personnel to determine 10 how to optimize terminal functionality to most 11 effectively notify players that a winning validation 12 has occurred. And this talks to the sounders and 13 other options and features that we may be able to use 14 on the on-line terminals referenced in the 15 recommendation. 16 MR. LAPINSKI: Send out messages on a 17 regular basis via terminals, signage and other 18 communication media, reminding retailers and clerks of 19 their prize payment responsibilities. 20 MR. ANGER: Staff agrees with this 21 recommendation and will work with the lottery operator 22 and other vendors to effectively disseminate this 23 message to retailers and their clerks. 24 MR. LAPINSKI: Review potential fraud 25 situations judiciously, simultaneously recognizing the 0097 1 need to protect consumers while at the same time not 2 inconveniencing or disturbing honest retailers. In 3 other words, balance consumer protection with retailer 4 motivation to sell lottery tickets. The great 5 majority of retailers try to serve their customers. 6 MR. ROGERS: The staff agrees with this 7 recommendation and has implemented systems and 8 processes to carry out this practice. As described in 9 our response to the first best practice 10 recommendation, the Lottery has a comprehensive 11 program to take in, investigate and take action on 12 complaints and other situations that may compromise 13 the security and integrity of lottery games. 14 The staff believes that the overall 15 compliance program must be focused on the need to 16 protect the consumers while at the same time not 17 inconveniencing honest retailers. As described in our 18 response to Best Practice No. 3, highlighting 19 disciplinary remedies such as temporary suspensions or 20 revocations in the retailer newsletter will serve to 21 ensure that retailers that conduct their business in 22 accordance with Lottery rules have an opportunity to 23 be informed on the agency's efforts to ensure 24 compliance on the part of all retailers and that 25 retailers that fail to conduct their business 0098 1 appropriately have an opportunity to know that they 2 will be held accountable for these actions. 3 MR. LAPINSKI: Encourage any retailer or 4 lottery player who believes there is a prize payment 5 violation to immediately contact the Texas Lottery so 6 that the complaint can be recorded in the retailer's 7 record and appropriate follow-up activities, such as 8 an investigation and possible disciplinary action, can 9 be initiated. 10 MR. ROGERS: Staff agrees with this 11 recommendation. And we believe that the agency's 12 compliance programs are focused specifically on this 13 activity. 14 MR. LAPINSKI: Conduct ongoing reviews 15 of management information systems to determine what 16 specific information should be provided to various 17 Texas Lottery business units to ensure (1) there are 18 appropriate checks and balances, and (2) that each 19 department has the necessary information to assist 20 them in identifying and acting upon potential 21 problems. 22 MR. ANGER: The staff agrees with this 23 recommendation and takes action to ensure that this is 24 taking place on an ongoing basis. The Lottery 25 conducts a variety of audits conducted by both 0099 1 external and internal audit teams that touch on these 2 issues. 3 On an ongoing basis, the Lottery and 4 Lottery Operator staff review information systems with 5 focus on improving efficiencies and in organizing data 6 and reports to effectively impose checks and balances 7 across the two organizations and their respective 8 departments. 9 The information tracking and case 10 referral features of the CAMP System and other systems 11 allow various Lottery departments to have the 12 information they need to act upon potential problems. 13 In support of these ongoing efforts, staff will share 14 these best practices with audit review teams that 15 visit the agency to conduct engagements. 16 MR. LAPINSKI: And finally, the Texas 17 Lottery is encouraged to contact other lotteries to 18 have an open discussion on how they approach this type 19 of situation and share best practices. 20 MR. ANGER: The staff also agrees with 21 this recommendation and will continue to engage in 22 discussions with other jurisdictions on an ongoing 23 basis to maintain the highest standards related to 24 consumer protection. 25 That concludes the staff's response. 0100 1 MR. LAPINSKI: Thank you, Commissioners. 2 MR. GRIEF: Questions? 3 CHAIRMAN COX: Do you have questions? 4 COMM. CLOWE: Do you have questions? 5 CHAIRMAN COX: I have some comments. 6 Please go ahead. 7 COMM. CLOWE: Gary, you sent, I assume, 8 both Chairman Cox and myself this report some months 9 ago about this situation in Canada and the man who was 10 a claimant and was denied for a three-year period? 11 MR. GRIEF: That's correct. 12 COMM. CLOWE: I've forgotten the 13 details, although I read it at the time. How did he 14 turn out to be refused over that period of time as a 15 winner? Can you refresh my memory, and perhaps 16 Chairman Cox, about the details of that situation? 17 MR. GRIEF: Commissioner Clowe, I've 18 also forgotten the details on that story. So I'll 19 look to any of my colleagues here who might recall. 20 MR. ROGERS: Commissioner, it's been a 21 while since I read the report, too. But as I recall, 22 the gentleman went into a retail location to claim the 23 prize and was told either that it was a small prize or 24 that the ticket wasn't a winner. 25 He began at a later time to feel 0101 1 uncomfortable about his interaction in the store and 2 contacted the Lottery. At the British Columbia 3 Lottery, the intake of these kinds of things was 4 through their customer service process. And as I 5 recall, the gentleman was basically told that it was 6 his responsibility to have signed the ticket and/or to 7 have made sure that he got paid the right amount. 8 There wasn't a real focus on making 9 inquiries with the retailer as to what might have 10 happened or to follow up to see if a ticket, as this 11 gentleman described, ever showed up as being claimed 12 by that retailer or someone associated with that 13 retailer. And over time, with continued complaints 14 and going to other folks, this escalated to the point 15 where they were able to determine that that retailer 16 either had or had attempted to claim the ticket that 17 this gentleman was concerned about. 18 COMM. CLOWE: That's helpful, and I seem 19 to remember some of that as well, now that you mention 20 it. And so my recollection is, we've had some of 21 those kinds of complaints in our history where a 22 claimant said, "I have a winning ticket," and the 23 retailer said, "No, you don't," and then it went to 24 resolution, not necessarily exactly the same details 25 here where there was perhaps fraud involved, but a 0102 1 disagreement on whether or not there was a winning 2 ticket. 3 And we've dealt with those in the past, 4 to my knowledge, to the best of our ability and to a 5 final resolution that was satisfactory, which 6 involves, even in some cases I think, Michael, paying 7 amounts that were really questionable. Am I 8 remembering this history in a generic way correctly? 9 MR. ANGER: Can you clarify for me, 10 Commissioner, your recollection with regard to the 11 amounts that were in question? 12 MR. GRIEF: Maybe you're thinking, 13 Commissioner -- if I could interject -- perhaps when 14 there is somewhat gray area, we try to tend to err on 15 the side of the player, to try to make the player 16 whole and make them come away with a good customer 17 service experience here at the agency. And if that's 18 your question, then definitely yes. 19 COMM. CLOWE: That's generally correct. 20 I'm sorry, Michael -- 21 MR. ANGER: Sure. 22 COMM. CLOWE: -- I can't come up with a 23 specific, but there have been some judgment calls in 24 my mind in the past. And my sense is that we're -- 25 there was a reasonable doubt. We've tried to make the 0103 1 decision favorable to the consumer, to the customer, 2 and balancing the fact that it's state money, on the 3 one hand, we're trying to do the right thing, and that 4 is a judgment call in some instances. Not every one 5 of these disputes is absolutely black or white. We 6 get into some gray areas. 7 MR. ANGER: That's absolutely correct. 8 It is not uncommon for there to be some sort of 9 validation dispute between a player and a retailer 10 that may arise. And the agency acts as a place for 11 players to come, or licensees to come for that matter, 12 with issues that they have. But in the case of a 13 player who has a dispute with regard to the validation 14 of their ticket, we both intake complaints, as Ed has 15 talked about, with regard to our consumer best 16 practices, but we also intake claims from players and 17 we fully investigate those claims. 18 And to the point that you raised, there 19 are often disputed facts between a licensee and a 20 player. And we investigate those and we make 21 determinations on the payment of those claims. And, 22 you know, we try to create the balance that you're 23 talking about, not only about the state's money, but 24 in that we're in a situation of making a determination 25 financially that has some impact either on the player 0104 1 or on a retailer in situations where there is a 2 dispute. 3 And I think we're very detailed in our 4 investigation of those matters and being fair and 5 balanced and coming to what I believe are the right 6 conclusions with regard to those claims. And in those 7 circumstances where, you know, we can support the 8 player, we attempt to do that and make payment on 9 those claims. 10 COMM. CLOWE: That's what I'm trying to 11 get to in my thinking. Probably the disputes that 12 involve a mutilated ticket or something that has 13 mechanically occurred are easier to get to the bottom 14 of and resolve and get a good clear correct decision. 15 Where you have a dispute between individuals -- I 16 think we've had this phantom ticket issue that we've 17 gone over -- you know, you have a winner/you don't 18 have a winner; well, you paid me/you didn't pay me the 19 right amount -- there's some judgmental issues there 20 that make it more difficult to resolve. And that's 21 where an honest error on somebody's part can come to 22 play or, in the case of the Canadian example you've 23 brought to us, there was attempted fraud, the way 24 you've explained it, if you recall the details 25 precisely. 