0001 1 2 3 4 5 ****************************************************** 6 7 TEXAS LOTTERY COMMISSION 8 MEETING 9 10 MAY 17, 2006 11 12 13 ****************************************************** 14 15 16 17 BE IT REMEMBERED that the Texas Lottery 18 Commission meeting was held on the 17th day of May 2006 19 from 9:03 a.m. to 3:24 p.m., before David Bateman, RPR, 20 CSR in and for the State of Texas, reported by machine 21 shorthand, at the Offices of the Texas Lottery 22 Commission, 611 East 6th Street, Austin, Texas 78701, 23 whereupon the following proceedings were had: 24 25 0002 1 A P P E A R A N C E S 2 3 Chairman: 4 Mr. C. Tom Clowe, Jr. 5 6 Commissioners: 7 Mr. James A. Cox, Jr. 8 9 10 General Counsel: 11 Ms. Kimberly L. Kiplin 12 13 Acting Executive Director: 14 Mr. Anthony Sadberry 15 16 Charitable Bingo Operations Director: 17 Mr. Billy Atkins 18 19 20 21 22 23 24 25 0003 1 I N D E X 2 3 PAGE 4 Appearances...................................... 2 5 6 7 AGENDA ITEMS 8 Item Number I.................................... 6 Meeting called to order 9 Item Number II................................... 170 10 Report, possible discussion and/or action on lottery sales and revenue, game 11 performance, new game opportunities, market research and trends 12 Item Number III.................................. 185 13 Report, possible discussion and/or action on transfers to the State 14 Item Number IV................................... 186 15 Report, possible discussion and/or action on the procurement of advertising services 16 Item Number V.................................... 186 17 Report, possible discussion and/or action on the Mega Millions game and/or contract 18 Item Number VI................................... 6 19 Report, possible discussion and/or action on GTECH Corporation, including proposed 20 acquisition of GTECH 21 Item Number VII.................................. // Consideration of and possible discussion and/or 22 action on the lottery operator contract, including whether the negotiation of the 23 lottery operator's contract in an open meeting would have detrimental effect on the commission's 24 position in negotiations of the lottery operator contract 25 0004 1 Item Number VIII................................. 193 Report, possible discussion and/or action 2 on the agency's contracts 3 Item Number IX................................... 194 4 Report and possible discussion of the agency's HUB performance, including the Texas Building 5 and Procurement Commission's FY 2006 Semi-Annual HUB Report and/or the agency's Mentor Protege 6 Program 7 Item Number X.................................... 194 Report, possible discussion and/or action on 8 the 79th Legislature 9 Item Number XI................................... 197 Report, possible discussion and/or action on 10 the agency's strategic plan for 2007-2011 11 Item Number XII.................................. 115 Consideration of and possible discussion and/or 12 action on external and internal audits and/or reviews, including the agency's lottery security 13 audit, relating to the Texas Lottery Commission and/or on the Internal Audit Department's 14 activities 15 Item Number XIII................................. 198 Consideration of an possible discussion and/or 16 action on the appointment and employment of an executive director 17 Item Number XIV.................................. 123 18 Consideration of and possible entry of orders in A. Case No. 2006-1079 - Thompson Allstate 19 Bingo Supply and B. Moore Supplies, Inc. 20 Item Number XV................................... 198 Report by the acting executive director and/or 21 possible discussion and/or action on the agency's operational status and FTE status 22 Item Number XVI.................................. 199 23 Report by Charitable Bingo Operations Director and possible discussion and/or action on the 24 Charitable Bingo Operations Division's activities 25 0005 1 Item Number XVII................................. // Public comment 2 3 Item Number XVIII................................ 168 Executive session 4 5 Item Number XIX.................................. 200 Adjournment 6 7 Reporter's Certificate........................... 202 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0006 1 AGENDA ITEM NO. I 2 CHAIR CLOWE: Today is May 17th, 2006. 3 It's nine a.m. Commissioner Cox is here. My name is 4 Tom Clowe. We'll call this meeting of the Texas 5 Lottery Commission to order. 6 AGENDA ITEM NO. VI 7 CHAIR CLOWE: And I would like to take 8 item number six up first, report, possible discussion 9 and/or action on GTECH Corporation, including proposed 10 acquisition of GTECH. 11 Mr. Sadberry, will you lead us in this 12 item? 13 MR. SADBERRY: Good morning, 14 commissioners. For the record, my name is Anthony 15 Sadberry, acting executive director. 16 Commissioners, this agenda item pertains 17 to the previously-announced proposed acquisition of 18 GTECH, the commission's lottery operator, by 19 Lottomatica, the operator of the Italian lottery. 20 Following the announcement by GTECH in 21 January of the proposed acquisition, commission began a 22 due diligence review of the persons and entities 23 involved to determine their suitability to operate the 24 Texas lottery. 25 Under the provisions of both the State 0007 1 Lottery Act and the lottery operations and services 2 contract, the commission has the authority to conduct 3 such an investigation. 4 Additionally, the commission has the 5 authority to require GTECH to reimburse the commission 6 for costs in connection with such an investigation. 