1 1 * * * * * * * * * * * * * * * * * 2 3 4 EXCERPT FROM TEXAS LOTTERY COMMISSION 5 MEETING 6 7 JULY 19, 2006 8 9 * * * * * * * * * * * * * * * * * 10 11 12 13 14 15 16 17 THE FOLLOWING IS AN EXCERPT FROM THE TEXAS 18 LOTTERY COMMISSION meeting held on the 19TH of JULY, 19 2006, from 9:00 a.m. to 2:15 p.m., before Brenda J. 20 Wright, RPR, CSR in and for the State of Texas, 21 reported by machine shorthand, at the Offices of the 22 Texas Lottery Commission, 611 East Sixth Street, 23 Austin, Texas, whereupon the following proceedings 24 were had: 25 WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 2 1 APPEARANCES 2 3 Chairman: 4 Mr. C. Tom Clowe, Jr. 5 6 Commissioners: 7 Mr. James A. Cox, Jr. 8 9 General Counsel: 10 Ms. Kimberly L. Kiplin (NOT PRESENT) 11 12 Executive Director: 13 Mr. Anthony J. Sadberry 14 15 Charitable Bingo Executive Director: 16 Mr. Billy Atkins 17 18 19 20 21 22 23 24 25 WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 3 1 EXCERPT FROM JULY 19, 2006 2 CHAIRMAN CLOWE: Good morning. We'll 3 come to order. It's July the 19th, 2006, 9:00 a.m. 4 Commissioner Cox is here. My name is Tom Clowe. I'll 5 call this meeting of the Texas Lottery Commission to 6 order. 7 And I would like to move to item number 8 seven, report, possible discussion and/or action on 9 GTECH Corporation, including proposed acquisition of 10 GTECH, first. Director Sadberry. 11 MR. SADBERRY: Good morning, Chairman, 12 Commissioner Cox. For the record, my name is Anthony 13 Sadberry, Executive Director. 14 Commissioners, this agenda item has to 15 do with the proposed acquisition of GTECH by 16 Lottomatica, the operator of the Italian lottery. As 17 you will recall, at the Commission meeting on 18 May 17th, Lieutenant Mark Riordan and Sergeant 19 Cliff Manning of the DPS made a presentation about 20 their due diligence review of the individuals and 21 entities involved in the transaction. At that 22 meeting, you also heard from David Mattax, Division 23 Chief of the Financial Litigation Division of the 24 Attorney General's Office, and the Commission's 25 outside counsel, Patrick Thompson and Rod Edens, with WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 4 1 the law firm of Graves, Dougherty, Hearon & Moody. 2 You took no action at that May 17th 3 meeting. Today, Lieutenant Riordan and 4 Sergeant Manning are here to provide an update on 5 their investigation for the Commission's information 6 and consideration. Mr. Thompson is also here to 7 answer any questions you may have about their work on 8 this matter. 9 At this time, subject to your pleasure, 10 I would ask Lieutenant Riordan and Sergeant Manning to 11 give you their report. 12 CHAIRMAN CLOWE: Very good. 13 Good morning, gentlemen. 14 MR. RIORDAN: Good morning, sir. I 15 have some handouts that I would like to give you. 16 I'll do that through Director Sadberry. 17 CHAIRMAN CLOWE: Great. 18 MR. RIORDAN: Thank you very much for 19 inviting us this morning, once again, to present to 20 the Commission. For the record, my name is 21 Mark Riordan. I'm a lieutenant with the Texas 22 Department of Public Safety Criminal Intelligence 23 Service, stationed in Houston, Texas. 24 MR. MANNING: Cliff Manning, Sergeant 25 with the Texas Department of Public Safety Criminal WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 5 1 Intelligence Service, stationed in Houston. 2 MR. RIORDAN: As I have explained, we 3 have put together a team at the request of the 4 Commission to look at the acquisition, proposed 5 acquisition of GTECH by Lottomatica, and we have 6 presented to you in the past the -- an update on the 7 Italian company that will be doing the acquisition. 8 And we actually still have one issue to -- to be yet 9 resolved from that that we will report to you as soon 10 as we get it. But today we would like to come and 11 give you our overview of GTECH, the company that 12 currently has the contract and that will, of course, 13 be acquired, ultimately acquired, perhaps, if 14 everything works out, by the Italian companies. 15 I have a prepared statement that I 16 would like to read, and then myself and the case 17 agent, Sergeant Cliff Manning, will be available for 18 any questions that you might have. 19 CHAIRMAN CLOWE: Very good. 20 MR. RIORDAN: Criminal Intelligence 21 Service investigators began the overall investigation 22 of the Italian companies and GTECH at the end of 23 January 2006. Emphasis was placed on the Italian 24 companies first and then, subsequently, to GTECH. 25 Throughout this time, we shared the time spent on this WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 6 1 investigation with our other routinely assigned 2 organized crime and counter terrorism intelligence 3 investigations. 4 Six investigators and two civilians 5 were assigned to this investigation, and even though 6 assigned to other investigations, several of them 7 worked fairly much full-time. The team that was 8 created has a combined 145 years of law enforcement 9 and investigative experience. And over the past few 10 months, approximately 3,000 hours has been spent on 11 this investigation. 12 Now, we do anticipate that some 13 additional information may come in on GTECH and 14 De Agostini, the parent company and the majority 15 stockholder, who is anticipated to be the majority 16 stockholder of the newly-created company, and 17 Lottomatica. And we will, of course, continue to 18 inform your legal office when these items come in and 19 report them accordingly. 20 For one reason that we have -- we've 21 maintained so many contacts with the other law 22 enforcement agencies and other lottery investigators 23 that are conducting similar investigations. We 24 continue to work with them, so of course, we 25 anticipate additional information coming in and will WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 7 1 provide that. 2 CHAIRMAN CLOWE: Mark, may I ask you a 3 question at this point -- 4 MR. RIORDAN: Yes, sir. 5 CHAIRMAN CLOWE: -- because you brought 6 that subject up, and I think Commissioner Cox and I 7 are very interested in that. 8 Give us, if you would, just your 9 informal opinion of what other states and other 10 investigative activities have amounted to relating 11 what you have done, working with the Attorney General 12 and the law firm, and any other impressions about that 13 that you might have. Is this an appropriate time for 14 you to comment on that? 15 MR. RIORDAN: Yes, sir. Sure. 16 This is a -- this has been from the 17 start a team effort. We were tasked by the Commission 18 and by Lottery Commission personnel of determining the 19 character and ethics and reputation of all the 20 companies involved. The law firm that was hired was 21 tasked with doing the financial investigation. And, 22 of course, the Lottery Commission has had a lengthy 23 relationship with GTECH, so there was a lot of that 24 that was already known. What we wanted to do was make 25 sure that, in doing our investigation, that we WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 8 1 utilized the investigative efforts by other agencies 2 that we knew were also conducting an investigation. 3 So at the start, we contacted every state that we knew 4 of that had a contract with GTECH, who might be doing 5 one of these background investigations, and also 6 several countries that might be doing these background 7 investigations. And through that process, we maintain 8 and continue to maintain a fairly close relationship 9 with several of those states and countries. And so as 10 their process has continued and their background 11 investigative process has continued, so has ours, in 12 some cases, paralleling each other. 13 We do know that, of course, there was 14 a -- NASPL, the large organization that I -- I assume 15 is the same organization, the same states that have 16 the big lottery contract, has also conducted an 17 investigation. There have been a combination of some 18 states who hired outside legal counsel or outside 19 accounting firms to do the investigation. Other 20 states have done it strictly internally, such as what 21 Texas has done -- at our end of it anyway -- and other 22 states have had a combination of outside law firms and 23 internal investigations such as what Texas has done. 24 We -- we made the determination early 25 on that we would do as thorough of an investigation as WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 9 1 we could possibly do within the time limits and the 2 resources. And we had the luxury of being able to put 3 our best team members on it, our best investigators on 4 it, and we also had the luxury of giving them carte 5 blanche to spend as much time as they needed to do 6 this investigation. Part of that luxury of time came 7 from yourselves, who told us to do a good job and not 8 put a time limit on it. And so with all of those 9 parameters, we have found that since we have done this 10 investigation, that we have put in considerably more 11 time and effort than we believe anybody else. We -- 12 our interviews with company officials lasted hours, 13 several hours, compared to other agencies who simply 14 didn't take as much time and look as thoroughly as we 15 did. Consequently, we believe, at the end of the day, 16 we have probably the best handle on this pending 17 transaction and the companies involved and the people 18 involved as any agency that GTECH contracts with. And 19 I believe I'm confident in saying that, very 20 confident. 