0105 1 On the one hand, we want customer 2 satisfaction. But on the other hand, we're dealing 3 with the state's money, and we are not like a retail 4 organization that lets somebody bring back a product 5 that's been abused and is old and is broken and we 6 want customer satisfaction. And we say, "Just pick 7 out anything in the store and take it. We want you to 8 leave here happy." I have a neighbor who does that 9 constantly (laughter), and he abuses the retailers' 10 desire. And it amazes me how giving some retailers 11 are to this individual. We don't play that role in 12 the sale of Lottery tickets. So there's a judgmental 13 area here that in my mind is very important. We're 14 striving to make the right decision. 15 Now, you made a lot of wonderful 16 recommendations. They sounded very good, and the 17 staff response sounded very good, but that's all 18 front-end kind of window dressing to me. Who is 19 responsible for the implementation of all of this, and 20 who is the oversight responsibility to see that this 21 is in effect and is happening at the Lottery, at the 22 Texas Lottery? 23 MR. GRIEF: Well, I'll make a general 24 comment and then let Michael talk more specifically. 25 But other than just a couple of those on that list, 0106 1 it's already implemented. It's already in place, and 2 it's already up and running. Our complaint process, 3 our review process of individual ticket disputes, 4 et cetera, that's all going. 5 And for that small number that's not in 6 place yet, that falls squarely on Michael's shoulders 7 as the Director of Lottery Operations and Ed as the 8 Manager of Retailer Services. Those projects are 9 ongoing and moving forward at a very satisfactory 10 pace. But I'll let Michael speak in more detail if he 11 would like. 12 MR. ANGER: I absolutely agree, 13 Commissioners. I think the good news in this is, is 14 that a lot of the underlying structure and effort is 15 already in place here at our agency. You know, I 16 speak with great pride in what we do already. I think 17 that we go to the great lengths that you talked about, 18 Commissioner, to make sure that we investigate, that 19 we follow up, that we strike the right balance and do 20 the important things with regard to protecting both 21 consumers and our licensees. 22 With regard to the issues that we've 23 identified here that we want to do more on, that's 24 ultimately my responsibility. All of the functions 25 related to these activities fall in Lottery 0107 1 Operations. And myself and many members of the team 2 in Lottery Operations will be working in the coming 3 weeks and months to put in place the additional pieces 4 that we want to put in place to support our efforts in 5 regard to consumer protection. 6 The Security Department resides in 7 Lottery Operations and would be actively involved in 8 the monitoring activities of the database with regard 9 to claims that we talked about. A number of folks 10 across different departments, including Ed's area in 11 Retailer Services, as well as our Products and 12 Advertising areas, will work together with regard to 13 pushing information out to consumers, to make 14 recommendations to them with regard to signing their 15 tickets and put those out through various different 16 media and some of the other recommendations. But 17 ultimately it resides in Lottery Operations, and it's 18 my responsibility to ensure that these are 19 implemented. 20 COMM. CLOWE: I think that's right. I 21 think that you-all are responsible. I would add that 22 I look to Director Sadberry as the ultimate person to 23 oversight this and you to bring issues that you feel 24 need his attention, to his attention. And as the 25 person responsible ultimately, I would want his 0108 1 judgment brought to bear on the resolution of issues 2 of this type and kind. And I would hope you have that 3 process established so that you have the benefit of 4 his experience and knowledge as well as his Deputy 5 Executive Director. 6 My sense is, about this whole process, 7 that it's an imperfect world. When you have the 8 number of machines that we have out there pumping out 9 the number of tickets that we do every 24 hours, 10 you're going to have instances where a machine is 11 going to die or a machine is going to malfunction or 12 there's going to be some error that occurs 13 mechanically. You can't avoid that. No matter what a 14 guarantee or an attempt is to assure mechanical 15 perfection, it's not going to happen. And you must 16 recognize that eventuality and be prepared to deal 17 with it. That plan, to my mind, is as important as 18 the plan to make things work. The space shuttle has 19 failed, as much effort and time and money and 20 expertise has gone into it. You know, mechanical 21 things will fail. 22 And then beyond the training and the 23 GTECH visits to the retailers and the attempt on 24 behalf of everybody who has a license to sell lottery 25 tickets, there will be some individuals who attempt by 0109 1 some means to take advantage, and we must be aware of 2 that. 3 And when you're running currently, I 4 think, a $3.7 billion a year sales business, we need 5 to be aware of this and plan to deal with it and try 6 to make the best decision. And we want to give 7 customer satisfaction; we want to. I think you've 8 pointed it out very correctly, protect the consumer 9 and see that that person is pleased. 10 We want to give our retailers and the 11 people who sell our product proper support. And then 12 finally, we've got to realize it's not a private 13 corporation's money that we're dealing with here. It 14 belongs to the State of Texas, and that has to weigh 15 in on our final decision. 16 And as you go through this process, I 17 hope you'll bring to bear the senior management in 18 this agency and have them be supportive of whatever 19 ultimate decision is made. That way we'll end up in 20 the right place. 21 Thank you, Chairman Cox. 22 CHAIRMAN COX: Commissioner Clowe, thank 23 you for those remarks. And I think that one of the 24 things that we sometimes lose track of is that we're 25 dealing with machines that malfunction, we're dealing 0110 1 with people who make mistakes. And if you look at 2 $3.7 billion in sales -- I don't know what the average 3 transaction is -- but that is probably over a billion 4 sales transactions. 5 COMM. CLOWE: Easily. 6 CHAIRMAN COX: And then you have 7 redemptions that you add to that -- I don't know how 8 many those are -- but you've got to be talking about 9 well over a billion transactions that we're engaged in 10 every year. And the remarkably small number, at least 11 in my view, of malfunctions and errors and problems 12 that we have and the elaborate preparation that we 13 make for those small number of transactions I think 14 speaks very well for our concern about our customers. 15 COMM. CLOWE: I don't know of any other 16 retail business that has the complexity that this 17 Lottery has and deals with it in the percentage that 18 we do of mechanical malfunction and then improper 19 action, whether intentional or unintentional, and then 20 we get the resolution. You know, it's an amazing 21 thing; it really is. 22 CHAIRMAN COX: It is; it is. 23 COMM. CLOWE: And I think it goes back 24 on the part of people to get education and 25 understanding of the system and a commitment to try to 0111 1 do the right thing, and I think we have that. And if 2 we continue to have it, we'll deal with these issues. 3 You know, I really read that report you 4 sent me with interest, and I thought about it at 5 length, and I thought, "That guy really wasn't treated 6 right." I hope we don't have to have an ombudsman 7 that comes from the eastern part of the country -- and 8 I think that's where Ontario is -- to the western part 9 of the country, which is British Columbia, to 10 intercede on the behalf of one of our players. I hope 11 we do that ourselves, and that's why I asked you about 12 the details. That was my recollection, that an 13 outsider had to intercede on this guy's behalf. And I 14 would hope that we would have internally the system 15 that you outlined here and we listen to people and 16 treat them fairly. 17 MR. RIVERA: Commissioner Clowe, as 18 someone from the outside looking in, I will tell you 19 that I recall that case. And in that particular 20 circumstance, the retailer actually did attempt to 21 claim a prize. So the acid test is, had that same set 22 of facts and circumstances be presented to the Texas 23 Lottery, how would the Texas Lottery have responded to 24 it? Because there were obvious discrepancies in the 25 way that the retailer presented that ticket. The 0112 1 lottery in question had access to information that 2 would lead that lottery to believe that the ticket was 3 questionable. 4 I'm pleased to report that had this same 5 set of facts and circumstances been presented to your 6 staff, I don't believe that you would have had the 7 issue in Texas as occurred there and that the 8 resolution of that issue would have been much faster. 9 So, you know, when you look at it on an overall 10 basis -- and that is why GTECH's assessment of your 11 current policies and practices is that you are a world 12 leader in that regard. 13 Now finally, just to reiterate some of 14 the things that were said here today, you can never 15 always have an exact set of facts. And you're 16 correct, the judgments have to be interjected. 17 And finally, I just want to also 18 reiterate something that your staff mentioned; and 19 that is, the vast majority of our retailers are 20 honest, hard-working, occasionally make mistakes. And 21 all we're dealing here is with a very small portion 22 who may not be as readily willing to comply with some 23 of the requirements that are imposed on them by the 24 Texas Lottery. 25 CHAIRMAN COX: Okay. Gary and Ramon, 0113 1 thank you very much, you and your staffs. Let me ask 2 a question. 3 Ramon, this is certainly responsive to 4 one of the questions that -- or the requests that I 5 made of Mr. Patel, and that is that if something goes 6 wrong anywhere in the world, we want to know about it 7 and be sure that we're not going to have it go wrong 8 here. 9 The other was that on a more routine 10 matter, we want to be sure that all best practices are 11 brought to us and that we have an opportunity to 12 improve in all areas. How do you see that latter 13 request, the more routine things that are not in 14 response to a crisis somewhere else, proceeding? 15 MR. RIVERA: Mr. Chairman, we have taken 16 that charter and that request very, very seriously. 17 And, in fact, last week we met with your Lottery 18 marketing staff and presented a set of industry best 19 practices with respect to both instant and on-line 20 games. The strategy, therefore, would be for us 21 subsequently at the local level to review these 22 practices to determine which are applicable to the 23 Texas Lottery, which can be implemented. 