7 And GTECH has done so. 8 The commission has sought assistance from 9 the Office of Attorney General, retained outside 10 counsel, and entered into an interagency contract with 11 Department of Public Safety. 12 All three entities have been actively 13 engaged in the review of the proposed ownership change 14 and are here today to report to you on their review. 15 Specifically, Patrick Thompson and Rod Edens with the 16 law firm of Graves, Dougherty, Hearon & Moody, 17 Lieutenant Mark Riordan and Sergeant Cliff Manning with 18 DPS and David Mattax, division chief of the Financial 19 Litigation Division of the Attorney General's Office 20 and Gaston Broyles, assistant Attorney General in the 21 Financial Litigation Division. 22 At this time, I would ask them to report 23 to you on the review. 24 CHAIR CLOWE: Thank you, Mr. Sadberry. 25 Rod and Patrick, will you-all come up 0008 1 first? Mark, you may want to just be comfortable where 2 you are. And we'll handle these gentlemen's comments 3 and then ask you-all to come up. 4 Gentlemen, by way of creating a record in 5 this matter that is clear and easy to understand, I'll 6 ask you-all and everyone else who is going to give 7 testimony today to please identify yourself clearly. 8 And we'll try to not speak over each other and in any 9 way disturb the record so that everybody is clearly 10 understood. And we'll appreciate that. 11 Rod, I believe you're going to begin. 12 Are you not? 13 MR. EDENS: Yes. 14 CHAIR CLOWE: Thank you. 15 MR. EDENS: Commissioners, I was asked to 16 give a brief background of my experience as an 17 attorney. I've been practicing law in Austin for -- 18 CHAIR CLOWE: And identify yourself 19 initially, if you would. 20 MR. EDENS: Yes. I'm Rod Edens, Jr. And 21 I've been practicing law in Austin for approximately 43 22 years. My practice has been in primarily mergers and 23 acquisition, acquisition financing and securities work, 24 securities being offering stock and that sort of thing 25 by companies. 0009 1 And my experiences included dealing with 2 transactions that involve international law matters 3 where there are companies in foreign jurisdictions 4 outside the United States that are involved. 5 So what I'd like to do now is give you a 6 very brief presentation as to the structure of the 7 parties that are involved in the acquisition of GTECH 8 and I have a Powerpoint presentation that I'd like -- 9 if I can get it to -- here we go. 10 CHAIR CLOWE: And just before you begin, 11 Mr. Edens, your law firm is headquartered here in 12 Austin. 13 MR. EDENS: That's correct. 14 CHAIR CLOWE: You live in Austin. And 15 your field of expertise is mergers and acquisitions 16 with particular emphasis on international transactions. 17 MR. EDENS: In recent years, I've had 18 considerable interest in international, yes. 19 CHAIR CLOWE: So you are what we would 20 consider an expert in looking at the type of 21 transaction that this commission is examining in regard 22 to GTECH Corporation at this time. 23 MR. EDENS: Well, if 43 years in this 24 area gives me some expertise, I guess that's correct. 25 CHAIR CLOWE: Nobody wants to be called 0010 1 an expert, do they? 2 MR. EDENS: Not on that basis, no. 3 CHAIR CLOWE: Thank you. 4 MR. EDENS: You bet. 5 To start with, I will go through very 6 quickly the current ownership structure of GTECH. 7 GTECH Holdings Corporation is a New York Stock Exchange 8 listed company. Its shares are publicly-traded. So it 9 is owned by public stockholders. 10 And it has a wholly-owned subsidiary 11 called GTECH Corporation, which is the company that has 12 the contract with Texas Lottery Commission. 13 See out to the right there that the 14 acquisition, which I'll describe in a little bit more 15 detail in a minute, involves the payment to the public 16 stockholders of 35 dollars per share cash. 17 And there are approximately 132.8 million 18 fully-diluted shares, which means that that includes 19 shares that are covered by options to purchase common 20 stock. And so the approximate equity value of the 21 transaction is about 4.648 billion dollars. 22 Lottomatica, which is the group or 23 company that is proposing to acquire GTECH, has the 24 ownership structure that's set out here. The control 25 entity of Lottomatica is De Agostini. And De Agostini, 0011 1 in turn, has currently approximately 23 shareholders in 2 four or five family groups. 3 De Agostini historically has been 4 involved in publishing and other activities and owns a 5 58-percent interest in Lottomatica. Lottomatica has no 6 other significant stockholder. 7 Other than De Agostini, I think there's 8 one institutional investor, Fidelity International, 9 which is an affiliate of the Fidelity Investment Funds 10 that we're familiar with here in the United States. 11 And it has approximately a three-percent interest, 12 although that may be greater now. But it's -- and 13 again, it's not a substantial shareholder in relation 14 to De Agostini. 15 Lottomatica, in turn, will own and does 16 own today 75 percent of a company called Gold Holding 17 Company or Gold Holding Co. And it also owns a hundred 18 percent interest in Nova Prima, which is shown off to 19 the left. And that entity, in turn, owns a hundred 20 percent of Invest Games. 21 The plan, upon the closing of the 22 acquisition of GTECH, will be for Nova Prima to merge 23 into Lottomatica with a result that Invest Games will 24 be wholly-owned by Lottomatica which will, in turn, own 25 25 percent of Gold Holding Company. 0012 1 So you can see from the chart that 2 Lottomatica will directly and indirectly own a hundred 3 percent of Gold Holding Company. And I'll explain the 4 structure of Gold Holding Company in a minute, as far 5 as its relationship to GTECH. 