21 CHAIRMAN CLOWE: Okay. Thank you. 22 MR. RIORDAN: We know that there are 23 several states and several countries yet to do their 24 investigation that are -- for whatever reason. 25 Perhaps their contract extension isn't coming up for WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 10 1 some period of time, and so they've made the 2 determination to wait to do their background. We know 3 that other agencies perhaps have waited for Texas's 4 background to be finished so that they could use that 5 as a baseline. And so the process in other states and 6 in other countries will probably continue for another 7 year, in some cases, because of the contract extension 8 dates coming up, and so on and so forth. We expect 9 this process to be ongoing in other agencies for a 10 long time. 11 CHAIRMAN CLOWE: Very good. Thank you. 12 MR. RIORDAN: Yes, sir. 13 GTECH is a global company primarily 14 involved in the lottery business, and also involved in 15 various capacities in casinos, video gaming, 16 pari-mutuel tracks, and scratch-offs. In some 17 jurisdictions contracting with GTECH, GTECH also 18 provides commercial services through their lottery 19 terminals or networks. 20 The State of Texas has contracted with 21 GTECH for many years to provide all lottery services 22 to Texas. And as we've already reported, there is an 23 offer on the table for the Italian lottery company, 24 Lottomatica S.p.A. and their parent company, 25 De Agostini S.p.A., to purchase GTECH. And the result WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 11 1 of this purchase will be a global company that, 2 according to media reports, will control two-thirds of 3 the world's lotteries. 4 But this is a complete financial buyout 5 of GTECH by Lottomatica. The newly created company 6 will be majority owned by De Agostini S.p.A., and a 7 portion of its -- the ownership of GTECH -- or of 8 Lottomatica, will be publicly traded on the Milan 9 Stock Exchange. 10 While this is -- and as I've already 11 reported in prior discussions, while this is a 12 financial takeover of GTECH by Lottomatica, 13 De Agostini, the parent company, has designed the new 14 company so that it will be led by the current GTECH 15 management. GTECH's CEO, Bruce Turner, who has served 16 as permanent CEO of GTECH since August of 2002, is 17 expected to be the CEO of the new Lottomatica. In the 18 words of Bruce Turner, "It will be my company to run." 19 DPS Criminal Intelligence Service 20 personnel traveled extensively and conducted hundreds 21 of interviews to conduct an administrative background 22 investigation at the request of the Texas Lottery 23 Commission. DPS was tasked with determining the 24 character, reputation and ethics of GTECH as well as 25 of De Agostini and Lottomatica, since GTECH will run WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 12 1 the new company. 2 Current GTECH board members who are 3 expected to transfer to a position on the Board of the 4 new newly created Lottomatica or to a position with 5 the company are as follows: Robert Manson Dewey, 6 Junior, who is the current chairman of GTECH's Board 7 of Directors; Anthony Ruys, who is a current GTECH 8 Board member; and James Francis McCann, who is a 9 current GTECH Board member, will be independent 10 directors on Lottomatica's Board. 11 Sir Jeremy James Hanley, who is a 12 current GTECH Board member, will serve on a 13 Lottomatica executive committee, as required by UK 14 law, and is expected to become a Board member of 15 Lottomatica in the near future. 16 GTECH is governed by a Board of 17 Directors who, with the exception of Bruce Turner, are 18 all independent of the company. In contrast, the 19 planned membership of the Lottomatica's Board of 20 Directors will have De Agostini Board members in a 21 majority position. As DPS investigators have noted, 22 De Agostini Board members are involved in the current 23 Lottomatica management. Lottomatica's officers have 24 stated that no major decision is made at Lottomatica 25 without De Agostini's input. WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 13 1 Bruce Turner has stated that many of 2 GTECH's current officers have agreed to sign five-year 3 contracts to work for the newly-created company if the 4 acquisition occurs. Two of GTECH's officers, Timothy 5 Nyman and Marc Crisafulli, who are both 6 vice-presidents, declined to accept the contracts. 7 Nyman retired and Crisafulli was terminated. 8 No disqualifying criminal history was 9 located on any of the GTECH personnel interviewed by 10 DPS personnel, including those who provided disclosure 11 statements. 12 Texas is also well aware of GTECH's 13 aggressive nature with some well-known and reported 14 infamous historical and unethical events here. 15 Bruce Turner admits that their past 16 continues to follow them and will always be associated 17 with their company. He states, however, that they no 18 longer conduct their operations in an unethical or 19 questionable manner. He also reported that several 20 high-profile company officers have been fired for 21 unethical behavior and that their policy is that that 22 type of behavior is not acceptable. 23 With that said, I would like to talk 24 about Brazil. This is a complicated matter that is 25 the subject of a long-term and extensive investigation WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 14 1 by Brazilian authorities and, according to the news 2 media, by the Securities and Exchange Commission. We 3 will discuss here only a few of the many issues in 4 Brazil concerning GTECH's contract. 5 In recent years there have been 6 numerous revelations of corruption involving political 7 officials and parties in Brazil. Most of the 8 allegations involve bribery by officials of 9 state-owned companies or contractors, with the money 10 being allegedly used for political campaigns. Some of 11 the companies involved include energy companies, 12 garbage companies and gaming companies. This was so 13 prevalent that one politician interviewed in 2005 14 stated that it was "...an obligation to try to get 15 financial contributions for the [political parties] 16 from contractors." 17 These were the conditions under which 18 GTECH operated since 1997 as the only provider of 19 lottery services to Caixa, the state-owned bank that 20 runs the national lottery in Brazil. The Brazilian 21 lottery contract amounted to approximately ten percent 22 of GTECH's revenues. 23 GTECH's contention is that under these 24 conditions they did not use bribery or payoffs in 25 order to obtain contracts or contract extensions in WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 15 1 Brazil. GTECH indicated that the bribery allegation 2 against them actually was an extortion attempt that 3 was a result of political corruption in Brazil. 4 Criminal Intelligence Service personnel 5 traveled to Brazil and reviewed evidence and conducted 6 interviews with some relevant parties and witnesses. 7 Additionally, interviews were conducted in the United 8 States with various persons who have knowledge of this 9 case. 10 During March and April of 2003, GTECH 11 was negotiating for an extension of the Brazil 12 contract. Bruce Turner was the CEO of GTECH during 13 this time. GTECH ultimately won an extension. 14 Brazilian news sources reported in 2004 that GTECH had 15 been involved with individuals who had allegedly 16 solicited bribes from GTECH in order to renew the 17 contract. GTECH denied that money had ever been paid 18 in response to what they termed to be extortion. 19 GTECH indicated that it was only after 20 they were made aware of the 2004 news reports, they 21 had hired a firm to investigate the allegations, and 22 that the only output of the investigation firm was a 23 PowerPoint presentation given to GTECH's Board 24 members. When questioned about obtaining a record of 25 this presentation to the Board members, Texas Lottery WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 16 1 Commission personnel were told that the presentation 2 was not in the Board minutes nor was it able to be 3 heard on any recordings of the minutes. The fact that 4 no written report had been made was told to Texas 5 Lottery Commission personnel, and also told to 6 Criminal Intelligence Service personnel during 7 interviews with GTECH's officers and Board members and 8 during the July 13th interview with Bruce Turner. 