24 But the practices themselves were a 25 collection of observations of the most successful 0114 1 lotteries in the world. And so to answer your 2 question, Mr. Chairman, we have taken that charge very 3 seriously and intend to continue to bring to you what 4 we see as the best in the world and help you in 5 becoming, as you've stated, the best lottery in the 6 world. 7 COMM. CLOWE: Thanks a lot. 8 CHAIRMAN COX: Thank you, Ramon. And 9 please give our thanks to Mr. Turner and Mr. Patel. 10 MR. RIVERA: I will, sir. Thank you. 11 CHAIRMAN COX: Thank you, Gary. 12 MR. GRIEF: Thank you. 13 MR. MARKER: Excuse me, Mr. Chairman. I 14 believe you have a witness affirmation form for this 15 item. 16 CHAIRMAN COX: I believe you're right. 17 COMM. CLOWE: He's doing his job. 18 CHAIRMAN COX: Yes, he is. 19 Ms. Nettles, do you have comments on 20 this item? 21 MS. NETTLES: Good morning, 22 Commissioners. For the record, my name is Dawn 23 Nettles, and I'm with LottoReport.com from Garland. 24 I truly appreciate the conversation that 25 you-all have had today with regard to claims because 0115 1 the claims issue is probably my biggest and most 2 important issue that I have been working on for some 3 years. "The Luck of the Draw" documentary was 4 something that -- I worked with the man who made the 5 film -- I've gone completely blank. 6 But at any rate, this is -- what 7 happened to the man in Canada truly does happen 8 elsewhere. He didn't know his ticket was a winning 9 ticket, and he took it to have it checked. And the 10 clerk either told him -- now I forget the details, 11 too, but the clerk either told him it was worth $5, 12 $10 or nothing. And what they did -- he just accepted 13 it, went on, and then they immediately went to claim 14 on the ticket. 15 But the solution to the claims, there's 16 really just one for consumer protection, and it's 17 something that I have brought to you-all many, many 18 times before. And I wish that you-all would consider 19 this because it truly is the only safe way for the 20 people, and that is to make the people check their own 21 tickets and to refuse to let clerks anywhere or 22 machines check the tickets for the players. If a 23 player is big enough to buy his own ticket, or a 24 ticket, then he should be big enough to check his own. 25 If he doesn't collect his prize because he failed to 0116 1 check his tickets, then that's his fault and that's 2 truly unclaimed money. 3 I have followed the Canadian deal for a 4 long time and what the ombudsman came up with and all 5 the suggestions and the dings on the terminal to let 6 people know that they've got a winning ticket. But I 7 want to address some of the 11 issues that Ramon, or 8 that they put before you today, and the first one -- 9 or just a few of them. 10 The first one was a formal complaint 11 process here in Texas. You-all may not be aware of 12 this, but players have to put it in writing when they 13 have a complaint. When somebody has $3 coming to them 14 and they can't get it or whatever, either the clerk 15 has taken their money or it didn't validate or it was 16 hit twice and the retailer gets a payout slip that 17 says, "Sorry. Not a winner" or "Previously paid" or 18 something like this because he's run it through the 19 terminal twice, that player knows he didn't get his 20 money; he knows that. And for $3 or $5, he either has 21 to drive 30 or 40 miles to a claim center or spend an 22 enormous amount of time and he makes phone calls. He 23 does everything to try to collect his $5. But let's 24 face it, a winning of $5 is not worth the hassle that 25 you have to go through. 0117 1 Well, he can call up here ten times if 2 he wants to, but you-all have no record of those phone 3 calls because you don't record those phone calls. The 4 only complaint that is taken at this agency is in an 5 e-mail or on it it has to say "Complaint." If it's 6 just a question or an inquiry or something along those 7 lines pertaining to he didn't collect his $5, it's not 8 considered a complaint and is not recorded. So I have 9 a problem with that because I think phone calls should 10 be sufficient. If a player is having a problem, he 11 wants to call up here and report it, he should be able 12 to do so without having to go through the long deal of 13 going on-line or driving to a claim center to get a 14 complaint form. 15 The second item was to tell all players 16 to sign tickets. Well, for a ticket that you have to 17 go to a claim center to collect, I can certainly see 18 the player needing to sign the ticket. But we all 19 know that on your $2 and $5, $50, $100 winnings, that 20 you can collect from retailer, it doesn't matter if 21 the ticket is signed or not. The retailer -- the 22 clerk takes the ticket, and if he's going to pay it, 23 it doesn't have to be signed. Or even if he lies to 24 the person and says that it's not a winning ticket or 25 it's only worth so much, it doesn't matter. That just 0118 1 helps -- would help clerks or investigations here in 2 trying to study this stuff. It wouldn't -- it doesn't 3 serve its purpose to tell everybody to sign all their 4 tickets because if they don't know they are winning 5 tickets, they give them to the clerks and they never 6 see them back anyway. 7 Then the self-service ticket inquiry 8 that they were talking about having purchased -- or 9 you-all are purchasing 10,000 so that people can check 10 their own tickets, well, why not save the money for 11 those 10,000 machines? If players have to check their 12 own, those machines aren't needed. And that is 13 consumer protection. 14 Encouraging players to report 15 suspicions, well, a player can't report a suspicion if 16 he doesn't know that his ticket is a winning ticket 17 and he just wants it checked. I don't think you-all 18 realize how many people buy scratch tickets and 19 uncover only the latex part with the number, the four- 20 digit code in there called the VIR number, and they 21 never even unscratch the rest of the tickets. They 22 don't have any idea. They know exactly where on that 23 ticket to unscratch the four-digit code and they turn 24 around and hand them to the clerk and say, "Okay. 25 Tell me if any of these are winners." They don't have 0119 1 a clue. And this is -- this is a big deal with these 2 scratch ticket players; I promise you it is. I'm in 3 the mist of collecting trash to where I can bring it 4 up here and show it to you, and I can -- I've already 5 got a bunch. 6 Clerks -- I mean, when I was running the 7 stores with my LottoReport, it was standard procedure 8 that clerks would pick up any tickets thrown in the 9 trash or laying around and check them because players 10 really did miss them and didn't know that they had a 11 winning ticket. 12 The bottom line here is that players 13 don't check their tickets. When they scratch them 14 off, they don't do it. And the same thing on Lotto 15 and the on-line games. I stood behind a man yesterday 16 who had a stack of tickets about an inch thick. I 17 don't know how far back they went, but he was standing 18 there in front of the scanner checking every one of 19 them, and he didn't have a clue what he had. And I 20 wanted to ask him for his tickets, but I wasn't going 21 to wait long enough for him to finish them. 22 I wholeheartedly agree that the vast 23 majority of the retailers are hard-working people and 24 they're good, honest people. But I think that you can 25 safely say that there's probably at least one clerk in 0120 1 every two stores that is dishonest. These people see 2 players coming in and they know exactly who they are 3 and that they don't have a clue what they have. And 4 they just -- they accept the players' tickets and 5 going to check them for them. And they might scan 10, 6 15, 20 tickets, and then they can turn to the player 7 and say, "Well, you've won $5." And the player is 8 happy: "Well, good. That's $5 more than what I had," 9 when it could have really been $78 or $300 that the 10 clerk turns around and gets when the man leaves. 11 The store clerks are not aware now that 12 they're supposed to give the players a receipt. I ran 13 stores last week, and I couldn't get any receipts. I 14 had to ask every store. And they said, "Well, we 15 don't really know what that's for," even though it 16 says "Players Receipt" and "Retailers Receipt." And 17 that's something that really needs to be implemented 18 big time, is that when they check these tickets, the 19 stores should give the ticket and the receipt back. 20 I'm afraid I don't agree with the 21 agencies moving rather quickly on claims that are 22 good-sized claims. I'm going to tell you a story -- 23 I'm going to tell you three stories that I have here, 24 three cases. I'm going to start with the ticket in 25 Brownsville -- I don't remember if it was Brownsville 0121 1 or Laredo -- a gentleman who worked for the City of 2 Laredo or Brownsville found tickets in a park. He 3 scratched them off. He had a $35,000 winning ticket. 4 He went to the claim center and he told -- he filled 5 out a claim form and he told them, "I found these 6 tickets." 7 Well, the claim center checked it and 8 she called the store because they had not activated 9 the pack, I believe is what the story was. And she 10 talked to the store people, the people at the store, 11 and they confirmed that, yes, they had been selling 12 those tickets. The ticket was validated. The Texas 13 Lottery cut him a check for $35,000, which was exactly 14 what they needed to do. He was honest all the way 15 through about the tickets. Lottery verified that the 16 retailer was selling the tickets, and they cut him a 17 check for $35,000. 18 Without calling the player and telling 19 him, the very next day the Texas Lottery stopped 20 payment on that check because the next day they 21 decided the tickets had been stolen and they stopped 22 pay. They did not notify the man, though your reports 23 say that you did, but he was never contacted. He made 24 multiple calls up here, never could get a return call 25 back. The way he found out the check had been 0122 1 stopped, the stop pay was put on the check, was from 2 his bank who notified him about five days later. 