6 Invest Games is a Luxembourg company that 7 enjoys tax benefits under Luxembourg law with a result 8 that sale of stock or assets by Invest Games will not 9 be subject to any capital gains tax. 10 So the purpose of that entity, just very 11 briefly, is to gain the tax benefits that are offered 12 by a Luxembourg company. Another country or group of 13 countries that have similar tax shelter benefits are in 14 the Netherlands. So this is quite frequently found in 15 structures where you're dealing with international and 16 European companies, in particular. 17 Gold Holding Co. owns a hundred percent 18 of Gold Acquisition Corp. And Gold Acquisition Corp. 19 is the company that will merge with and into GTECH 20 Holdings in the event that the transaction is 21 consummated. 22 In this chart, I'll start from the bottom 23 first. Gold Holding Co. is shown, which we just 24 discussed. Gold Acquisition has disappeared in this 25 chart and has become merged into GTECH Holdings 0013 1 Corporation, which was formerly the publicly-traded 2 GTECH Holdings and is now owned indirectly by 3 Lottomatica. 4 GTECH Corporation is still in existence. 5 Following the closing, there are some further mergers 6 that may occur. Gold Acquisition Corp. is gone. And 7 there is the possibility that GTECH Holdings 8 Corporation will merge into GTECH Corporation. And 9 GTECH Corporation will be the only entity left in what 10 is the current owned structure of GTECH. 11 Gold Holding Company will probably be 12 renamed GTECH Holdings, I think. There's some 13 change -- let's see. Yes. So that the Gold name will 14 disappear and the structure will be Gold Holding 15 Company, now named GTECH Holdings, and GTECH 16 Corporation. 17 I think most of the other parts on this 18 chart I've discussed. This shows the ownership above 19 De Agostini which is, again, the control entity of 20 Lottomatica. And this is the proposed ownership at or 21 following the acquisition of GTECH. 22 The plan is that they will cause to be 23 formed a company called B&D Holding di Marco Drago. 24 And it is -- the counterpart in the United States to 25 this entity is a limited partnership. 0014 1 But it's a partnership with shares and 2 they talk about the equity ownership in terms of 3 shares. So they will have seven general shareholders, 4 although that number again may be adjusted slightly 5 based on some indirect information that we have, but 6 not a material issue. 7 The limited shareholders, there will be 8 approximately 18 of those. And this really reflects 9 the way we have been told the ownership of De Agostini 10 works today, that there are basically going to be five 11 family members who are active today who will continue 12 to be active in the management of the affairs of De 13 Agostini. 14 And they also are going to bring in one 15 or two independent directors who will also be nominal 16 shareholders. And all seven of these general 17 shareholders will have unlimited liability just like a 18 general partner of a limited partnership under the laws 19 of Texas or Delaware or other states in the U.S. 20 The limited shareholders have limited 21 liability and, accordingly, have limited rights and 22 involvement in the day-to-day management of the company 23 and overall control of the company. 24 The identity of these people I'm not 25 really familiar with. But others who will present 0015 1 today can give you more information about these 2 shareholders if you desire that. 3 The -- this is a chart that's designed to 4 show the management structure starting with De Agostini 5 and going down through Lottomatica. And this is post 6 acquisition of GTECH. 7 The plan is for the De Agostini board of 8 directors to establish an executive committee. And 9 there is an executive committee already in existence. 10 But it is to have what we've been told will be complete 11 and unlimited authority to make all decisions with 12 respect to gaming and lottery holdings. 13 So it's going to be calling the shots, as 14 far as Lottomatica/GTECH group is concerned post 15 acquisition. Lottomatica, of course, will have a board 16 of directors. But they'll be determined by the 17 executive committee of De Agostini. 18 And the management team that is proposed, 19 based on our current information from the 20 Lottomatica/GTECH group will be Bruce Turner as CEO, 21 Jaymin Patel as chief financial officer and Marco Sala, 22 who will be the managing director of the Italian 23 division of Lottomatica. 24 The funds to make this acquisition are 25 coming from several different sources. The first is 0016 1 Lottomatica will have cash on hand of approximately 480 2 million dollars. 3 They will raise an additional 1.7 million 4 dollars through a rights offering to its shareholders 5 which, of course, is predominantly De Agostini. And 6 they have committed to fund their portion of that. 7 The next strip of funding will be a 8 subordinated debt offering of 750 million Euros. That 9 offering was placed on May 10th and is scheduled to 10 close today and probably already has closed today. 11 And then the next layer is the senior 12 loans that will be made to Gold Acquisition Corp. 13 which, of course, will merge into GTECH Holdings upon 14 consummation of the acquisition. And that's a $2.3 15 billion senior loan financing. 16 And that number, by the way, probably 17 moves around for two reasons. One, of course, the -- 18 it's a loan in Euros and you have an exchange rate 19 adjustment there to an amount. There's also some 20 strips that are part of the senior loan that are not 21 actually used for the acquisition of GTECH, which will 22 be in the nature of evolving credit for 250 million and 23 a guarantee facility for a similar amount. 