9 That's July 13th, 2006. 10 Criminal Intelligence Service personnel 11 learned that GTECH had actually hired the firm to 12 investigate a request for a suspicious payment by a 13 GTECH employee in Brazil. This firm was hired shortly 14 after the contract extension was obtained in 2003, and 15 DPS investigators learned that the initial written 16 report produced by the firm indicated that no employee 17 of GTECH had violated the Foreign Corrupt Practices 18 Act. Later, the same firm had produced a second 19 report in 2004, in PowerPoint format, after having 20 been tasked with looking at the media allegations. 21 Multiple requests to GTECH to produce 22 all written reports that they initially denied existed 23 but have now acknowledged exist have gone unanswered 24 as of this date. 25 Another major issue surrounding the WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 17 1 contract extension in Brazil involves GTECH's 2 involvement with Rogerio Buratti, an individual GTECH 3 considered hiring as a consultant after Buratti was 4 introduced to GTECH. As Bruce Turner explained, when 5 GTECH put out the word that they were looking for a 6 Government Relations consultant, Buratti showed up. 7 It was Buratti who GTECH alleges was attempting to 8 extort money from GTECH in return for the successful 9 contract extension in Brazil. In fact, GTECH was 10 negotiating with several entities regarding their 11 contract extension in Brazil, and Buratti's attempted 12 extortion was not the only one that allegedly 13 occurred. 14 GTECH explained that they attempted to 15 vet Buratti, and they immediately learned that he was 16 not qualified as a consultant and therefore his 17 services were not utilized. 18 Criminal Intelligence Service personnel 19 learned, however, that the vetting process for Buratti 20 was not as cut and dried as GTECH had indicated. In 21 fact, according to evidence found in Brazil, the 22 April 2003 request from GTECH headquarters to their 23 vetting firm was informal and not a formal vetting 24 process. Additionally, Rhode Island personnel asked 25 that there be no trace of the informal check on WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 18 1 Buratti that could be discovered by either GTECH 2 officials or the government. 3 GTECH indicated that the vetting 4 process found that Buratti would not pass; however, as 5 stated above, there was no vetting process, so 6 subsequently no record was made on the vetting of 7 Buratti. 8 DPS investigators also reviewed 9 evidence indicating that a clean break from Buratti 10 was not made because additional meetings with Buratti 11 occurred even after the contract extension was signed. 12 This was because GTECH and their vetting firm believed 13 that Buratti may have been important enough to the 14 contract extension process that they could not 15 immediately cut off their relations with him. 16 Further, DPS investigators interviewed 17 Anfranio Nabuco, a consultant who was retained by 18 GTECH early on in the 2003 contract extension process. 19 Nabuco explained that he resigned from GTECH's employ 20 when he learned that GTECH was associating with, 21 quote, crooks, and that GTECH was holding secret 22 meetings where he was not invited. He further stated 23 that he was given no guidance in negotiations he was 24 taking part in with Caixa. Criminal Intelligence 25 Service personnel reviewed a copy of his resignation WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 19 1 letter sent to GTECH that corroborated his statement. 2 GTECH officials stated that Nabuco was terminated, 3 though no explanation for his termination was given. 4 Criminal Intelligence Service personnel 5 learned that GTECH Brazil made a November 18, 2002, 6 payment to Dreamport Brazil 1.542 million dollars. 7 That same date, Dreamport Brazil transferred the money 8 to Dreamport USA, a company in Boca Raton, Florida 9 that Bruce Turner stated was created in the mid-1990s 10 to enter into casino business opportunities, among 11 other things. Turner explained that Dreamport USA had 12 been used as a means of moving cash out of Brazil. 13 Information received by DPS investigators suggests 14 that Rogerio Buratti had an account at the same bank 15 where Dreamport USA had its account. 16 The amount of money paid and 17 transferred is also approximately the same amount of 18 money that Buratti was allegedly attempting to extort 19 from GTECH. 20 Also of note is that DPS investigators 21 were told by Bruce Turner that Dreamport USA had been 22 closed in the year 2000. On July 13th, 2006, Turner 23 explained that the fact that the company's account 24 remained active was not unusual, as contractual 25 expenses and revenue from the company often continues WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 20 1 long after they are closed. Turner continued to 2 affirm that no money was paid to Buratti. 3 In an April 19th, 2006 conference call 4 by GTECH's legal counsel, Michael Prescott, Prescott 5 indicated that GTECH had discovered an improper 6 payment that they were concerned about discussing 7 because he did not want anyone in Brazil to focus on 8 it. 9 DPS investigators discovered that the 10 improper payment referred to was made on February 11 10th, 2003, for more than 380,000 dollars, and was 12 made to the Brazilian Institute for Social 13 Development, a nongovernmental organization, known in 14 Brazil as IBDS. Criminal Intelligence Service 15 personnel learned that the Brazilian authorities were 16 aware of the payment to IBDS and that IBDS was a paper 17 company suspected to be used in Brazil as a means for 18 laundering money and making illegal political 19 contributions. 20 Our investigation revealed that the 21 head of IBDS, Fabio Rolim, has an extensive criminal 22 history in Brazil. 23 Bruce Turner explained that the payment 24 to IBDS was made at the request of one of GTECH's 25 Brazilian attorneys and that Turner did not know what WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 21 1 the payment was for. Turner stated that GTECH would 2 not pursue criminal action against the Brazilian 3 attorney because it would not accomplish anything. 4 In explaining the Brazilian incidents, 5 Bruce Turner stated to DPS investigators that some of 6 his GTECH Brazil employees may have, quote, "...flown 7 dangerously close to the sun." 8 Ultimately, Brazil has split their 9 lottery contract into four main areas that include 10 technology, communications, terminals, and supplies. 11 This new model developed by Caixa for contracting 12 lottery services resulted in increased competition for 13 those contracts. GTECH chose not to participate in 14 competing for those contracts, and it is expected that 15 GTECH will be completely out of business in Brazil as 16 early as August the 1st, 2006. Turner explained that 17 he believes that governments should not get into the 18 technology business, and that this new Caixa lottery 19 concept ultimately would not affect their company. 20 Trinidad Tobago: GTECH personnel 21 disclosed to Criminal Intelligence Service personnel 22 that the country of Trinidad Tobago discovered that 23 payments made by GTECH to Flexx Avitar, a company 24 based in California, were actually diverted to pay 25 Trinidad Tobago National Lottery Control Board WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 22 1 officials in the amount of 1.9 million dollars. These 2 alleged payments occurred between 1999 and 2001. 3 According to media reports, this is one of multiple 4 investigations being conducted in Trinidad Tobago on 5 GTECH. 6 GTECH explains that they hired Flexx 7 Avitar to provide for community programs in Trinidad, 8 and that the amount of the agreement was 2.8 million 9 dollars. This agreement was part of their lottery 10 contract extension or renewal. According to Bruce 11 Turner, Flexx Avitar came to GTECH and presented their 12 proposal to provide those community programs. GTECH 13 approached the Trinidad NLCB, the National Lottery 14 Control Board officials, who gave their approval to 15 hire Flexx Avitar. 16 Interestingly, Bruce Turner admitted 17 that there was no written contract with Flexx Avitar. 18 He also indicated that GTECH relied on their Trinidad 19 employee to oversee their agreement with Flexx Avitar. 20 No other audits occurred. 