3 That ticket was validated. The store 4 never reported to the police that they had anything 5 stolen from the store. And the Texas Lottery should 6 not have done that. If anything, the Texas Lottery 7 should have taken the funds from the retailer, the 8 $250 for the pack of tickets or whatever it was. He 9 should have just been charged. Other tickets from 10 that same pack had already validated and been paid. 11 We've got a case coming up August the 12 2nd in Dallas, Dallas County Courts, over a lady by 13 the name of Hazel Belyeu. She bought a $25,000 14 scratch ticket. She scratched it off, saw that it was 15 a winner, showed it to the store clerk, took it home, 16 hid it underneath her mattress. She had one person in 17 her home that day and that she showed, and it was her 18 best friend. The next morning, she went to get her 19 ticket; her ticket was gone. She knew immediately who 20 took her ticket. No questions asked, no nothing; she 21 knew. 22 She got in her car; she drove to the 23 Wichita Falls Police Department. She told them. The 24 detective got on it immediately, went to the best 25 friend's house, best friend admitted taking the ticket 0123 1 and said, "But I've given it to another friend. He is 2 in route to Dallas now to collect the $25,000." 3 Wichita Falls Police Department and the player who 4 owned the ticket contacted the Texas Lottery, the 5 claim center in Dallas. 6 The guy arrived there. They let him 7 fill out the paperwork. As soon as he submitted it, 8 they told him that there was a computer error or some 9 problem with the ticket and they would have to send it 10 to Austin. They didn't tell him the truth, that they 11 knew it was -- it had been reported as a stolen 12 ticket. 13 This agency knows beyond any reasonable 14 doubt that that ticket -- who that ticket belongs to. 15 There's an internal memo here that very clearly 16 states -- 17 MR. MARKER: I'm sorry, Mr. Chairman. I 18 just want to make sure we're still on this same item. 19 This item is noticed up as -- 20 CHAIRMAN COX: Would you help us stay on 21 the item, Andy? 22 MR. MARKER: Yes, sir. I mean, this 23 item is noticed as -- 24 CHAIRMAN COX: It doesn't seem related. 25 MR. MARKER: Right. 0124 1 MS. NETTLES: It's regarding claims. 2 MR. MARKER: To the extent that you're 3 talking about retailers processing prize claims, the 4 presentation you had was on consumer best practices. 5 We seem to be moving now into specific enforcement 6 matters that may be beyond what's been noticed up. It 7 may be more appropriate to have this under public 8 comment. 9 And I would leave it to the 10 Commissioners' discretion. What you've talked about 11 is consumer best practices, activities by retailers 12 and processing claims at retail locations. To the 13 extent that you've moved beyond that, I think you're 14 beyond the purview of this agenda item. 15 CHAIRMAN COX: In an abundance of 16 caution, Ms. Nettles, let's keep anything that is not 17 directly related to this agenda item for public 18 comment. 19 MS. NETTLES: Okay. I thought of this 20 and was telling this story based on what Commissioner 21 Clowe -- I believe it was Commissioner Clowe -- was 22 talking about on the claims, on how efficient the 23 agency was and how we have these investigative reports 24 and all. And so I was trying to refer that, you know, 25 on this one -- this one is now two years old or a year 0125 1 and a half old on this case. The lady has not 2 received her money. The Texas Lottery did not get the 3 case to the courts. They wanted to indict the person 4 who tried to do a fraudulent claim. No, it's not a 5 retailer in question on this case. 6 But the point is, my point on this is 7 that players need to check their own tickets. That's 8 the only safe way to protect the consumers of Texas. 9 You do have dishonest clerks. You do have terminals 10 that err. And all of these items are good, except 11 they won't work because if you still have dishonest 12 clerks out there, if there's one in every store or one 13 in every two stores -- which there are -- these 14 people, they cannot tell you -- players can't tell you 15 that they lost money because they didn't know if they 16 had a winning ticket or not. 17 CHAIRMAN COX: Excuse me, Ms. Nettles. 18 I think you're repeating yourself. 19 MS. NETTLES: Okay. I may be, and y'all 20 caught me off guard on that one. I just wish you-all 21 would consider having players check their own tickets 22 instead of allowing clerks or terminals, machines to 23 check them. 24 COMM. CLOWE: No questions. 25 CHAIRMAN COX: Thank you, Ms. Nettles. 0126 1 Why don't we take about a ten-minute 2 break and come back about a quarter of 12:00. 3 (Recess: 11:35 a.m. to 11:45 a.m.) 4 CHAIRMAN COX: Let's come back to order, 5 please. 6 AGENDA ITEM NO. XXI 7 CHAIRMAN COX: Item XXI, report, 8 possible discussion and/or action on Scientific Games 9 Corporation's acquisition of Oberthur Gaming 10 Technologies. 11 Mr. Marker. 12 MR. MARKER: Thank you, Chairman. For 13 the record, my name is Andy Marker. I'm General 14 Counsel Section Chief for the Lottery Commission. 15 This item has been on prior Commission 16 meeting agendas. It's here today to give you an 17 update with regard to Scientific Games' acquisition of 18 Oberthur Gaming Technologies. As we previously 19 informed the Commission, the agency was contacted by 20 the Federal Trade Commission in connection with the 21 FTC's review of the acquisition. We held a conference 22 call with the Federal Trade Commission earlier this 23 month, answered their questions and then were asked to 24 provide some information about our contracts with our 25 instant ticket manufacturers. And so that information 0127 1 has been provided and there's -- I do not have 2 anything additional to report. We do not have any 3 outstanding requests from the Federal Trade 4 Commission. 5 I would be glad to answer any questions 6 you might have. 7 COMM. CLOWE: No questions. 8 CHAIRMAN COX: Thank you, Andy. 9 AGENDA ITEM NO. XXII 10 CHAIRMAN COX: Item XXII, report, 11 possible discussion and/or action regarding agency 12 action in response to allegations of possible 13 misconduct. 14 Mr. Marker. 15 MR. MARKER: Thank you; thank you, 16 Chairman. This matter is on the agenda to give you an 17 update. Staff met with representatives from the 18 Travis County District Attorney's office earlier this 19 month to answer questions that the District Attorney's 20 office had. We have attempted to cooperate fully in 21 the District Attorney's office investigation. At that 22 meeting, the representatives from the Legal Services 23 Division, together with representatives from the 24 Internal Audit Division, Ms. Melvin and Ms. Oballe, 25 who are at the table, presented the methodology they 0128 1 used to review these allegations. 2 And then following our meeting last 3 week -- we met with the District Attorney's office 4 earlier this month -- we were notified last week by 5 the District Attorney's office of their intent to 6 recommend that their investigation be closed because 7 the allegations could not be substantiated. 8 I would be glad to answer any questions. 9 Ms. Melvin and Ms. Oballe are available to answer 10 questions also. 11 COMM. CLOWE: I would like to hear from 12 them. 13 CHAIRMAN COX: Okay. Andy, we -- the 14 agency cooperated in every possible way with the 15 District Attorney in this matter? 16 MR. MARKER: Yes, sir. We provided 17 files to the District Attorney's office. We attempted 18 to answer their questions as fully as we could. 19 CHAIRMAN COX: Okay. Okay. Catherine, 20 why don't y'all tell us what you did here. I know 21 that there was some partial information, if you will, 22 some incomplete information about possible winners. 23 And you had some clues and you followed up on those 24 clues, and you're going to tell us what you found. 25 MS. MELVIN: Yes, sir. Again, Catherine 0129 1 Melvin, Director of the Internal Audit Division. At 2 this point I'm going to turn it over to Susan Oballe, 3 a member of the Internal Audit Division, who will 4 explain her processes. 5 MS. OBALLE: Good morning, 6 Commissioners. For the record, I'm Susan Oballe with 7 the Internal Audit Division. I would like to provide 8 a synopsis of the work we performed related to the 9 allegation. 10 Based on the attributes Ms. Nettles 11 provided to us and to the Travis County District 12 Attorney's office directly, Internal Audit conducted 13 an independent review of agency prize winner files and 14 other information related to prizes awarded. The 15 results of our review did not identify a prize winner 16 that matched all the attributes provided by 17 Ms. Nettles. 18 As Mr. Marker indicated, we provided our 19 methodology and review results to the District 20 Attorney's office. And this concludes my report. I 21 would be happy to answer any questions you have. 22 COMM. CLOWE: No questions. 23 CHAIRMAN COX: Okay. Well, Director 24 Sadberry, where do we go from here? 25 MR. SADBERRY: Well, Mr. Chairman, 0130 1 that's a pertinent question from our perspective. My 2 understanding is that there were some activities that 3 the District Attorney's office did undertake on its 4 own and determined some information, but it apparently 5 could not reach a conclusive position with respect to 6 that position. And we are not in a position, to my 7 understanding, to independently pursue that 8 information, which I understand to be separate from 9 the methodology report that you have received. 10 I also understand that at the suggestion 11 of the Chairman, some contact has been made with the 12 State Auditor's office, I believe in terms of best 13 practices. And I don't know that we have received any 14 response to that communication or not. 15 One of the interests that I have, as you 16 are aware from our previous discussions, is that this 17 agency does exercise best practices in situations 18 where there are accusations, whether they're anonymous 19 or not, whether they're alleged and whether or not 20 they can be substantiated to some extent or not at 21 all. One of the elements of that that I'm interested 22 in is that we engage some independent source of 23 credibility to verify that we have both the internal 24 audit function within the agency as well as the 25 District Attorney's office, acting independently, 0131 1 which suggests to me that at least the best practices 2 component of our duty, our responsibility, has been 3 exercised. 4 Beyond that -- and there probably is a 5 notification requirement since this matter has been in 6 the media and has been a matter of some interest to 7 state leadership as to where we are in this process 8 and that we are being responsible as stewards to the 9 public for what we do, to reasonably pursue an 10 investigation of a reasonably sound allegation as far 11 as we can determine, based upon the information we've 12 been given. 13 So I think the notification aspect 14 obviously is important to us. We are working on that. 15 I've already had meetings in that regard of how we 16 should go about that and would keep you advised of 17 what we plan to do in that regard. If in the event 18 the State Auditor's office is able to respond and give 19 us any advice or suggestions on best practices, we 20 certainly would be amenable and receptive. 