24 The senior loan was oversubscribed by 25 institutional lenders by some four times the amount 0017 1 that they needed. The subordinated debt offering 2 similarly was oversubscribed, indicating good market 3 acceptance by institutional investors of the financing 4 plan of Lottomatica. 5 Credit Suisse, First Boston and Goldman 6 Sachs are the underwriters for the rights offering and 7 the subordinated debt. And they have provided the 8 senior loan, which I think is already signed up and is 9 ready to go. 10 This chart for Lottomatica and the chart 11 for GTECH reflect a couple of things, I think. On the 12 left, the Lottomatica stock prices are shown starting 13 with December. The acquisition of GTECH was announced, 14 I believe, January 10th of this year. 15 And you can see that, since that time 16 through May 12th, the stock of Lottomatica has gone up. 17 So it's been received -- the proposed acquisition seems 18 to have been pretty well received by the investment 19 community. 20 The GTECH chart is for a much shorter 21 period of time. It really is a one-month period just 22 to show that, as we get closer to the proposed closing 23 of the GTECH acquisition, the stock price for -- is 24 traded on the New York stock exchange and approaching 25 the 35-dollar merger price. 0018 1 That's -- that's it. 2 CHAIR CLOWE: Any questions? 3 COMMISSIONER COX: No, sir. 4 CHAIR CLOWE: Mr. Edens, in your 5 examination of this transaction, did you find anything 6 that struck you as being unusual or out of the 7 ordinary? 8 MR. EDENS: No, I did not. I found the 9 Lottomatica/De Agostini disclosures that we reviewed to 10 be business as usual for companies that like to operate 11 with transparency. They were very open and, in my 12 discussions with representatives of De Agostini and 13 Lottomatica, I found them to be cooperative and willing 14 to answer any questions. 15 CHAIR CLOWE: Did you go to Italy to 16 interview those individuals that you contacted 17 personally or did you talk with people that represented 18 the company by telephone? 19 MR. EDENS: By telephone, e-mail. 20 CHAIR CLOWE: And -- 21 MR. EDENS: But no, the answer is I did 22 not go to Italy. 23 CHAIR CLOWE: And did you -- 24 MR. EDENS: I'd be happy to go, 25 commissioner. 0019 1 CHAIR CLOWE: Did you find those 2 individuals that you spoke with to be responsive and 3 open and forthcoming in regard to the questions that 4 you asked? 5 MR. EDENS: I did. 6 CHAIR CLOWE: Is the control of 7 publicly-held corporations in the country of Italy 8 similar or dissimilar to the control that we are more 9 familiar with in this country relative to SEC 10 regulations? 11 MR. EDENS: They have a very similar 12 regulatory scheme. It's not identical by any means. 13 They have to report their financial information on a 14 annual basis certainly. There are some bases for being 15 exempt for quarterly reports. 16 But by and large, they have to report 17 significant events in a timely manner. Here in the 18 United States, since the enactment of Sarbanes-Oxley 19 legislation, U.S. companies have to report more 20 quickly, within a shorter time frame than it is the 21 case perhaps anywhere in the world, certainly in Italy. 22 CHAIR CLOWE: Did the differences in 23 language appear to be a problem in your contacting 24 representatives of these companies? 25 MR. EDENS: No, and I don't speak 0020 1 Italian. So the people I talked to were very 2 conversant-speaking English. They publish, by the way, 3 their information both in Italian and in English. 4 CHAIR CLOWE: The point of that question 5 is that, in my experience in the past in business in 6 doing business in some foreign countries, I have felt 7 that I did not fully understand the answer to a 8 question or I did not understand the question that was 9 being posed to me. 10 And in a business transaction, I was less 11 than sure that both parties were communicating 12 effectively. You didn't have that feeling in regard to 13 your part in this report? 14 MR. EDENS: I did not. I won't say that 15 there were some occasions that I had to ask my question 16 in a different way to get the answer so that I 17 understood what I needed to understand, but we always 18 got there. 19 CHAIR CLOWE: Although to a person who is 20 not acquainted with mergers and acquisitions, this 21 might seem to be a complex transaction. You mentioned 22 that the Gold Acquisition tool might go away and become 23 GTECH Holding. 24 That sort of a protocol is not unusual in 25 achieving this kind of a merger acquisition. Is it 0021 1 not? 2 MR. EDENS: That's correct. It's not at 3 all unusual. The Gold Acquisition entity in this case 4 was used primarily to locate the funding of the cash so 5 that it could turn and have that cash available in 6 connection with the merger to pay the GTECH Holdings 7 shareholders. 8 And that -- that sort of structure in an 9 acquisition I didn't find at all unusual. 10 CHAIR CLOWE: To the extent that you have 11 knowledge, is De Agostini practice in acquisitions, 12 have they been a company that has done acquisitions in 13 the past and has grown and expanded? 14 Do they have some knowledge and 15 experience of how to acquire a company successfully or 16 not? 17 MR. EDENS: I would say, even if they had 18 not done other transactions, which they have, and just 19 based on this one transaction alone, I'd say they were 20 extremely knowledgeable. 21 They retained competent investment 22 bankers to provide advice to them and to their 23 stockholders. They used Credit Suisse, First Boston 24 and Golden Sachs. 