21 Board members who were interviewed 22 explained that they don't suspect that GTECH will be 23 found to have committed any wrongdoings. 24 Criminal Intelligence Service personnel 25 are aware that an independent auditor has been hired WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 23 1 by Trinidad to conduct an investigation and that 2 Trinidad has asked the Securities and Exchange 3 Commission to conduct an investigation. 4 Poland: In an effort to look at a 5 similar consultant or lobbyist relationships such as 6 Brazil and Trinidad, Criminal Intelligence personnel 7 were made aware of the consultant hired by GTECH to 8 assist them in obtaining the lottery contract for 9 Poland. This came to the attention of DPS personnel 10 while conducting interviews in Rhode Island and after 11 questioning GTECH personnel concerning co-terminus 12 contracts. GTECH personnel advised that their 13 contract with Josef Blass was a co-terminus contract, 14 though we later determined that none of the four 15 existing contracts GTECH has with Blass were based on 16 a percentage of earnings or revenue. DPS 17 investigators learned that Blass' original co-terminus 18 contract was bought out in the year 2000 for over six 19 million dollars. 20 The issue that Criminal Intelligence 21 personnel had with the Poland contract was not in the 22 wording of the contract. The issue has to do with the 23 amount of money that Blass was to get over the 24 contract's life compared with the relatively little 25 amount of work that Blass admittedly did for the WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 24 1 money. Blass stated that he never was personally 2 involved in consulting activities in Poland. He, in 3 fact, had only traveled there once recently for other 4 reasons. As we've discussed concerning the Brazil and 5 Trinidad issues, similar large payments for little or 6 no work have resulted in alleged illegal activity by 7 GTECH personnel in some countries. Similarly, also, 8 GTECH has admittedly not audited the work done by 9 Blass, just as in Brazil and in Trinidad. 10 According to Bruce Turner, only 11 Don Sweitzer, a GTECH Senior Vice-President of Global 12 Business Development and Governmental Affairs, 13 monitors and manages consultant contracts. All 14 consultant contracts are reviewed by Turner annually. 15 The largest contract between GTECH and 16 Blass was to ultimate total nearly 18 million dollars 17 over a ten-year period. Blass advised Criminal 18 Intelligence personnel that he hired two people to 19 monitor the government in Poland, which Blass billed 20 back to GTECH as expenses, but that he refused to 21 allow them to use his name in connection with their 22 duties. GTECH advised Criminal Intelligence Service 23 personnel that Blass was hired for his "name" and his 24 influence in Poland that was gained from his 25 participation in the Solidarity Movement. WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 25 1 Blass further admitted that he believed 2 that he received the contracts because he was friends 3 with a former co-founder of GTECH, Victor Markowicz. 4 Turner admitted that Markowicz had recommended to 5 GTECH that a contract be negotiated with Blass. 6 Criminal Intelligence Service personnel 7 questioned GTECH Board members about this contract, 8 especially after seeing numerous questions by Board 9 members in the review of GTECH's Board minutes. Board 10 members admitted that they knew a lot of money was 11 going to Blass for little work. Bruce Turner admitted 12 to Board members, as written in the minutes, and he 13 has also admitted to DPS personnel that he alone 14 approved Blass' largest contract. 15 After these issues were brought up to 16 GTECH's Board members by Criminal Intelligence 17 personnel, and during the July 13th, 2006 interview 18 with Bruce Turner, he stated that at his direction, 19 Josef Blass' largest contract had been recently bought 20 out for a percentage of its remaining value, said to 21 be approximately six million dollars. 22 Actually, we believe that figure to be 23 a bit higher. 24 Czech Republic: Bruce Turner was asked 25 on July 13th, 2006, about a Board of Directors meeting WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 26 1 minutes comment about the Board not wanting another 2 UK-type incident. Bruce Turner indicated that that 3 statement was in reference to the Board's concern 4 about a 20 million dollar loan from GTECH for a sports 5 stadium to be built in the Czech Republic that was 6 negotiated during the time that the Czech Republic's 7 contract with GTECH was negotiated. 8 Criminal Intelligence Service personnel 9 asked Turner for details about the 20 million dollar 10 loan and whether or not GTECH was in the business of 11 loaning money. Turner advised that this was a 12 necessary business expenditure. 13 In summarizing, I would like to bring 14 up the following major points of consideration that I 15 wanted to re-emphasize. Number one, GTECH's current 16 management is expected to be the management team over 17 the planned new company. 18 Number two, no disqualifying criminal 19 history was located on current GTECH personnel who 20 provided disclosure statements. 21 Number three, GTECH's Board of 22 Directors are currently all independent with the 23 exception of Turner himself, and according to our 24 interviews with each of them, are not familiar with 25 the day-to-day operations of the company. They rely WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 27 1 upon and accept Bruce Turner's explanations for 2 business operations. Under the newly-designed company 3 that will not be the case. Lottomatica's Board of 4 Directors is expected to have De Agostini Board 5 members as a majority influence. Only three current 6 GTECH Board members will have a place on Lottomatica's 7 planned new Board. 8 Number four, Brazil is a complicated 9 matter involving political corruption and a climate 10 that appeared to require bribes to conduct business 11 with state-owned companies. Under these conditions, 12 and fully aware of the corruption in Brazil, as the 13 head of GTECH Brazil had already acknowledged as early 14 as 2000, GTECH's contract extension was approved. 15 There is a suspicious GTECH money 16 transfer that has not been fully explained by GTECH to 17 a closed subsidiary named Dreamport USA. 18 GTECH misrepresented the output of 19 their internal investigation of this incident and has 20 not provided requested documents despite multiple 21 requests. 22 GTECH's explanations of their 23 relationship with Buratti are questionable. 24 And GTECH made a questionable payment 25 to IBDS, a suspect organization in Brazil that has WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 28 1 also not been fully explained. 2 Number five, GTECH blames one of their 3 contractors for the alleged illegal activity in 4 Trinidad Tobago. They also state that their Trinidad 5 Tobago employees should have watched this company 6 closer. Criminal Intelligence Service personnel note 7 that GTECH entered into an agreement for 2.8 million 8 dollars with this company with no written contract. 9 Number six, Josef Blass, a consultant 10 hired for his influence in Poland and whose largest of 11 four contracts was recently bought out by GTECH, 12 admittedly did little or nothing for that 18 million 13 dollar contract. 14 Number seven, GTECH's willingness to 15 loan 20 millions dollars to help finance a sports 16 stadium in the Czech Republic that was described by 17 Bruce Turner as a necessary business expenditure, 18 appears to be completely outside the normal business 19 activity of GTECH; however, is evidence to their 20 aggressive contractual negotiation behavior. 21 Number eight, GTECH's past management 22 style indicates their willingness to spend large 23 amounts of money for consultants with little or no 24 audit process and no accountability for consultant's 25 actions. WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 29 1 Number nine, GTECH's operating style is 2 very aggressive and contracts will likely continue to 3 be pursued by the newly-planned company in the current 4 GTECH manner since GTECH will manage the new company. 5 And, number ten, ultimately, GTECH is 6 likely continue to take the position that they are the 7 only company that is capable of providing lottery 8 services for the State of Texas. 9 At this time, we'll be available for 10 any questions that you might have. 11 COMMISSIONER COX: This is a remarkable 12 report. 13 CHAIRMAN CLOWE: It is indeed. 14 COMMISSIONER COX: What are your 15 observations, Mr. Chairman? 