21 I know that Ms. Nettles received a 22 letter inviting her to this meeting -- she is here -- 23 and inviting her to provide any additional information 24 specifically that she might have that could assist us 25 further. So we remain open in that respect. 0132 1 Beyond that, we're at a point where it 2 appears that we have disposed of the matter from an 3 investigative standpoint within the agency and would 4 make our appropriate report and be sure that internal 5 to the agency we have examined our procedures and 6 looked at all possibilities to prevent any occurrence 7 of this nature from having a possibility of actually 8 occurring. And I think we're undertaking that or 9 we'll look at undertaking that as a possibility as 10 well. 11 CHAIRMAN COX: Excellent. 12 Catherine, I believe you told me as well 13 that in your risk assessment you will be looking at 14 this matter to see if it bubbles up for additional 15 work in your audit plan for next year? 16 MS. MELVIN: Yes, sir, that is correct. 17 Earlier I reported on the development of the audit 18 plan and the risk assessment process we're currently 19 going through. That is focused on key processes, and 20 certainly prize winner processing is one of those. 21 And so that will be considered along with other 22 processes in the agency for consideration of risk. We 23 certainly want to look at some of the controls over 24 that process, as Mr. Sadberry stated, to prevent such 25 an occurrence happening. 0133 1 CHAIRMAN COX: Excellent. 2 COMM. CLOWE: No questions. 3 CHAIRMAN COX: Okay. Thank you. 4 MS. MELVIN: You're welcome. 5 AGENDA ITEM NO. XXIII 6 CHAIRMAN COX: Item XXIII, report, 7 possible discussion and/or action on Stansell et al. 8 versus New Mexico Lottery. 9 Ms. Rienstra. 10 MS. RIENSTRA: Good morning, 11 Commissioners. For the record, Deanne Rienstra, 12 Assistant General Counsel. 13 This item is to provide you information 14 about a class action filed last month against the New 15 Mexico Lottery by three lottery retailers. You have 16 also been provided a memo in your notebook. The 17 allegations include unfair trade practices and 18 negligent misrepresentation. The complaint is that 19 the New Mexico Lottery is closing instant ticket games 20 that still have substantial cash prizes available, 21 thereby leaving thousands of dollars in winning 22 tickets that could have been sold. They also complain 23 that this practice causes the actual odds of winning 24 to be much less than the odds advertised for the game. 25 The class action is asking the New 0134 1 Mexico Court to order the Lottery to stop prematurely 2 discontinuing scratch-off games and to set the 3 criteria by which the lottery games can discontinue -- 4 the lottery can discontinue their games. Legal 5 Services is monitoring this class action. At this 6 time we do not have any further details regarding the 7 New Mexico Lottery's game-closing practices and 8 procedures. 9 Legal Services will also review this 10 agency's practices and procedures in light of the New 11 Mexico allegations and, in particular, advertising and 12 information provided to players to determine if there 13 are opportunities to improve these services. 14 This concludes my presentation, and I 15 would be happy to answer any questions. 16 COMM. CLOWE: No questions. 17 CHAIRMAN COX: Well, that sword 18 certainly has two edges, doesn't it? 19 MS. RIENSTRA: Yes, sir. 20 CHAIRMAN COX: It was what, month before 21 last that we took the approach of dealing with the 22 fact that if the top prizes are gone, the deck is no 23 longer fair to the players and we should take it down? 24 And they're complaining about just exactly the 25 opposite. 0135 1 MS. RIENSTRA: Yes, sir. 2 CHAIRMAN COX: Hard to win, isn't it? 3 (Laughter) 4 CHAIRMAN COX: Thank you, Deanne. 5 AGENDA ITEM NO. XXIV 6 CHAIRMAN COX: Item XXIV, consideration 7 of the status and possible entry of orders in -- and, 8 Chairman Clowe, with your permission, I would like to 9 take Item K out of order. 10 COMM. CLOWE: Certainly. 11 CHAIRMAN COX: Item K, Case No. 12 2006-771, In The Matter of GameTech International, 13 Inc. 14 Mr. Marker. 15 MR. MARKER: Chairman, this item will be 16 presented by Enforcement Attorney Kristen Guthrie, and 17 then also Director Phil Sanderson. 18 CHAIRMAN COX: Okay. Ms. Guthrie and 19 Mr. Sanderson. 20 MS. GUTHRIE: Thank you, Commissioners. 21 For the record, my name is Kristen Guthrie, Assistant 22 General Counsel. 23 This order arises from two separate 24 complaints filed against GameTech International, 25 Incorporated. The facts of the order are not in 0136 1 dispute. First of all, on July 20, 2005, a 2 card- minding device malfunctioned for one day that 3 was GameTech International, Incorporated's. GameTech 4 failed to immediately notify the Commission of the 5 defect, and a complaint was filed on July 21, 2005, to 6 the Commission. 7 The second set of facts arises from a 8 complaint against GameTech that a director and greater 9 than 10 percent shareholder, Richard Fedor, held 10 shares of stock in Multimedia Games. An investigation 11 was conducted that found that Mr. Fedor had held 12 shares in Multimedia stock from October 1, 2001, 13 through May 1, 2002. 14 The investigation also showed that 15 Mr. Fedor short-sold stocks in Multimedia Games, 16 another licensed manufacturer, and FortuNet, Inc., 17 which is also another licensed manufacturer. None of 18 these interests were disclosed to the Commission. 19 GameTech does not dispute that the 20 ownership of Multimedia stock by Mr. Fedor should have 21 been disclosed to the Commission. GameTech did 22 dispute that the short selling of the Multimedia stock 23 in FortuNet, Inc., should have been disclosed to the 24 Commission. Nevertheless, GameTech did agree to this 25 order which outlines that short selling or engaging in 0137 1 the transaction of cover short of stock is ownership 2 of the stock for the purposes of the Act. 3 The order assesses a penalty of $24,630 4 for the violations and requires that GameTech notify 5 within 90 days all of their owners, directors, 6 shareholders or persons owning 10 percent or more of 7 GameTech's shares, that having an equitable or credit 8 interest in another manufacturer, including short- 9 selling stock, is prohibited conduct under the Bingo 10 Enabling Act. 11 The order also requires that if an 12 owner, director, shareholder, or person owning 13 10 percent or more of GameTech's shares is required to 14 be named on the organization's application for a 15 manufacturer's license obtains an interest equitable 16 or credit or ownership in another manufacturer, that 17 they must notify the Commission within 10 days of 18 obtaining such interests. 19 Additionally, every year on February 1, 20 GameTech will submit verified affidavits for each of 21 its officers, directors and persons owning 10 percent 22 or more of GameTech shares, stating that that 23 individual nor their spouse do not currently or during 24 the preceding year have a proprietary or equitable 25 interest in another manufacturer or distributor. 0138 1 I'm available for any -- to answer any 2 questions. 3 COMM. CLOWE: No questions at this time. 4 CHAIRMAN COX: Okay. I have a witness 5 affirmation form from Steven Hieronymus who wants to 6 speak on this matter. 7 COMM. CLOWE: May I ask a question, 8 Mr. Chairman -- 9 CHAIRMAN COX: Of course. 10 COMM. CLOWE: -- before this witness 11 begins? I would like to know if this witness, what 12 this witness' position is, and if this witness was 13 part of the hearing and is on the record in regard to 14 the comments that are made before the Commission 15 today, and if they are within the record so that 16 whatever the comments are are properly made in regard 17 to this case. 18 MR. MARKER: Commissioner Clowe, it is 19 my understanding -- and Ms. Guthrie will correct me -- 20 that this is not a contested case. This is an agreed 21 order, so there is no record. There was a complaint 22 that was filed with this agency. An investigation -- 23 the agency conducted an investigation. What's being 24 presented to you today is an agreed order to take 25 disciplinary action, but there is no -- there is no 0139 1 record, per se. This is not a matter that was 2 presented at the State Office of Administrative 3 Hearings. And so this witness would be here to offer 4 public comment, which the Commissioners may take into 5 consideration in deciding whether or not to approve 6 the agreed order that has been presented. 7 COMM. CLOWE: So it's fair to all 8 parties for this Commission to hear these comments 9 with the intent to influence the Commission's 10 decision? 11 MR. MARKER: I believe that the 12 Commission can receive public comment. Both parties 13 are represented here. GameTech I believe has 14 representatives who are here at this meeting. Of 15 course, staff is here. So, yes, I mean, this is 16 something that the Commissioners may take into 17 consideration, may give it no weight. But you 18 certainly may receive public comment on this matter. 19 COMM. CLOWE: Thank you. 20 CHAIRMAN COX: Go ahead, Mr. Hieronymus. 21 MR. HIERONYMUS: My name is Steven 22 Hieronymus, for the record. Obviously, I've just 23 heard the terms of the agreed order. I would come to 24 you today and request that you reject the 25 recommendation of the staff and direct them to send 0140 1 this to the State Office of Administrative Hearings. 2 The presentation by Ms. Guthrie is 3 somewhat antiseptic in that there is a great deal to 4 this. Unfortunately, because of the limitations of 5 where we are in our positions, I'm not allowed to go 6 into it at length. But I would remind you that 7 GameTech is under an agreed order with you already 8 that required compliance. They immediately were out 9 of compliance. 10 And during the course of this 11 investigation, matters took place even after becoming 12 aware of the violations itself, after they thought -- 13 and, in fact, the investigative report was initially 14 closed as insufficient. They couldn't establish it. 15 And the individual involved, Mr. Fedor, in fact, did 16 his subsequent actions, even believing he had gotten 17 by this. 18 I believe that it is in the best 19 interest for this Commission and for you and for the 20 staff to allow the process to work. I was here last 21 year when the GTECH -- DPS presentation for GTECH -- 22 and the subsequent meeting which actually took place 23 last July. And both you and -- both Chairman Cox and 24 you, Commissioner Clowe, made comments about the 25 importance for the character and integrity of the 0141 1 companies doing business here, and their executives. 