25 And I believe that both of those firms 0022 1 rendered opinions to Lottomatica that the transaction 2 is fair, from a financial point of view, to the 3 stockholders of Lottomatica. 4 GTECH, of course, had their own 5 investment banking firms render similar opinions with 6 respect to the fairness, from a financial point of 7 view, to the shareholders of GTECH. 8 CHAIR CLOWE: And you visited in length 9 with the GTECH officers and officials. Did you not? 10 MR. EDENS: No, I have not visited with 11 them. 12 CHAIR CLOWE: And has Mr. Thompson done 13 that? 14 MR. THOMPSON: No, sir. The -- the 15 face-to-face interviews with representatives and 16 executives with GTECH, De Agostini and Lottomatica were 17 conducted by Sergeant Manning and Lieutenant Riordan. 18 And we were -- they were our eyes and 19 ears for the purpose of direct interviews with those 20 representatives. 21 CHAIR CLOWE: So we'll -- we'll have some 22 questions for them relative to GTECH? 23 MR. THOMPSON: Yes, sir. 24 CHAIR CLOWE: All right. And Mr. Edens, 25 before we -- before I conclude my questions to you, let 0023 1 me ask you this: 2 At this point in time, based on what 3 you've done in this process, do you see that anything 4 that, in your opinion based on your knowledge, renders 5 this acquisition unsuitable or unfit in regard to our 6 contract with GTECH? 7 MR. EDENS: No. I see nothing that would 8 lead me to conclude that it's an unsuitable 9 transaction. I would think, based on my observation of 10 the De Agostini/Lottomatica group and how they run 11 their business, it could be only characterized in my 12 judgment as a favorable transaction. 13 CHAIR CLOWE: Anything -- 14 COMMISSIONER COX: No, sir. 15 CHAIR CLOWE: -- commissioner? Mr. 16 Thompson, do you have comments for us, please? 17 MR. THOMPSON: Yes, commissioner. I'm 18 Patrick Thompson. I'm from the Austin firm of Graves, 19 Dougherty, Hearon & Moody. Along with Rod Edens, 20 another attorney from our office, Debbie Ramirez, 21 assisted us in this matter, especially when it came to 22 familiarizing us with formerly unfamiliar matters such 23 as financial security laws in the country of Luxembourg 24 and SEC type filing requirements in Italy. 25 I have practiced law in Austin for 24 0024 1 years. During that time period, my focus of my 2 practice has been almost exclusively on the 3 relationship between corporations and Texas state 4 agencies. 5 On occasion, I represent the 6 corporations. On occasion, I've represented the 7 agency. And that's true in litigation, administrative 8 matters and contract negotiations. 9 I incurred the -- my career started at 10 the Railroad Commission while I was still continuing my 11 education in Austin. I was there for four years, left 12 as the adviser to the chairman and then spent 17 years 13 with Vinson & Elkins in the Austin office and this last 14 three years with Graves Dougherty continuing my 15 practice of administrative law. 16 The -- I encouraged Graves Dougherty to 17 seek appointment to this position to assist the Lottery 18 Commission because -- primarily because of two prior 19 experiences I had being part of a legal team that 20 provided services to the Texas Lottery Commission. 21 The first was when Commissioners Miers 22 and Sadberry and Hill voted to accept new proposals for 23 the lottery operator position, which resulted in the 24 lottery operator suing the Lottery Commission. And I 25 represented the Lottery Commission in court. 0025 1 And the second was when the current 2 contract with GTECH was drafted and negotiated, I was 3 part of the team that drafted and negotiated that 4 contract. 5 And so when this opportunity to be a part 6 of continuing to provide services to the Lottery 7 Commission on its relationship with the lottery 8 operator, a very important relationship, I was very 9 eager to be a part of the team. 10 This process started back in January. 11 And as Rod indicated, the Lottomatica, De Agostini and 12 GTECH announced to the world on January 10th that this 13 acquisition was planned. 14 The team that was assembled by the 15 Lottery Commission included, of course, your own legal 16 staff led by general counsel Kim Kiplin. And then the 17 primary legal staff attorney on this matter was Andy 18 Marker who, among many other tasks in this case, acted 19 as our traffic director for the flow of enormous 20 amounts of information between the various other parts 21 of the team. 22 And the team also included two attorneys 23 from the Attorney General's Office, Mr. Dave Mattax and 24 Mr. Gaston Broyles. 25 Two absolutely invaluable members of the 0026 1 team, as you will find out, are Lieutenant Mark Riordan 2 and Sergeant Cliff Manning, who led the DPS 3 investigative team which actually went to Italy and 4 were responsible for collecting enormous volumes of 5 information that were invaluable in the performance of 6 this due diligence investigation. 7 The investigation began with the 8 preparation of a very detailed request for information 9 and like 19-page disclosure form, which was prepared 10 with the participation of DPS, the Attorney General's 11 Office, your legal staff and my firm. 12 That request for information was sent to 13 GTECH I believe on February 10th and -- and asked for a 14 lot of information regarding financial issues, prior 15 litigation issues, disciplinary style actions involving 16 regulatory agencies, and other issues. 17 The -- and then those -- the responses to 18 those questions led to other requests for information 19 and also to on-the-ground, live interviews by the DPS 20 investigators in Italy with many executives with 21 Lottomatica, De Agostini and owners of interest in the 22 De Agostini company. 