16 CHAIRMAN CLOWE: Well, I'm concerned 17 about it. I would like to call on Mr. Mattax, who is 18 in the Office of the Attorney General, and has been 19 here in the office -- in the audience and heard this 20 report, and is our attorney, for his reaction. 21 MR. MATTAX: Good morning. My name is 22 David Mattax. I'm the Chief of the Financial 23 Litigation Division at the Office of the Attorney 24 General. 25 Well, as the Chairman has noted, there WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 30 1 are concerns that this report does raise with respect 2 to the methodology that GTECH has apparently employed 3 in the past. And I think that my observations would 4 be two. One, these investigations are ongoing in the 5 various -- in Brazil, there are apparently SEC 6 investigations ongoing, the results of which may or 7 may not result in any criminal indictments or criminal 8 charges. At this stage, no criminal charges have been 9 levied. But I think it's something, particularly if 10 the transaction is consummated with Lottomatica and 11 with the De Agostini group, that we -- this Lottery 12 Commission should watch and should basically caution 13 the new owners, frankly, of GTECH about, that we will 14 be watching this. That we anticipate, based on the 15 representations that have been made to the Department 16 of Public Safety by De Agostini group that this is not 17 the way they do business, that we would anticipate 18 that things of this nature would not occur in the 19 future. And I would ask, again, the Department of 20 Public Safety to comment on their conversations with 21 some of the Lottomatica folks with respect to at least 22 the assurances I think we've gotten that this type of 23 behavior is not what they plan. If that's the correct 24 statement. 25 MR. RIORDAN: If you want to comment. WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 31 1 MR. MANNING: One of the -- one of the 2 things I found interesting in my interviews with the 3 De Agostini group is, they fully believe that 4 everything that we have discussed occurred before the 5 Bruce Turner regime took over, which is not the case. 6 They have a very positive opinion of Bruce Turner, and 7 I believe they are going to allow Bruce Turner to 8 continue to run the company as it has run due to their 9 belief that he runs a very tight operation. And 10 things will continue to run the same unless something 11 happens, again of this nature, where Bruce Turner is 12 the CEO. At that time, they may take action, but 13 until that occurs, I feel that De Agostini is going to 14 continue to allow Bruce Turner to run the operation 15 and has voiced that in the interviews that I had with 16 them. 17 MR. RIORDAN: And if I may say 18 something also. In our discussions with Mr. Turner, 19 as I state in here, he has assured us that that type 20 of behavior is not currently acceptable by the 21 company. And in -- in discussions about our report, 22 and when we had Mr. Turner at our offices on 23 July 13th, we went over every one of these points with 24 him. He knew very well exactly what we were going to 25 say. My discussion with Mr. Turner was that I believe WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 32 1 at some point, you will probably be asked to -- to 2 acknowledge what you're doing to make sure this does 3 not happen again. And I believe that is -- that would 4 certainly be something that needed to happen at some 5 point. 6 MR. MATTAX: And if I could follow up 7 on that. And I think as is apparent from the 8 thoroughness and the depth of the investigation that's 9 been performed by the Department of Public Safety, it 10 should be apparent to GTECH that we are watching, and 11 that we're going to continue to watch what they're 12 doing, and that should additional things occur, which 13 they've now made representations that, you know, these 14 things are -- types of things are not going to happen 15 in the future, that we will expect them to make sure 16 those things don't happen and that we will continue to 17 be watching. So I think that, like I said at the 18 outset, nothing criminal has been -- you know, no 19 one -- Mr. Turner or anyone like that has not been 20 indicted, but the very fact that we've done an 21 investigation of this depth and confronted GTECH with 22 it, you know, establishes the fact that we are going 23 to be watching them. They've made representations 24 this won't happen again in the future, and I think 25 that, as Lieutenant Riordan said, we need to hold them WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 33 1 to that word. And my recommendation would be that we 2 continue to have DPS, to the extent possible, do some 3 monitoring and then following-up investigations with 4 other states and with other governments that they've 5 been working with. 6 MR. MANNING: Mr. Chairman, on that, 7 I've had some very lengthy considerations with the 8 officers at GTECH, and the firm that was hired to do 9 the investigation on Brazil by GTECH recommended 10 several changes be made by GTECH to enforce some of 11 the policies that they had in place and expand some of 12 those policies. And GTECH has taken those steps to 13 expand those policies. I think that it's still yet to 14 be determined whether or not they work, but several 15 changes have been made at GTECH to oversee some of 16 their contracts and many of their contracts with the 17 consultants. And Board approval is now required on 18 the majority of the consultant contracts that GTECH 19 enters in with them. 20 COMMISSIONER COX: Mr. Chairman, I 21 thought that we had been assured in 2002 by Mr. Turner 22 that things like this would not happen on his watch, 23 and I think I hear DPS saying that they have happened 24 on his watch. I don't know exactly where to go with 25 that, because they report there have been no WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 34 1 convictions, maybe not even any criminal charges, but 2 they've happened. Where does that put us? 3 CHAIRMAN CLOWE: Well, I think that's 4 the question. And as I said, I think the report is 5 concerning. 6 The nonresponsiveness of GTECH is 7 something, Mark, that you have mentioned more than 8 once. And I would like to ask for your opinion in an 9 attempt to begin to answer Commissioner Cox's 10 question, why you feel you run into that situation and 11 what is the resolution of that situation, if you see 12 any. 13 MR. RIORDAN: The -- let me say that, 14 initially, our ability to gather information, talk 15 candidly with the Italian companies, was very good, 16 and remains good. Our ability to do that, to talk 17 candidly and to get whatever we wanted from GTECH has 18 not been as good. The withholding information refers 19 to documents that were prepared in an investigation by 20 the law firm, and I suspect that perhaps not everyone 21 knew that the documents were created. But they have 22 been acknowledged as existed. They've been 23 acknowledged to Attorney General Mattax, and -- who 24 has requested them. They were promised. We requested 25 them from -- again from their legal staff. They were WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 35 1 promised. We requested them from Mr. Turner, on the 2 13th, and we haven't seen them yet. So if I had to 3 make an opinion of the issue, I would say there may be 4 an issue on their part with some type of, perhaps, 5 organization or proprietary information that may be in 6 that document, maybe some other type of confidential 7 business information that may be in those documents 8 that they're not willing to -- to let out. But 9 they've been promised to us. We still don't have 10 them. 11 CHAIRMAN CLOWE: They have been 12 promised. 13 MR. RIORDAN: They have been promised. 14 MR. MANNING: And initially, those 15 documents were denied to ever exist, period. And we 16 later determined, through our investigative process, 17 that there was actually multiple documents. And once 18 we determined their existence and those documents were 19 actually viewed, it was later -- they were later 20 formally requested multiple times. But they 21 originally denied that they ever existed. 22 COMMISSIONER COX: And, Cliff, do you 23 believe that they denied it because they didn't know 24 they existed, or do you believe that they were not 25 telling you the truth -- WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 36 1 MR. MANNING: Initially, I may have 2 believed that. But in reviewing their Board minutes, 3 the Board of Directors request several times to see 4 the written report. 5 COMMISSIONER COX: So you -- you 6 believe they were not telling you the truth. 7 MR. MANNING: Yes, sir, I do. 8 COMMISSIONER COX: And I see in your 9 report, Mark, that you say, GTECH indicated that the 10 vetting process found that Buratti would not pass. 11 However, as stated above, there was no vetting 12 process. 