2 One comment, I looked real quickly -- 3 and this came from you, Commissioner Clowe. You said, 4 "We have a responsibility, as I see it, to the people 5 of Texas to pursue this matter, to reach a level of 6 confidence and satisfaction that where we are is where 7 we should be." Skipping down a few other lines, "And 8 we're looking at a culture of how this entity does 9 business, and that's important to us. That's 10 important to the State of Texas and to the people we 11 have to look after." And I applauded those comments. 12 Mr. Fedor is the Chairman of the Board 13 and the largest shareholder of GameTech International. 14 He was knee-deep in the matter that was before you two 15 years ago this summer. He was also the individual 16 where, you know, under oath said, "We know the law, we 17 understand the law, but we did it anyway," and that 18 was with respect to the price-fixing case. 19 I think you owe it to yourselves and for 20 the benefit of this Commission to allow a formal 21 disciplinary process to go to its conclusion, to allow 22 the state disciplinary procedures to work, and then 23 you would be presented with all the facts and not in 24 the limitation that I'm struggling under here. 25 I would also say that this matter has 0142 1 not been handled the way other licensees for virtually 2 identical issues -- in fact, Ms. Guthrie was involved 3 with some of them -- the same time frames that we're 4 talking about here. And this is not how -- those were 5 immediately moved for revocation and immediately moved 6 to the State Office of Administrative Hearings. 7 It seems with respect to GameTech, this 8 Commission, or the staff, has had great difficulty in 9 wanting to confront them with the realities of their 10 misdeeds. And I would respectfully request that you 11 consider that as you're weighing this agreed order, 12 recognizing that this is a multiple offense situation, 13 and do, I believe, the state a great benefit by 14 allowing the process to move forward as it should be 15 in a public manner and not as I believe Mr. Stewart, 16 in a communication -- who represents GameTech -- in a 17 communication to the Commission said, you know, "We 18 believe that the allegations can be resolved 19 informally without the necessity of formal 20 disciplinary action," which is the way GameTech would 21 prefer to do it. And I don't think that that serves 22 the state or this Commission well. 23 Please allow the process to work, and it 24 will give you the benefit of having full knowledge of 25 the things that are in, you know, one of my famous 0143 1 binders of information that I can't share with you. 2 But this is a very, very -- Mr. Fedor's actions were 3 egregious and very -- flaunt Texas and our law. And I 4 think you need better information before you make a 5 decision on something of this importance. 6 So I thank you. 7 CHAIRMAN COX: Thank you, 8 Mr. Hieronymus. 9 COMM. CLOWE: What do you say to that, 10 counselor? 11 MS. GUTHRIE: Commissioners, my view is 12 that this order should be approved. It's the right 13 results, and it's the best result that we could even 14 hope to get if we were to go ahead and try the case at 15 the State Office of Administrative Hearings. We got 16 what we needed out of this order, which is a 17 determination that short selling and cover-shorting 18 stock, engaging in that is a violation as contemplated 19 by the Bingo Enabling Act. It's a proprietary 20 interest in another licensed manufacturer. And this 21 does have a penalty for the violation, and it forces 22 GameTech to own up to the violations that were 23 committed. 24 CHAIRMAN COX: Okay. Well, let's look 25 specifically at some of the things Mr. Hieronymus 0144 1 said. He said that GameTech International was under 2 an agreed order and was immediately out of compliance. 3 Is that a true statement? 4 MR. SANDERSON: For the record, Phil 5 Sanderson, Director of Charitable Bingo Operations 6 Division. 7 There was a prior agreed order that 8 GameTech entered into with the Commission. It was the 9 one that addressed the price-fixing allegations. 10 There was a statement in there that they would comply 11 with any future investigations by the Commission. 12 And I'll defer to counsel as to the 13 interpretation of that, or also Steve White, the 14 attorney that was working on that agreed order. If 15 he's here, he might be able to answer them. 16 MR. HIERONYMUS: I have a quote actually 17 from the thing that I think might be germane. 18 CHAIRMAN COX: Let's see if counsel can 19 respond, please, Mr. Hieronymus. 20 MS. GUTHRIE: We did look into that and 21 take that point seriously, and we did not see that as 22 a violation of that provision of the agreed order, 23 given the facts of this case at hand. 24 CHAIRMAN COX: So what I hear you saying 25 is that, yes, there was an agreed order, but it was 0145 1 not related to the kinds of violations that we're 2 dealing with in this particular case? 3 MS. GUTHRIE: That's correct. 4 CHAIRMAN COX: Okay. I heard you 5 specifically say that I guess it related to the 6 previous price-fixing allegations, and this relates to 7 a card-minding device that had too many faces and to a 8 shareholder who engaged in inappropriate stock 9 ownership activities? 10 MS. GUTHRIE: That's correct. 11 CHAIRMAN COX: Okay. 12 MR. HIERONYMUS: Can I offer something 13 directly from that to you, sir? 14 CHAIRMAN COX: Sure. 15 MR. HIERONYMUS: This is in Paragraph 3 16 from Page 5 of 8 of the agreed order. And it said, 17 "The compliance officer" -- meaning there was a 18 requirement for GameTech to install a compliance 19 officer. It said, "The compliance officer's duties 20 will include but not be limited to reviewing all Texas 21 contracts between GameTech and distributors of 22 GameTech's products, conduct training for GameTech 23 employees and GameTech distributor employees regarding 24 all applicable statutes and rules and immediately 25 report any act or rule violation of the division." It 0146 1 was not limited to. So I significantly disagree that 2 that consent order only had to do with price-fixing 3 matters. 4 CHAIRMAN COX: Were you aware of that 5 language, Counsel? 6 MS. GUTHRIE: Yes, I am aware of that 7 language. And GameTech is here today. GameTech 8 asserts that the nondisclosure of Mr. Fedor's interest 9 was an oversight, it was not intentional. And given 10 the issues at hand, the facts and the result of the 11 investigation, this is staff's recommendation that 12 this order be approved because it does assess a 13 penalty. It does state what the violations were and 14 why, and it also has the remedies that are going to 15 prevent this from happening in the future. GameTech 16 will now be required yearly to provide affidavits by 17 each of its shareholders, greater than 10 percent 18 shareholder, director, and officers, that they do not 19 own shares in another licensed manufacturer or 20 distributor. 21 CHAIRMAN COX: Okay. Now, 22 Mr. Hieronymus, as Mr. Fedor -- is that his name -- is 23 the chairman and largest stock shareholder of the 24 corporation. Was that taken into consideration when 25 you determined that we should enter into an agreed 0147 1 order, that this just isn't a guy that shows up for 2 meetings once in a while, this is the Chairman of the 3 Board? 4 MR. SANDERSON: I believe he may be the 5 former Chairman of the Board. I don't know if he's 6 the current chairman. I'm not aware. They just 7 report to us as officers and directors on their 8 applications. 9 CHAIRMAN COX: Okay. So I'm seeing 10 counsel say that he is the current chairman. Was that 11 taken into consideration in the process of agreeing to 12 this order? 13 MR. HIERONYMUS: I couldn't say. 14 MS. GUTHRIE: Yes, yes, it was taken 15 into consideration that he was a director of the 16 organization and greater than 10 percent shareholder. 17 CHAIRMAN COX: Okay. And the final 18 thing that I saw that Mr. Hieronymus said was that 19 this was not handled as other cases were handled, that 20 other cases went to the State Office of Administrative 21 Hearings. And I inferred from what he said that 22 greater penalties were assessed in other cases. 23 MS. GUTHRIE: I mean, this case wasn't 24 handled any differently than any other case. It's a 25 very routine matter, that if we can resolve the issues 0148 1 and agree to the penalties and violations, we will in 2 an agreed order format. I'm not exactly sure what 3 cases Mr. Hieronymus is talking about, but I do know 4 that the way the penalty was determined is a standard 5 way the Charitable Bingo Operations Division uses to 6 determine penalties for violations such as these. 7 MR. SANDERSON: And I would like to add, 8 I'm not aware of any hearing taking place over at SOAH 9 in the recent last several years that addresses this 10 failure to notify issue or stock ownership issue. 11 CHAIRMAN COX: Okay. Now, what about 12 the matter of the card-minding device that had too 13 many faces? 14 MR. SANDERSON: To the best of my 15 recollection, this is the first offense that we've had 16 of this nature for any manufacturer. 17 CHAIRMAN COX: And if I remember the 18 facts of this situation, this occurred on the first 19 day of operation. Is that correct? 20 MR. SANDERSON: It was recent -- 21 CHAIRMAN COX: It was a malfunction of a 22 new machine rather than something that had been in 23 operation for a long time, and it was immediately 24 corrected? 25 MR. SANDERSON: That is correct. Yes, 0149 1 sir. 2 CHAIRMAN COX: Okay. Mr. Hieronymus, do 3 you have anything else you would like for us to 4 consider? 5 MR. HIERONYMUS: Yes. I would disagree 6 with Ms. Guthrie's representations as to -- I'm going 7 to defer to Mr. Marker as to how far I can or cannot 8 go because I do not want to incorrectly state things. 9 I believe you are not being given an accurate picture 10 of what took place there, in that a complaint was 11 filed, an investigation was started. This was in 12 April of 2006. I'm not talking about the card-minding 13 issue. 14 And you actually have letters of denial 15 from Mr. Fedor. The investigation was closed. It was 16 only re-opened because of, truthfully, my 17 intervention. And this was when Billy Atkins was 18 still here. And I actually directed staff as to who, 19 what and where to go confirm the issue. GameTech was 20 not forthcoming. 21 What was interesting is, shortly after 22 the denial of Mr. Fedor from -- and he parsed his 23 denial very, very carefully, not acknowledging that he 24 had -- previous to this had the prohibited interest. 25 At that particular date that he sent the thing, he did 0150 1 not, but two weeks later, he did it again, after being 2 contacted by the Lottery and knowing there was an 3 issue. 