Lottery Firm Fined $1.4 Million

By David Nakamura
Washington Post Staff Writer
Friday, September 19, 2008

The District government has fined the company that runs the D.C. Lottery $1.4 million for security breaches, a decision that could reignite a debate over selecting the next contractor to operate the city's gaming industry.

In a letter to Lottery Technology Enterprises, District contracting officer Eric W. Payne said the company failed to conduct proper oversight of its employees, allowing $72,855 in payouts to fraudulent winners and $86,166 in stolen tickets in 2005 and 2006.

"As a result of the breach to the system's security, the [D.C. Lottery Board] incurred losses and costs both as a direct result of the breach and as part of a prudent effort to prevent recurrence," Payne wrote in the letter dated Wednesday.

LTE spokeswoman Ann Walker Marchant called the fine "wild" and "unreasonable" and suggested that it was politically motivated.

Last spring, D.C. Chief Financial Officer Natwar M. Gandhi and Mayor Adrian M. Fenty (D) said that the city could save $5 million by awarding the management contract for lottery services to W2I, a joint venture between national gaming firm Intralot and the family of local businessman Warren C. Williams Jr. The contract, if extended over 10 years, could be worth more than $120 million.

But the D.C. Council blocked the mayor's proposal, citing problems with previous ventures by Williams unrelated to the lottery. After twice attempting to get council support, Fenty withdrew the proposal rather than risk its rejection.

LTE is a joint enterprise between national gaming powerhouse Gtech and the family of local businessman Leonard Manning. Both competing lottery conglomerates have members with political ties to District leaders.

Fenty this week reintroduced legislation to award the contract to W2I, but it has not been placed on the council's agenda.

Marchant said LTE, which has been negotiating with the city since 2007, is willing to pay $164,000 in damages. The fine is "unreasonable and not consistent," she said. "They're wild charges that don't have actual merit. The timing of the issuance of the penalty is suspect."

D.C. Acting Attorney General Peter J. Nickles said the fine reinforces the administration's contention that the council should approve a change of lottery vendors. Nickles called LTE's performance "outrageous," and said the fine was "a conservative amount." If LTE refuses to pay the fine, Nickles said he might consider terminating the city's contract with the firm.

Council Chairman Vincent C. Gray (D) declined to comment.

A 2006 investigation by a D.C. government consultant found that the fraud that led to the fine was committed by LTE field service technicians, who manipulated radio technology used to transmit ticket purchases from retail locations to the central lottery system.

In addition to asking for the money to be repaid, Payne demanded that LTE pay $95,000 for hours worked by District government officials in investigating the problems, $63,000 in legal fees and $60,000 to cover future monitoring. The largest part of the fine, $980,000, was for damages to the Lottery Board's reputation, which Payne said resulted in lower revenue shortly after the scandal was made public.

Crystal Wright, a W2I spokeswoman, yesterday implored the council to award the contract to W2I.

"We hope the news forces action on this," Wright said. "If no action is taken, this irresponsible vendor will continue to be paid. If they're failing, why are we still paying them? It's an arrogance of political power."

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