13 MR. RIORDAN: Yes, sir. That's 14 correct. 15 COMMISSIONER COX: That looks like 16 another instance where they didn't tell you the truth. 17 MR. RIORDAN: Well, it's another 18 instance where they misrepresented the vetting 19 process. In our opinion, when you say "vetting 20 process," you mean the formal process of vetting 21 someone, where records are kept. And, in fact, the 22 process they used was informal, and they actually 23 requested that no record be made that can be traced 24 back to either the government or to their own 25 officials, their own GTECH officials. WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 37 1 COMMISSIONER COX: So that could have 2 been a case -- could -- put it this way. Could that 3 have been a case in which they thought a vetting 4 process was one thing and you thought it was something 5 much more stringent? 6 MR. RIORDAN: If I were them, I would 7 use that argument, yes, sir. 8 COMMISSIONER COX: Thank you. 9 CHAIRMAN CLOWE: As we get into this, I 10 want to point out for the record that item number 11 eight on the agenda, Commissioner Cox, allows the 12 Commission, should they so decide, to go into 13 executive session to discuss this contract. My sense 14 is that it ought to be discussed in the public. And 15 I'm very comfortable with the discussion we're having 16 now, but I would like to call everyone's attention to 17 that. Those of you gentlemen with the Department of 18 Public Safety, the Attorney General, and the law firm, 19 so that if at any time we reach a point in this 20 discussion in the future, that option is open. As I 21 said, I prefer, and I believe Commissioner Cox does, 22 too, to have this discussion in the public, but I want 23 to -- 24 COMMISSIONER COX: Yes. 25 CHAIRMAN CLOWE: -- point that out to WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 38 1 you. I don't want to put you in a position in this 2 public discussion that you don't want to be in and, 3 legally, you shouldn't have to be in. 4 Having said that, Mr. Mattax, I would 5 like to turn you. I view you in these proceedings as 6 our attorney. And I would like to ask for guidance 7 from you. You made the comment that there have been 8 no indictments, and Commissioner Cox amplified on 9 that, and that this investigation is ongoing. My 10 sense at this time is that we are not finished with 11 this subject. There is more to be done and there may 12 be conclusions to be reached at some point in time in 13 the future when more information is determined. I 14 think we would like your guidance in this regard and a 15 suggested course of action. 16 MR. MATTAX: Yes. Chairman, I think 17 that's a fair assessment, and I think that where we 18 would start would be -- you know, GTECH has said that 19 they -- you know, again, although I think they've said 20 this a couple of years ago as well -- but they do now 21 have more formal proceedings so that the types of 22 issues that have been discussed today won't happen in 23 the future. That information has been sent to me and 24 I have reviewed it. And so I think that would be step 25 number one is, basically, get with GTECH and say, you WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 39 1 know, you have said these are the processes you are 2 going to have in place to prevent these things from 3 happening again in the future. Are you going to use 4 them, and follow up and make sure they are used in the 5 future. Because that's the fundamental issue with 6 respect to GTECH, if you have a corporate culture that 7 is designed to prevent these things from happening, 8 then it's unlikely they'll be repeated in the future. 9 If you have a corporate culture that is paying lip 10 service to this, and that's not, in fact, intent on 11 issuing -- on the safeguards to make sure it doesn't 12 happen again in the future, then it'll probably be 13 repeated. And I think that's fundamentally what is 14 key here in this transaction or in this situation is 15 making sure the representations that have been made 16 about the processes that GTECH is going to have in 17 place to prevent this from happening in the future 18 actually are in place. And I think that's number one 19 where the assurance needs to be -- to come from. I 20 think that's the most important. 21 Secondly, I would agree that I think 22 the investigations are going to be continuing. It's 23 not just our investigation but, you know, Brazil is 24 pursuing things, and the SEC is pursuing things. And 25 I think we need to follow those and to the extent that WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 40 1 additional information comes out or things get more 2 serious, then that could result in action needing to 3 be taken by this Commission. 4 At this point, I think the information 5 is troubling, but I don't think it rises to the level 6 of requiring any specific action by the Commission 7 other than, as I said, you know, perhaps sending a 8 letter back to GTECH saying, you know, here are the 9 processes that you have said are going to be 10 implemented to prevent these actions from happening 11 again in the future and we expect you to fully comply 12 with those. And like I said, then continue with 13 the -- monitoring the investigations, and if 14 additional information comes forward, bring it back to 15 the Commission. But I think that's where we need to 16 be right now. 17 COMMISSIONER COX: David, as you do 18 that, would you look also at what representations 19 they've made to us in the past, formally or 20 informally, because I believe that Mr. Turner told us 21 when he became CEO that this was part of the history 22 of that company and these things would not happen on 23 his watch. And if, in fact, he told us that and they 24 have happened on his watch, I'm going to be real 25 concerned about his credibility that this time we've WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 41 1 really changed. 2 MR. MATTAX: Well, I'll do that. I 3 don't think I focused particularly on that aspect, but 4 I think we should go back and review the records and 5 see what has been said and compare that with what the 6 Department of Public Safety has found, and perhaps 7 then ask him for an explanation. And we certainly can 8 report back to the Commission with respect to what we 9 find in that regard. 10 COMMISSIONER COX: Good. 11 CHAIRMAN CLOWE: Director Sadberry, do 12 you have a comment? 13 MR. SADBERRY: Chairman, I have a 14 comment that concurs entirely with the observation I 15 have heard from you and Commissioner Cox, and that is 16 from an overall standpoint. From the agency, we are 17 very comfortable and confident in the configuration of 18 the team and the process that has been carried out by 19 this team that has been assembled. We're privileged 20 and fortunate in that respect, in my belief, that 21 we've been able to have access to the best resource 22 available to the agency for this purpose. And as you 23 have indicated in prior meetings, it is our intent, to 24 the extent protocol permits, to continue this assembly 25 and this process, to carry it to its logical and WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 42 1 ultimate conclusion, wherever that might lead. It is 2 my intent, as I have personally interacted and 3 interfaced with GTECH and Mr. Turner in this process, 4 as well as our team members and his staff, to see that 5 every aspect of any issue that has been raised is 6 followed in a legitimate way and in a way that gets to 7 the information that is helpful and appropriate to the 8 Commission to make any decisions and determinations 9 that it -- you might at some point deem appropriate. 10 You asked earlier that lieutenant -- 11 Sergeant Riordan comment further on the work that is 12 being conducted by other agencies or combinations of 13 consortiums, and we are mindful of that process in 14 other states, other consortiums, and we are in the 15 process of making certain that we use every avenue 16 available to this agency to pursue, through our team 17 as well as our own resources, in obtaining any 18 information that might be available to which we are 19 entitled through legal means to obtain. So put 20 simply, we are at the switch. We recognize and -- the 21 importance of all of this and are mindful of it. 22 The specific matter before you, which 23 came in the making of the Lottomatica transaction, 24 which is the matter that we wanted to be certain that 25 you have received a full and complete report from our WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 43 1 team in that respect as it proceeds to -- or it 2 appears from all indications we've had -- ultimate 3 conclusion that it will occur. That process is one 4 thing. That's this particular item on the agenda. As 5 you point out, we have other matters under our 6 contract that can come before you and may come before 7 you in future meetings that this is the beginning 8 process in that regard to give you a baseline of 9 information to alert you what we believe you should 10 know and to give you the opportunity of indicating any 11 direction you wish us to take, or to indicate where 12 you might feel we stand in that regard. And that 13 would be agenda item eight as we pointed out. 14 So with that, I would say, from the 15 agency's standpoint, we are pleased with the process 16 and appreciative of the team effort and feel that you 17 have received, for your benefit, the best there is to 18 offer from the investigative process of this entire 19 matter. 