4 The lottery then, based on my insistence 5 in re-looking at the issue and telling them where to 6 look, GameTech did provide some financial records 7 later in the summer that then verified what I had told 8 them. And they determined that there was, in fact, a 9 violation. And it wasn't until all the way until 10 October that Mr. Fedor produced his 2006 financial 11 records that indicated that he had done it actually 12 post-investigation, you know, completely flaunting the 13 situation. 14 He was not forthcoming. They did not 15 cooperate as required under the consent order. No 16 matter how you look at that, I would disagree with 17 Ms. Guthrie's representation there. But this was a 18 complete flaunting of everything about this. And I 19 urge you to allow the process to go forward as it 20 should, a formal disciplinary process. 21 CHAIRMAN COX: Just a second. 22 Counsel, is there anything you're 23 hearing here that is new information for you, 24 information that you did not previously consider? 25 MS. GUTHRIE: I'm not aware that this 0151 1 happened -- oh, okay. I see what he's saying. He's 2 talking about the FortuNet -- I was confused when he 3 said that this happened post-investigation process. 4 And it does appear Mr. Fedor engaged in short selling 5 post the investigation process. 6 As I've said before, the short-selling 7 issue was a contested issue. GameTech -- in the order 8 itself, it says GameTech disputes our interpretation 9 of short selling being inequitable or proprietary 10 interest in another manufacturer, being a violation of 11 the Bingo Enabling Act. But they do agree to these 12 terms. They're going to notify certain individuals 13 that they can't engage in that. 14 I'm aware of Mr. Hieronymus' view that 15 GameTech was less than forthcoming. There were issues 16 that our investigator asked, "Do you own shares of 17 stock in Multimedia Games?" And Mr. Fedor said "No." 18 And at that time, he, in fact, did not own shares of 19 stock. And he indicated that he didn't think he had 20 ever owned shares of stock. We now know that is not 21 true, that he did at one point own shares of stock in 22 Multimedia Games. But when you look at the 23 transcript, we did not find that there was evidence to 24 move forward on the fact that he lied to our 25 investigator. 0152 1 CHAIRMAN COX: So you have -- what does 2 that mean, that you don't believe he lied to our 3 investigator? 4 MS. GUTHRIE: That's correct. 5 CHAIRMAN COX: Okay. 6 MS. GUTHRIE: I mean, the issue is, we 7 don't know what was going on, what Mr. Fedor -- what 8 his internal process was, if he was trying to 9 deliberately mislead the investigator. But we did not 10 have the evidence to move forward towards saying that 11 he did, in fact, lie to our investigator. 12 CHAIRMAN COX: Okay. I have a witness 13 aff- -- 14 COMM. CLOWE: I don't understand that 15 answer. Do you? 16 CHAIRMAN COX: Well, I'm looking here, 17 perhaps to Mr. Stewart, to add to that. And then 18 maybe we can drill down on that if we need to. 19 COMM. CLOWE: Okay. 20 CHAIRMAN COX: I have a witness 21 affirmation form from Mr. Jay Stewart of Hance 22 Scarborough, representing GameTech International. 23 MR. STEWART: Thank you, Mr. Chairman, 24 Mr. Clowe. Jay Stewart for the record, representing 25 GameTech International. I wasn't going to speak 0153 1 today, but Mr. Hieronymus' comments have encouraged me 2 to, and I will answer any questions that certainly you 3 gentlemen have. 4 Thank you, Ms. Guthrie. She's done an 5 excellent job of presenting this. I've been working 6 on this, I think, for more than a year or about that 7 time. We have been fully complaint with the agency. 8 We have divulged all our information. 9 What we're talking about here is a 10 technical violation of one of the qualifications for 11 fitness statute, what I call it, qualifications of 12 being a licensee. You can't be a felon, you can't do 13 this and that, just general fitness qualifications. 14 One of the qualifications, that you 15 can't own an equitable interest in another licensed 16 manufacturer or distributor. What we're talking about 17 here is a publicly traded purchase of a stock that's 18 publicly traded over the open markets done by 19 Mr. Fedor's stockbroker. 20 My friends that are in the oil and gas 21 industry, they often own stocks that are in the oil 22 and gas industry because that's what they know. Well, 23 Mr. Fedor and his stockbroker know something about 24 gaming. And in this situation, they've bought very 25 small amounts. We're talking about a few hundred 0154 1 shares of a publicly traded company, Multimedia Games. 2 I've personally held a couple hundred 3 shares of Dell Computer in the past, and Michael Dell 4 has never called me once to ask about his Europe 5 strategy. As just an owner of a few hundred shares on 6 the publicly traded markets, you do get a few chances 7 to vote, but you're not going to make any decisions on 8 where that manufacturer or distributor is going. 9 The statute, if you read it very 10 closely, it is designed to prevent a minimum -- a 11 minimal number of people in Texas to control the 12 industry. That's what this is all about. It's not 13 whether you buy one share of stock. Unfortunately, 14 the Attorney General's office did interpret the 15 statute as it's written to include publicly traded 16 shares, so that's why we're here today dealing with 17 this issue. 18 But there's no evidence that Mr. Fedor, 19 through his ownership of a very small number of 20 shares -- I think GameTech -- I mean, Multimedia Games 21 has 28 million outstanding shares. Mr. Fedor, I don't 22 recall. It's 800 or 1,000 shares we're talking about, 23 way far less than 1 percent. We're not talking about 24 a 10 percent owner buying another -- buying an 25 interest to be another 10 percent owner of a 0155 1 manufacturer or distributor, to try to determine how 2 that person is going to sell bingo equipment in Texas. 3 This is something that you or I might do, you just buy 4 the stock and you have some voting rights. That's 5 about it. 6 I encourage you to think of this as a 7 technical violation of this statute. When I became 8 aware of it, I actually went to your Web page and 9 downloaded the list of manufacturers and distributors 10 and sent it to my client. That was the first time 11 they ever knew that Multimedia Games was even 12 licensed. They don't do business in Texas in the 13 bingo arena, but they are a licensed manufacturer. 14 And we're here willing to pay a fine and agree to this 15 order to resolve this matter. 16 But the charge that these are egregious 17 violations of the Bingo Act is just patently false. 18 Not one Texas consumer was hurt by this. We are 19 saddled with a statute that has been interpreted by 20 our Attorney General to mean one share of publicly 21 traded stock. We're here to abide by that decision, 22 pay a fine, educate the client, ensure compliance on 23 these issues and move forward. 24 I encourage you to enter this order. 25 We've worked hard through it. The staff has done an 0156 1 excellent job; the inspector has done an excellent 2 job. I got to work personally with him and provide 3 him significant information. He was very tough. And 4 I think the issue has been fully looked at, and I 5 encourage entry of this order. 6 I'm open for any questions. 7 COMM. CLOWE: Not at this time. 8 CHAIRMAN COX: Okay. Do you want to ask 9 Kristen to clarify her previous statement? 10 COMM. CLOWE: Yes, I would like that. 11 MS. GUTHRIE: Okay. Thank you. What I 12 was saying is that given the -- I don't know what was 13 going on in his head, if he knew in the back of his 14 mind that back in 2001 he owned Multimedia shares. 15 What he was asked was, "Do you own any shares of 16 Multimedia stock?" He said "No." 17 Then he went on to say, "Gosh! I don't 18 know if I ever did," or something to that effect. I'm 19 fine with saying that he didn't lie, but I just -- you 20 know, I don't know if he was -- if in the back of his 21 mind he knew he did. I find it -- I mean, myself, I 22 think it's unlikely, just because it seems like he had 23 a great deal of stock in numerous companies. So 24 that's where -- that's why I said it the way I 25 said it. 0157 1 MR. HIERONYMUS: Can I offer 2 something -- 3 CHAIRMAN COX: Please. 4 MR. HIERONYMUS -- that's directly to 5 this? I believe Mr. Stewart has misdirected what was 6 being said. But Mr. Fedor, this was not a purchase 7 through a stockbroker that he was unaware about. If 8 you read the investigative report itself, he actually 9 said he was considering buying the company. 10 But what's interesting to note is this 11 complaint -- as strange as this may sound since, as 12 you know, GameTech and my company have been at odds 13 for a number of years -- but Mr. Fedor and I met 14 personally on April 4, 2006, and he's the one who 15 personally told me of his ownership of it; yet, then 16 when inquired just a few days later, he denied it. 17 But he directly -- you know, "I am the witness. I was 18 the complainant," and he's the one who personally told 19 me about it. 20 So to say that, you know, he didn't know 21 or he didn't know what was going on, that is 22 absolutely false. Ms. Guthrie knows that. She knows 23 my statement that I provided to the investigator. 24 And, you know, my part about the egregious nature has 25 to do with the efforts to not necessarily comply or to 0158 1 obfuscate the situation where it was unclear and, in 2 fact, initially were successful in getting the initial 3 report, said insufficient evidence, because it was on 4 the honor system: 5 "Did you do it, Mr. Fedor"? 6 "No, I didn't do it." 7 Okay. That's it. And it's only because 8 of my persistence, and that's more -- the biggest 9 issue is the fact of the flagrant disregard for the 10 process, complying with the previous agreement and 11 hiding what he was doing. That's the important issue 12 that needs to be examined and considered by you, not 13 maybe the so-called technical violation. That was 14 bad. And we're all required to know -- I heard that 15 this morning -- we're all required and held to a 16 standard. We know what that standard is. That's been 17 clarified now for a number of years by the Attorney 18 General. We certify that we know the rules. 19 Mr. Fedor clearly didn't care. And even 20 after confronted with the issue, did he come and ask 21 for advice, "Oh, I can go do short sales or 22 something." No, he did it again and then waited for 23 six or seven months before he provided the records, 24 even after they were requested because, you know, 25 there were other things going on in trying to get 0159 1 other approvals. 