23 These days when you hire a private 24 investigative firm to perform an investigation, very 25 often what you will have to show at the end of it, 0027 1 after you spend a great deal of money, is a room full 2 of three-ring binders full of documents downloaded from 3 the Internet. 4 And I don't mean to discredit the 5 usefulness of the Internet as a tool. This 6 investigation was different. That was for a large 7 number of reasons, most importantly the DPS's standard 8 method of operation. I was very happy to see that. 9 A few years ago, I was asked by a partner 10 to review a memo that was prepared by a first-year 11 associate regarding the acquisition by a pipeline 12 company of a number of assets. 13 And the associate had written in the memo 14 that, though they had been informed at the beginning 15 that a Railroad Commission form called the T-4 would be 16 significant, they couldn't find a T-4 on the Internet. 17 So they assumed that the person meant P-4 and a blank 18 P-4 was attached to the memo. 19 The associate was dead wrong. As you 20 know, commissioner, the form T-4 is extremely important 21 to any company involved in operation of pipelines in 22 Texas. And after that, I try to make a point in 23 dealing with first-year associates to impress upon them 24 that the fact that you can't find something on the 25 Internet doesn't mean that it doesn't exist and it 0028 1 certainly doesn't mean that it's unimportant. 2 This investigation was done with full 3 knowledge of that. The DPS investors here certainly 4 know how to use the Internet and how to use it as a 5 tool. But they did not rely on it exclusively for the 6 performance of their task. 7 The DPS enter -- the DPS investigators 8 conducted face-to-face interviews. They made 9 unannounced visits. They dogged lawyers and executives 10 for months for documents and information. 11 They required lawyers to leave the room 12 during interviews. They reviewed voluminous records in 13 English and, with the assistance of translators, in 14 Italian. They built relationships and they built 15 trust. 16 The individuals that they interviewed 17 were identified to us through the process of the 18 response for information. And the position that we 19 took is that, if an individual was identified in 20 response to a question, such as identify all of the 21 owners of interest in the De Agostini group or identify 22 all executives of the GTECH Corporation and owners of 23 three percent or more of the publicly-traded stock, 24 then that person went on a list of people who then had 25 to be interviewed and investigated by the DPS. 0029 1 Compliance by the three companies was 2 very good. De Agostini and Lottomatica were very 3 forthcoming. 4 Among the red flags that you might look 5 for in investigation of this type would be large gaps 6 or significant gaps in the documentary information or 7 refusals by the respondents to comply with what would 8 appear to be reasonable requests. We did not encounter 9 either of those. 10 There were some areas where we had to 11 negotiate with the companies in order to obtain the 12 information that we thought was necessary to complete 13 our investigation. 14 But in each of those areas, it was clear 15 that the company was operating from the standpoint that 16 the original request was extremely burdensome and 17 perhaps not ultimately beneficial rather than because 18 of any apparent attempt to conceal information. 19 One example would be that one of our 20 requests apparently would have generated over 10 21 thousand documents. And the company made a reasonable 22 proposal to select those documents which would most 23 likely be pertinent and relevant to our investigation 24 and promptly provided those. 25 De Agostini and Lottomatica were very 0030 1 forthcoming even on issues that would not reflect 2 favorably on the company, and there were very few of 3 those. 4 The most significant was a finding by the 5 Italian antitrust regulator that certain activities and 6 behavior by Lottomatica and certain agreements that 7 Lottomatica had with a competitor in Italy constituted 8 violations of Italian antitrust regulations. 9 Lieutenant Riordan may discuss that event 10 in greater detail. But Lottomatica and De Agostini 11 were very forthcoming in addressing our questions about 12 the event. And we're satisfied that they made no 13 effort to hide any facts from us with respect to what 14 transpired and the issues that were involved. 15 Even with this degree of cooperation, 16 however, there are some disadvantages that the proposed 17 transaction will create for you, as a customer of 18 GTECH. Those disadvantages are primarily the result of 19 three facts. 20 The first is that the owner of the 21 lottery operator will no longer a U.S. publicly-traded 22 corporation. The second is that up to 25 percent of 23 the lottery operator will be owned by a Luxembourg 24 company. And the third is that the owner of the 25 lottery operator will be a company that operates 0031 1 primarily in a foreign language. 2 With respect to the first of those, you 3 presently deal with a company that is traded on the New 4 York Stock Exchange. As such, it is subject to SEC 5 regulations and filing requirements. 