20 CHAIRMAN CLOWE: Mr. Thomas, we have 21 not heard from you. Do you have any comments for us? 22 MR. THOMPSON: Commissioner, I'm 23 Patrick Thompson with Graves, Dougherty, Hearon & 24 Moody. And there are just two points that I would 25 like to make, having listened to the discussion this WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 44 1 morning. One is that very often when you read in the 2 media about a situation where some company is alleged 3 to have paid bribes to a government in order to get a 4 contract, that investigation comes out of the fact 5 that the product itself has turned out to be defective 6 or insufficient. And that's not the case here. 7 The -- we have not seen any evidence in our 8 investigation and I'm not aware of any evidence 9 discovered by the DPS in its investigation that GTECH 10 has delivered substandard or deficient products to the 11 companies -- to the countries that it has contracted 12 with but, in fact, the reputation of GTECH is a 13 company that actually has a high degree of proficiency 14 in delivering complex, reliable systems that perform 15 according to their specifications. So the issue here 16 is not one of where some sort of artifice was used to 17 put a product that was insufficient in place or one 18 that had not been sufficiently evaluated. The issue 19 here is the behavior of the company. The -- as you 20 know, under the Foreign Corrupt Practices Act, the 21 position of the United States is that while people may 22 contend that in other parts of the world certain types 23 of payments that would be considered improper here are 24 just part of the regular course of doing business, but 25 under the Foreign Corrupt Practices Act, the United WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 45 1 States has made the statement that if you do business 2 here, you will not do -- do not do business in that 3 manner elsewhere. And so the -- so all of that is 4 important to the examination of GTECH. 5 In the contract negotiations with GTECH 6 that I participated in, the Lottery Commission has 7 always heavily emphasized the obligation that the 8 Lottery Commission has under the law to keep the 9 lottery operating in a way that is beyond reproach. 10 And in those negotiations, it has been emphasized to 11 GTECH that it's important even to avoid the appearance 12 of impropriety. That it goes beyond actual strict 13 adherence to the law, that the parties have an 14 obligation to avoid the appearance of impropriety. 15 Payment of large sums of money to 16 consultants who perform very little work gives rise, 17 in some cases -- on occasions to suspicions that -- 18 that the money doesn't stop with that consultant, that 19 it's going elsewhere, and that somehow that could 20 potentially be a vehicle for making improper payments 21 to decision-making personnel. And I'm not making the 22 accusation that that has happened here, but to 23 continue the practice of making large payments to 24 consultants for -- and then not auditing their 25 performance or not reviewing the tasks that they WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 46 1 actually perform for those large sums of money is 2 potentially an issue with respect to this issue of the 3 appearance of impropriety. 4 And so one of the options that would 5 seem available to you -- and I support everything that 6 Mr. Mattax has said today in terms of the proper 7 course of action -- is that possibility that the 8 Lottery Commission of Texas and the other lotteries in 9 the United States, for example, those associated with 10 NASPL, could use their bargaining power to reform the 11 company if the company needs reforming. And that 12 would include amending practices that lead to the 13 appearance of impropriety. 14 As Mr. Mattax said, there are ongoing 15 investigations and those will either lead to 16 indictments or convictions or they will not. Whether 17 they do or not still leaves open the issue of whether 18 the company has engaged in behavior that gives rise to 19 suspicions or -- and that it is one of your rights 20 under your contract to deal with the company on that 21 issue and, most likely, a similar right under numerous 22 other state lottery contracts with GTECH. 23 So what I'm saying is that the -- that 24 as long as the product itself is not defective and 25 there is an interest in continuing to do business with WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 47 1 a company that is capable of delivering a reliable 2 product, then an alternative course of action to you, 3 other than looking for a replacement, is to use your 4 ability, with your contract and your marketability, to 5 persuade the company to adopt practices that will 6 avoid in the future even the appearance of 7 impropriety. And so I don't know if you -- it is up 8 to you to decide whether that is a sufficient course 9 of action or whether it's likely to bear fruit, but it 10 appears -- it seems to me that it's one of the options 11 available. 12 And I just wanted to avoid a possible 13 misimpression, leaving here, that what we're talking 14 about here is some sort of trick or artifice that was 15 used by GTECH to -- for example, to obtain the Texas 16 contract. My understanding is, the performance of 17 GTECH under the contract, while there are issues that 18 the Commission has raised and continues to raise with 19 GTECH on a regular basis, that there isn't an 20 accusation here that GTECH misrepresented itself with 21 respect to obtaining that contract. And though -- not 22 with respect to obtaining it, though there could be 23 issues ongoing as to whether some of these things 24 should have been disclosed to you. 25 What it all amounts to is the fact that WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 48 1 you have the right under your contract to monitor 2 GTECH very closely. You have the right of access to a 3 great deal of information about the company and its 4 operations. And -- and you can exercise that right to 5 help persuade the company to adopt practices that may 6 cause you to have less concern in the future about the 7 behavior of the company, and maybe increase their 8 transparency to your investigators, so that in the 9 future your investigators don't have to work for 10 several months to get the answers to their questions. 11 COMMISSIONER COX: Patrick, you were 12 engaged to help us -- help the Texas Lottery negotiate 13 the contract with GTECH, weren't you? 14 MR. THOMPSON: Yes, sir, I was. 15 COMMISSIONER COX: Do you recall, when 16 that contract was being negotiated, whether we 17 received assurances that these things of things would 18 not occur in the future? 19 MR. THOMPSON: The attorneys that I was 20 dealing with directly in the contract negotiations, 21 those issues didn't come up. We were dealing with the 22 terms of the contract itself. However, my 23 understanding was that at that time, there were higher 24 level meetings going on between representatives of 25 GTECH and people from the Lottery Commission, where WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 49 1 those representations were being made. That is, that 2 the -- that some of very publicized incidences in the 3 past, including Great Britain and Ireland, that those 4 were done by people who were no longer with the 5 company and that the company's practices had changed. 6 COMMISSIONER COX: What -- what kind of 7 Sarbanes-Oxley requirements might be involved and 8 might have already required that these controls be in 9 place? Compliance with laws, I think, is certainly an 10 important part of any corporate governance structure, 11 and these seem to be -- there seem to be questions 12 that Mark and Cliff are raising as to whether these 13 acts are, in fact, legal. 