District’s online gambling venture clouded

September 19, 2011

The District was supposed to launch a Web site this month allowing people to play poker for money, the first jurisdiction in the country to try to grab some of the millions of dollars that pour out of American living rooms and into online casinos overseas.

Proponents of the District’s Internet gambling venture envisioned a fresh draw for tourists, crucial new revenue and a pioneering role in the history of American betting.

What the city got instead was a lesson in the risks of trying to play casino boss in a place where even the traditional lottery has proved to be a messy enterprise.

Tucked into a budget amendment late last year, the District’s authorization for online incarnations of blackjack and Texas hold ’em was passed at the urging of council member Michael A. Brown (I-At Large), without the normal debate or scrutiny.

Now, as the District tries to finalize plans for putting government-sanctioned online gambling into households and hotels, a host of issues has clouded the venture’s prospects, and the underlying lottery contract has drawn the attention of the city’s inspector general, according to interviews and government documents.

Some council members have expressed concerns, and Tommy Wells (D-Ward 6) and Phil Mendelson (D-At Large) were planning to introduce a bill Tuesday to repeal the gambling effort.

One issue is that District officials did not put the city’s online gambling business out for competitive bid, unlike similar government-approved efforts in places such as Canada and Finland. Intralot, a Greek-owned lottery contractor, was granted the multimillion-dollar opportunity to run the online casino when it won a fierce competition to run the city’s traditional lottery system.

David Umansky, a spokesman for the Office of the Chief Financial Officer, which oversees the lottery, said it made sense not to run a competition to find a separate online gambling vendor. Major contractors with competing interests are often “at each other’s throats” and would heap blame on each other if the gambling system crashed, Umansky said. “With one platform, we don’t have to worry,” he said.

City’s approach questioned

A former top federal procurement official questioned the city’s approach.

“The online gambling thing is outside of the scope here. That should have been done separately,” said Steven L. Schooner, who worked in the White House’s Office of Federal Procurement Policy. “It seems disingenuous to embark upon that kind of enterprise without at least testing the competitive marketplace.”

Another potential problem is that provisions in the written agreement between the District and Intralot contain possible ambiguities on how the city and company will split millions of dollars in gambling proceeds. Those provisions could come into play if the relationship sours between the contractor and the District.

Although Intralot said it has already spent millions of dollars developing the District’s online gambling system, it is still considered an option in the contract that the city has not formally exercised, and the language can be changed, city officials said. “I’m not worried about it,” said Buddy Roogow, the executive director of the lottery.

From New Jersey to California, some state officials see online poker and other games as a balm for their economic woes. Lottery operators, eyeing Internet-savvy customers, see online gambling as a way to avoid becoming another brick-and-mortar cautionary tale. Traditional gambling powerhouses like Las Vegas casinos want in as well.

The U.S. Justice Department has long held that Internet gambling is illegal, but advocates in the District argue that keeping betting within the city limits avoids federal restrictions.

In the District, the debate began to simmer this spring and summer. Critics pointed to Brown’s work at a law firm with a gambling practice, but he denied a conflict. Brown, who has since left the law firm, cited his concern about budget cuts affecting the poor and the risks to players on offshore sites.

Lottery officials say they are awaiting guidance from the council.

A foothold in the potentially vast U.S. online gambling market would be a big win for Intralot.

Economic turmoil in Europe, and news that Intralot executives had come under investigation in connection with a contract in Greece, have sliced the company’s stock price in half since late May. Intralot said earlier investigations have established the “absolute legality” of the relevant agreements.

The District is “a very important place to do business and have on your resume,” said Byron E. Boothe II, head of government relations for Intralot’s U.S. subsidiary.

Other groups around the world, including a large government-backed charity in Finland and lotteries in Canada, put their online gambling contracts up for competitive bid.

In the District, there was no weighing of online gambling proposals against one another, said Joseph Giddis, the contracting chief for the project. Officials also did not try to learn from outside experience when crafting the gambling deal with Intralot, Giddis said.

“There’s nothing in the states. . . . I wouldn’t want to have an evaluation committee look at D.C. and try to evaluate it against what’s happening in Italy or Canada or anyplace else,” Giddis said.