6 And that provides you with a wealth of 7 information regarding structure, ownership and the 8 liabilities and the activities of that company. This 9 will end when this transaction is completed and GTECH 10 will be delisted from the New York Stock Exchange. You 11 will no -- they will no longer be required to make 12 regular filings with the SEC. 13 GTECH's new owner, Lottomatica, is traded 14 on the Milan Stock Exchange and it is subject to 15 regulation by CONSOB, the Italian Securities Exchange 16 Commission. CONSOB has a number of reporting 17 requirements that are similar to U.S. SEC requirements. 18 And those will, we understand, be available to you in 19 English. 20 Secondly, as Rod explained, up to 25 21 percent of the company will be owned by or pass through 22 a Luxembourg company, Invest Games. In addition to 23 distinguishing itself by virtue of having very, very 24 favorable tax treatment laws for capital gains, 25 Luxembourg distinguishes itself as a company (sic) with 0032 1 very strict privacy laws for financial information. 2 And so having a portion of the lottery 3 operator owned by or passing through a Luxembourg 4 corporation creates special issues with respect to your 5 ability to track ownership of the company. 6 And finally, Lottomatica and De Agostini 7 are Italian entities. They conduct their business 8 primarily in Italian. And while many of their 9 corporate documents are routinely produced in both 10 Italian and English, the versions that are legally 11 controlling and binding on Lottomatica are, of course, 12 the versions in Italian. 13 Your ability to audit, investigate and 14 monitor the lottery operator and its owners will be 15 affected by this language issue. And translation 16 services of the caliber necessary to conduct audits and 17 conduct investigations will be expensive. 18 Now taking all this into consideration, 19 your contract with GTECH does give you very broad 20 rights of access to information about GTECH and its 21 owners. 22 We, as your outside counsel, the Attorney 23 General's office and your legal staff, believe that 24 those contractual rights can be exercised to address 25 and largely overcome these disadvantages that I just 0033 1 described. Mr. Mattax from the Attorney General's 2 Office is going to discuss that in greater detail. 3 Lastly, I'd like to point out that this 4 investigation was conducted with full awareness of the 5 fact that there are many individuals who hold a lot of 6 preconceived notions and prejudices about Italian 7 businesses. 8 But unlike the authors of popular 9 fiction, our job is to inform you, not to entertain you 10 and -- and certainly not to entertain ourselves. And I 11 can assure you that, when Sergeant Manning was slogging 12 through day after day and hour after hour of reviewing 13 corporate minutes and executive committee minutes with 14 a translator, he was not entertained. 15 For anyone who still puts stock in those 16 old prejudices and preconceived notions about Italian 17 businesses, I would encourage them to take a look, a 18 hard look, at what has been going on in Europe over the 19 last five to 10 years. 20 They should look at the level of 21 transparency required by the European Economic Union 22 for participation by businesses and institutions, a 23 level of transparency that some business analysts will 24 tell you is equal to or greater than that required in 25 the United States. 0034 1 And they should look at how Italian 2 businesses and institutions have embraced those 3 requirements and have been accepted as part of the 4 European Economic Union. 5 Lastly, if anyone doubts that we're 6 currently operating in a global economy, they probably 7 should have been on the plane when six Texas Department 8 of Public Safety officers headed off to Milan and Rome, 9 Italy to get acquainted with the prospective new owners 10 of the Texas lottery operator. 11 And I should close by telling you that 12 they did an amazing job. At the beginning of this 13 task, it was apparent that the DPS investigators were a 14 little out of their element as we talked about reverse 15 mergers and earnings before interest, taxes, 16 depreciation and amortization. 17 But within hours of hitting the ground in 18 Italy, they quickly became the go-to guys for 19 everything that we needed to know. If you wanted to 20 know what happened to the executive stock options after 21 the closing, you call Mark. 22 If you want to know who was going to be 23 included on the board of directors once De Agostini 24 underwent its reorganization, call Mark. They did 25 frankly an amazing job of, in a very short amount of 0035 1 time, very quickly familiarizing themselves with, not 2 only the framework within which these companies 3 operate, but the people who actually operate them. 4 They actually now have personal 5 relationships with a number of the people who are 6 associated with De Agostini. Their investigation is 7 the critical heart of this overall investigation and I 8 think one that should give you confidence that the job 9 was well done. 10 I frankly wish that I had Sergeant 11 Manning and Lieutenant Riordan available to me whenever 12 I needed to perform an investigation, but I guess 13 that's a privilege that's only afforded to the state 14 agencies. 15 With that, I think that we're going to 16 now pass this over to Lieutenant Riordan and Cliff 17 Manning. And they're going to explain to you the 18 investigation that they performed, unless you have 19 questions for me. 20 CHAIR CLOWE: Please. Thank you, Mr. 21 Thompson. 22 COMMISSIONER COX: Patrick, excellent 23 report and thank you very much. I had a couple of 24 things that I'm not sure I heard clearly. 25 First, let me ask. You said you -- said 0036 1 you requested large amounts of information. Was there 2 any significant information that any of the companies 3 could not or would not produce? 