14 MR. THOMPSON: The -- one of the issues 15 that we have been dealing with in the course of this 16 review is the -- what changes will occur as a result 17 of GTECH no longer being a publicly-traded corporation 18 in the U.S., which is going to be one of the end 19 results of this transaction. And, certainly, in terms 20 of monitoring by the SEC and rights of U.S. 21 shareholders of access to information about the GTECH 22 Corporation itself, those will be radically altered. 23 The -- we have attempted to address 24 those issues by notifying GTECH that the Texas Lottery 25 Commission is going to exercise its rights under the WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 50 1 contract to demand continuing access to certain items 2 of information that it may lose access to under normal 3 circumstances as a result of the company no longer 4 being publicly traded. Certainly, there is no doubt 5 about it, that GTECH is subject to the Foreign Corrupt 6 Practices Act, and it is now and will continue to be, 7 after this transaction, though jurisdiction for 8 enforcing it or prosecuting GTECH could change from 9 the SEC to the Department of Justice as a result of 10 this transaction. So there is no doubt that they are 11 subject to these laws. 12 With respect to their obligation to 13 divulge information to shareholders, that -- that is a 14 little bit more complicated question, and if you're 15 interested in the answer to it, we'll be happy to 16 prepare a report for you on it. But it involves the 17 fact that GTECH will be part of a corporation which is 18 traded on the Milan Stock Exchange. And then 19 De Agostini, which of course holds controlling 20 interest, is not a publicly-traded corporation 21 anywhere; it's privately held and fairly closely held. 22 So I -- I don't know that we can count on the statutes 23 in the United States that give people rights of access 24 to information about the affairs -- the internal 25 affairs of the company as much maybe as you can rely WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 51 1 on your contractual relationship with them for access 2 to that information. But if you want to know what 3 information you will continue to have simply by virtue 4 of GTECH being a company that operates in the United 5 States, we'll be able to provide that for you. 6 COMMISSIONER COX: Well, I think the -- 7 I'm intrigued by your idea that this is not a question 8 of defective product, but maybe a defective process 9 back in Rhode Island and that maybe one can be fixed 10 and the other, therefore, we can continue to avail 11 ourselves of. But I think we're on a slippery slope 12 here when we say, well, if you just tell us that 13 you're going to be good folks in the future that we'll 14 just buy into that, unless we have a way of monitoring 15 that or we know that someone is monitoring that. So 16 as I ask that as y'all go forward you consider how 17 much reliance we can actually place on the assurances, 18 whatever they may be, that we receive because of the 19 lack of visibility and transparency here. 20 MR. THOMPSON: Yes, sir. That's an 21 excellent point, and I do think it's a very legitimate 22 issue at this point, to what extent you'll be able to 23 rely on their representations that practices have 24 changed, or even if they implement new practices and 25 the extent to which we'll be able to rely on the WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 52 1 belief that the -- that they will be enforced. And 2 increase methods of monitoring the company may be 3 appropriate under those circumstances. It's -- that's 4 one of the decisions that is for you to make. 5 COMMISSIONER COX: Thank you, 6 Mr. Chairman. 7 CHAIRMAN CLOWE: I'll try to sum up my 8 thinking. Perhaps I can speak to some extent on 9 behalf of Commissioner Cox and Director Sadberry. 10 I am most appreciative to each of you 11 and to the three entities you represent for the 12 thoroughness and the thoughtfulness of the work that 13 you've done. 14 Lieutenant Riordan, especially I want 15 to tell you how much I appreciate in your report all 16 of it, but the summation of the major issues. I think 17 that you have done an excellent job of stating the 18 things that we need to be focused on, and I'm 19 appreciative of the effort that went into the 20 summation as you have crafted the verbiage. I think 21 that you hit on the things that are of concern to this 22 Commission. 23 You have mentioned management style, 24 and aggressive style for obtaining contracts, and 25 being less than forthcoming, and those are the things WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 53 1 that have certainly come to the level of attention 2 that I think we have our concern about. And I -- 3 although I say I'm concerned about this, I am at the 4 same time appreciative of it, and the work that you've 5 done and that we hope you'll continue to do. 6 I think Commissioner Cox has properly 7 expressed the thought that we felt like, some time 8 ago, we were at the point, Patrick, where you say, you 9 know, we need to get to of saying, everything is in 10 the past and then we're going to go forward and 11 everything is going to be just right. And I -- that's 12 a question that clearly is in his mind and my mind, 13 just where are we with Mr. Turner and with GTECH. 14 And I am mindful of your comments, 15 Mr. Mattax, that, you know, we have a situation here 16 where we need to be in balance. We are not a 17 prosecutor, we are not a -- a judge, and there are 18 worldwide indications here of activity, but we are 19 concerned about our responsibilities and our rights 20 within our contract. 21 My sense is that we must pursue this 22 and that we must continue to communicate with 23 Mr. Turner, and I think -- I think that is your role, 24 Director Sadberry, and to ask for responses and 25 probably to have him here at a point in time to WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 54 1 discuss this in the open and to hear what a person of 2 his position would say to the questions that you have 3 raised and that we now have in our minds. And we have 4 a responsibility, as I see it, to the people of Texas, 5 to pursue this matter and to reach a level of 6 confidence or satisfaction that where we are is where 7 we should be. 8 And I think it's particularly 9 important, Lieutenant Riordan, as you pointed out, 10 that Lottomatica and the Italian personnel were very 11 forthcoming. You didn't get that level of response 12 with GTECH. But GTECH is to be the surviving entity 13 of this acquisition and merger, and that culture which 14 exists in that entity in the United States, in the 15 state of Rhode Island, I assume, from everything we 16 have had as an indication, will be the surviving 17 culture. And I think that's what we're focused on. 18 We're not focused on the points that you properly 19 made, Mr. Thomas, about the performance. We're not 20 seeking failure-to-perform criteria. We're looking at 21 a culture of how this entity does business. And 22 that's important to us. That's important to the State 23 of Texas and to the people that we have to look after 24 as far as defending their rights in a contract that we 25 put into place on behalf of this agency. WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 55 1 So I would say, thank you very much. I 2 think we're, as a group, very impressed with the 3 thoroughness of the work that you have done in this 4 project. With your continued devotion, all three of 5 you in your roles, have helped us tremendously and I 6 hope you'll continue to do that. 7 Mr. Mattax, I think at this point, 8 we're looking to you to work with Executive Director 9 Sadberry to carry it forward and to keep us advised. 10 MR. MATTAX: Very good. We'll proceed 11 along those lines. 12 CHAIRMAN CLOWE: Anything further on 13 this subject? Let's take a short recess. 14 (RECESS.) 15 16 17 18 19 20 21 22 23 24 25 WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363 56 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, BRENDA J. WRIGHT, Certified Shorthand 7 Reporter for the State of Texas, do hereby certify 8 that the above-captioned matter came on for hearing 9 before the TEXAS LOTTERY COMMISSION as hereinafter set 10 out, that I did, in shorthand, report said 11 proceedings, and that the above and foregoing 12 typewritten pages contain a full, true, and correct 13 computer-aided transcription of my shorthand notes 14 taken on said occasion. 15 Witness my hand on this the 20TH day of 16 JULY, 2006. 17 18 19 BRENDA J. WRIGHT, RPR, 20 Texas CSR No. 1780 Expiration Date: 12-31-06 21 WRIGHT WATSON & ASSOCIATES Registration No. 225 22 Expiration Date: 12-31-07 1801 N. Lamar Boulevard 23 Mezzanine Level Austin, Texas 78701 24 (512) 474-4363 25 JOB NO. 060719BJW WRIGHT WATSON & ASSOCIATES (800) 375-4363 (512) 474-4363