2 He did not comply. He was trying to 3 hide it and hoping it would go away. And that's why 4 this needs to go through the process. And, you know, 5 I again recommend that it go to SOAH and maybe even 6 request the AG's office to provide somebody to handle 7 it, just so you have that hands-off. And I can be 8 more than happy to show and educate them on other 9 licensees under the exact same issues that were 10 happening at the exact same time last spring of 2006. 11 I have all that information. I have it right here, 12 and you will see a very different approach, very 13 different. 14 CHAIRMAN COX: Has Mr. Hieronymus said 15 anything, Counsel, that you were not aware of or did 16 not consider? 17 MS. GUTHRIE: No, we did -- we 18 considered everything that Mr. Hieronymus said. We 19 considered the conversation that took place between 20 Mr. Hieronymus and Mr. Fedor and compared what both 21 people took away from that conversation. It is my 22 understanding that -- and GameTech's attorney may be 23 able to speak more to this -- Mr. Fedor was interested 24 in buying Multimedia Games, the company. But it was 25 my understanding the complainant Mr. Hieronymus took 0160 1 away from that, that he owned stock in Multimedia 2 Games. So we did take all of these conversations and 3 what was said into consideration. 4 CHAIRMAN COX: Okay. Mr. Stewart, did 5 you have anything further? 6 MR. STEWART: Ms. Guthrie's recollection 7 is correct. At the time of the conversation with 8 Mr. Hieronymus, my client did not know that was a 9 violation. And, unfortunately, his compliance people 10 should have educated him on that. The Attorney 11 General's opinion I believe is dated 2004. And when 12 he held Multimedia games, it was in 2001, previous to 13 that. So I think there is some confusion on that 14 issue, but my client did not lie. 15 As I understand, he had referenced -- he 16 had come to Austin to meet with Mr. Hieronymus to talk 17 about other things and mentioned that he might be 18 going to learn about Multimedia Games. There was no 19 discussion that -- Mr. Hieronymus certainly did not 20 say, "Now you understand that if you own this stock, 21 that that's a violation." And my client certainly did 22 not say, "Yes, I understand that." That was not the 23 discussion. Mr. Hieronymus is taking what he wants 24 out of it, then utilizing it, laying on top of this 25 fitness statute and coming after my client. And 0161 1 that's why we're here today to resolve that issue. 2 CHAIRMAN COX: What's your pleasure? 3 COMM. CLOWE: What's your pleasure? 4 CHAIRMAN COX: Well, I think that 5 Mr. Hieronymus has had an opportunity to provide his 6 input on multiple occasions. I think that GameTech's 7 attorneys have had an opportunity to provide their 8 input. I think our staff has been diligent in 9 considering that and arriving at a disposition of this 10 case that seems appropriate to me. So I'm going to 11 move approval of the staff recommendation. 12 COMM. CLOWE: Second. 13 CHAIRMAN COX: All in favor, say "Aye." 14 COMM. CLOWE: Aye. 15 CHAIRMAN COX: Aye. 16 Motion carries 2-0. 17 Thank you. 18 MR. STEWART: Thank you, Commissioners. 19 MR. MARKER: Commissioners, I have an 20 order for your signature. 21 CHAIRMAN COX: Okay. Mr. Marker, 22 items -- I believe you said that A through C are 23 similar items? 24 MR. MARKER: Yes, that is correct, 25 Mr. Chairman. Items A through C on the agenda for 0162 1 today are lottery cases where we have proposals for 2 decisions recommending revocation of lottery retailer 3 sales agent licenses based on the retailer's failure 4 to maintain funds, sufficient funds in its lottery 5 account. And so staff would recommend that the 6 Commissioners adopt the proposal for decision in each 7 of these matters. 8 CHAIRMAN COX: Okay. I move approval of 9 staff recommendation for Items A, B and C. 10 COMM. CLOWE: Second. 11 CHAIRMAN COX: All in favor, say "Aye." 12 COMM. CLOWE: Aye. 13 CHAIRMAN COX: Aye. 14 Motion carries 2-0. 15 Okay. Mr. Marker, I believe that D 16 through H are similar cases as well? 17 MR. MARKER: That is correct, 18 Mr. Chairman. Items D through H are also lottery 19 cases involving a common owner. Items I believe D, E 20 and F, Aldine Express, Ace Cash Express and Beltway 21 Express are all owned by the same individual. Items G 22 and H, that same individual is a director or owner or 23 officer of the corporation that owns those retail 24 locations. 25 But the central issue to each of these 0163 1 cases is that the director, owner or officer of this 2 retail sales agent was convicted of a felony, and that 3 felony was dumping of illegal waste, or illegal 4 dumping of waste. So staff presented this matter to 5 the State Office of Administrative Hearings. The 6 Administrative Law Judge issued a Proposal For 7 Decision and recommended that the Commission impose a 8 six-month suspension of his retailer sales -- excuse 9 me -- sales agent. 10 Staff filed exceptions to those 11 proposals for decisions on the basis that it has been 12 this agency's practice that if a sales agent has a 13 disqualifying criminal conviction, to revoke that 14 license rather than to suspend the license. And so 15 what you have presented to you today are proposals for 16 decisions to accept -- I'm sorry -- a recommendation 17 to accept the proposal for decisions but to carve out 18 or to reject the conclusion of law from the 19 Administrative Law Judge recommending a suspended 20 sentence. 21 The basis for rejecting that conclusion 22 of law would be that a recommendation is not a proper 23 finding of fact or conclusion of law under the 24 Administrative Procedure Act. And so what staff would 25 recommend is that you accept the PFDs but reject the 0164 1 conclusion of law recommending a suspension of the 2 sales agent license but, instead, consistent with 3 agency practice, revoke that license. 4 COMM. CLOWE: So move. 5 CHAIRMAN COX: Second. All in favor, 6 say "Aye." 7 COMM. CLOWE: Aye. 8 CHAIRMAN COX: Aye. 9 Motion carries 2-0. 10 Item I, Docket No. 362-07-990424AM.B, 11 removal of persons' names from Registry of Bingo 12 Workers. 13 Mr. Marker. 14 MR. MARKER: Commissioners, what you 15 have before you is a proposal for decision to remove 16 workers from the registry, approved bingo workers, 17 based on underlying criminal convictions. And so 18 staff would recommend that you adopt the proposal for 19 decision and remove these individuals from the 20 registry. 21 COMM. CLOWE: So move. 22 CHAIRMAN COX: Second. All in favor, 23 say "Aye." 24 COMM. CLOWE: Aye. 25 CHAIRMAN COX: Aye. 0165 1 Motion carries 2-0. 2 MR. MARKER: And, Commissioners, I have 3 some orders for your signature. 4 CHAIRMAN COX: Sure. 5 And, finally, Item J, Docket No. 6 362-07-2747.B, Jackie Cory Simpson. 7 MR. MARKER: Commissioners, staff 8 request that we pass this item. We will bring this 9 back to you at a future Commission meeting. 10 CHAIRMAN COX: Is that okay with you, 11 Chairman Clowe? 12 COMM. CLOWE: Yes, sir. 13 CHAIRMAN COX: Okay. Done. So there's 14 no order in here for that matter? 15 MR. MARKER: That is correct. 16 AGENDA ITEM NO. XXV 17 CHAIRMAN COX: And while we're signing 18 these, Item No. XXV, report by the Executive Director 19 and/or possible discussion and/or action on the 20 agency's operational status, activities relating to 21 the Charitable Bingo Operations Division, agency 22 procedures and FTE status. 23 Director Sadberry. 24 MR. SADBERRY: Chairman, Commissioner, 25 Anthony Sadberry, for the record, Executive Director. 0166 1 There are materials in your notebooks 2 for your review regarding the status of positions as 3 of July 2, 2007, also materials regarding site visits 4 of Pollard and Scientific Games. 5 And I would be happy to answer any 6 questions at this time. 7 COMM. CLOWE: No questions. 8 CHAIRMAN COX: No questions. 9 AGENDA ITEM NO. XXVI 10 CHAIRMAN COX: All right. Item No. 11 XXVI, public comment. 12 I have no further witness affirmation 13 forms. Okay. There's no further public comment. 14 AGENDA ITEM NO. XXVII 15 CHAIRMAN COX: Are you ready to go into 16 executive session? 17 COMM. CLOWE: Yes, sir. 18 CHAIRMAN COX: Okay. At this time I 19 move the Texas Lottery Commission go into executive 20 session -- 21 A. To deliberate the duties and 22 evaluation of the Executive Director 23 B. Deliberate the duties and evaluation 24 of the Deputy Executive Director 25 C. Internal Audit Director and 0167 1 D. Charitable Bingo Operations Director 2 and 3 E. To deliberate the duties of the 4 General Counsel, pursuant to Section 551.074 of the 5 Texas Government Code 6 F. To receive legal advice regarding 7 pending or contemplated litigation pursuant to Section 8 551.071(1)(A) and/or to receive legal advice regarding 9 settlement offers pursuant to Section 551.071(1)(B) of 10 the Texas Government Code and/or to receive legal 11 advice pursuant to Section 551.071(2) of the Texas 12 Government Code, including but not limited to: 13 Cynthia Suarez v. Texas Lottery 14 Commission 15 Shelton Charles v. Texas Lottery 16 Commission and Gary Grief 17 First State Bank of DeQueen, et al v. 18 Texas Lottery Commission 19 Stansell et al. v. New Mexico Lottery 20 Employment law, personnel law, 21 procurement and contract law, evidentiary and 22 procedural law, and general government law. 23 Is there a second? 24 COMM. CLOWE: Second. 25 CHAIRMAN COX: All in favor, say "Aye." 0168 1 COMM. CLOWE: Aye. 2 CHAIRMAN COX: Aye. 3 Vote is 2-0. 4 We're going into executive session. The 5 time is 12:36 p.m. 6 (Recess: 12:36 p.m. to 1:10 p.m.) 7 AGENDA ITEM NO. XXVIII 8 CHAIRMAN COX: The Texas Lottery 9 Commission is out of executive session. The time is 10 1:10 p.m. 11 Is there any action to be taken as a 12 result of executive session? 13 (No response) 14 AGENDA ITEM NO. XXIX 15 CHAIRMAN COX: If not, the meeting is 16 adjourned. 17 (Proceedings adjourned at 1:11 p.m.) 18 19 20 21 22 23 24 25 0169 1 C E R T I F I C A T E 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, Kim Pence, a Certified Shorthand 7 Reporter in and for the State of Texas, do hereby 8 certify that the above-mentioned matter occurred as 9 hereinbefore set out. 10 I FURTHER CERTIFY THAT the proceedings 11 of such were reported by me or under my supervision, 12 later reduced to typewritten form under my supervision 13 and control and that the foregoing pages are a full, 14 true and correct transcription of the original notes. 15 IN WITNESS WHEREOF, I have hereunto set 16 my hand and seal this 8th day of August 2007. 17 18 _______________________________ 19 KIM PENCE Certified Shorthand Reporter 20 CSR No. 4595-Expires 12/31/07 21 Firm Certification No. 276 Kennedy Reporting Service, Inc. 22 Cambridge Tower 1801 Lavaca Street, Suite 115 23 Austin, Texas 78701 512.474.2233 24 25