After Intralot won a bid for the broader lottery contract in 2008, the council delayed approving it and finally killed it. Objections had been raised about the business dealings of Intralot’s local partner.

Intralot considered suing but decided to bid again. It tried to find a local business partner but ended up competing alone, even though teaming up with a local firm weighs in a bidder’s favor. Still, Intralot won, and once again it was up to the D.C. Council.

Boothe, of Intralot, said the council made clear the company needed to work with a local firm or it would fail again.

Last-minute deal

Days before the council vote, Intralot signed a deal with a District-based consulting company called Veterans Services Corporation. Intralot agreed to give Veterans Services a 51 percent stake in a new company, DC09, set up to “perform the obligations” of the lottery contract, records show.

Veterans Services is owned by Montgomery County businessman Emmanuel Bailey and his mother Barbara, who was a longtime District employee. The company was established months before the Intralot deal was signed.

In written testimony submitted to the council, Bailey introduced himself as the “proud son of Barbara Bailey, who dedicated 25 years of her professional career” to District residents and employees.

The council approved the contract.

Peter J. Nickles, who served as the District’s attorney general during the period, said he was troubled by the process. Concerned that a company “unknown during the contract proposal vetting process” ended up with a majority stake in the effort, Nickles and the city’s top procurement officer jointly called for an investigation by the city’s inspector general in July 2010.

The message the council appeared to be sending the outside world was that “unless you have your political ducks in a row, you can forget about” getting city business, Nickles said recently.

“It’s more than odd,” he said. “I think it’s illegal and corrupt and everything else.”

The city had a laudable goal of trying to break the “glass ceiling” for District businesses, Boothe said, adding that Intralot is happy to have joined with Bailey.

“Nobody told us if we didn’t pick this guy we’d lose the contract,” Boothe said. “I think it’s just a win-win. We got ourselves a very good local minority partner who works extremely hard.”

Boothe said he was introduced to Bailey by former District council member Kevin P. Chavous, who has lobbied for the lottery firm. Intralot remains ultimately responsible for fulfilling the contract with the city, Boothe said.

In a statement, Bailey said he was interviewed and told he is not the target of the “Inspector General’s investigation into the alleged ‘Council’s role in the awarding of the Lottery contract.’ ”

Bailey said in an interview that his agreement with Intralot commits him to investing more than $10 million in the project.

“People tend to think I’ve got 51 percent of the upside only,” Bailey said. “There’s a good news part and a bad news part. The bad news part is I’m responsible for 51 percent of the loss. This is far more than sweat equity. I’m taking real risk here.”

Coming to terms

The contract between the District and Intralot runs more than 200 pages, but the section on online gambling is thin.

Roogow, the lottery director, says the terms of how the money would be split with the city are clear and widely accepted. Intralot’s Boothe agrees.

The District gets half the money that’s left after prizes are paid out. Intralot gets the other half, but with a big asterisk: The costs of operating the virtual casino, including developing new games, must come out of its share, a cost the company says could total millions of dollars a year.

But the contract contains possible ambiguities about whether Intralot’s operating expenses are subsidized under the contract.

In one spot, it echoes Roogow and Boothe’s explanation, noting that Intralot “absorbs the cost for the full scope” of the gambling venture, including operating expenditures. But it goes on to define Intralot’s share in a way that could exempt it from covering those same operating expenditures.

The jargon-packed provision says Intralot gets 50 percent of “net gaming revenue,” which it describes as overall revenue “minus prize winnings which covers . . . operational expenses.”

Boothe said the language does not reflect the company’s view of the agreement. “Our position is that after ‘minus prize winnings’ there is a period,” said Boothe. Otherwise, “it basically takes away the first part of the contract . . . Nobody would sign that deal.”

As time goes by, both parties’ incentives to exploit those ambiguities and inconsistencies increase, Schooner, the contracting expert, said. “When things go wrong, and the relationship breaks down, the words of the contract will be the starting point for all future negotiations and litigation,” he said.

Lottery officials offered no explanation for the possible inconsistencies in the contract language, but Roogow said Friday that they will be fixed. “There are technical errors in contracts all the time,” he said.

Mike Laris came to Post by way of Los Angeles and Beijing. He’s written about the world’s greatest holstein bull, earth’s biggest pork producer, home builders, the homeless, steel workers and Italian tumors.
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