4 MR. THOMPSON: Sir, on a regular basis, I 5 kept a thing called the -- going called the exception 6 report because, as you can guess given the large volume 7 of information that we asked for, it didn't all come in 8 at once. 9 And what we would get is regular reports. 10 There's an attorney named Jeremy Kleinman, who was 11 acting as the U.S. legal representative for De Agostini 12 and Lottomatica. Mr. Kleinman kept us informed as to 13 what documents could be promptly produced and which 14 ones were forthcoming. 15 And then Denise Ogilvie with GTECH 16 Corporation was the representative keeping us informed 17 about what they would provide. We did get a little bit 18 of push back on some documents. 19 The -- probably the two most significant 20 areas that lasted all the way to the conclusion of the 21 investigation had to do with access to certain 22 individuals who are owners of significant interest in 23 De Agostini and the issue of corporate minutes. 24 I believe we're on the verge of 25 successfully resolving the issue with respect to the 0037 1 corporate minutes. There again, we did not get any 2 impression that there was any effort to withhold 3 minutes for the purposes of concealing information. 4 In fact, there the issue was primarily 5 one of the sensitivity of the information contained in 6 some of the corporate minutes. Both De Agostini and 7 GTECH operate at a level where some very large and 8 significant financial transactions are discussed by 9 their board members. 10 And so a great deal of negotiation had to 11 take place with respect to the way that we could access 12 those minutes and whether we would end up with copies 13 of those minutes. We also had to deal with the 14 translation issue. 15 I can tell that with -- we did get access 16 to a significant volume of corporate minutes with 17 respect to the GTECH Corporation. Those dealt 18 primarily with issues involving the acquisition of 19 stock or the trading of stock. 20 The -- and with respect to Lottomatica, 21 we received the minutes, though in Italian. And that 22 presented a challenge. But -- but we made our way 23 through it. 24 And with respect to De Agostini, where 25 things stand today is that the -- certain minutes were 0038 1 produced to the DPS investigator for his review and 2 summary. And I have reviewed those summaries. 3 There were executive sessions for which 4 the minutes were not included in the report. If they 5 were kept, they were not included in the report 6 provided to our DPS investigator. And my understanding 7 today is that Mr. Kleinman is working and will very 8 shortly have available to us descriptions of the events 9 discussed in those executive committee meetings that 10 will assist us in evaluating whether the reasons for 11 not producing them was justified. 12 So De Agostini and Lottomatica continue 13 to be forthcoming with respect to how we can resolve 14 the issue of information that may be too sensitive to 15 make a public record and still adequately perform our 16 investigation. 17 With respect to the access to the 18 individuals, as Rod indicated, the De Agostini group is 19 actually a group of family members, essentially the 20 Drago family members and the Boroli family members. 21 They are cousins, I believe. 22 And they are very dramatically divided, 23 in terms of those family members who have been actively 24 involved in running the corporation and those who have 25 not. And as Rod explained, that relationship is going 0039 1 to be formalized with the creation of B&D Holdings and 2 the creation of a system of limited shareholders. 3 The way we wrote our original request for 4 information required the respondents to identify anyone 5 who owns any interest in De Agostini. We made a 6 distinction between publicly-traded corporations and 7 private corporations. 8 With respect to a publicly-traded 9 corporation like Lottomatica or GTECH, only directors, 10 officers and persons who own three percent or more of 11 the stock were required to be identified and were then 12 subject to investigation by the DPS. 13 With respect to the one public -- 14 privately-held company of the group De Agostini, we 15 asked that all owners of any interest be identified. 16 That caused those persons to automatically go on to a 17 list that we required to produce disclosure forms and 18 were subject to investigation. 19 The position of the De Agostini group was 20 that a number of those individuals, because they have 21 -- they are not actively involved in the company, have 22 not actively been involved in the company and in the 23 future will actually, in fact, be legally constrained 24 so that they cannot be involved in corporate governance 25 issues, that those persons should not be subject to 0040 1 investigation. 2 One of the issues that we had to consider 3 there was whether a logical explanation was being given 4 to us for why those persons would not be subject to 5 full investigation by the DPS or whether there was, for 6 some reason, an effort to hide information from the 7 lottery. 8 My conclusion is that the explanations 9 offered were logical and were made in good faith and 10 that the compromise is a -- is a solid one that was 11 reached between the investigative team and De Agostini 12 on that issue. 13 The representations made by De Agostini 14 regarding the participation of those family members 15 were independently verified by a number of other 16 records. The De Agostini group is being forthcoming 17 and direct with the Lottery Commission when they 18 represent that a number of the individuals who hold an 19 interest, maybe even a significant interest in De 20 Agostini, do not participate in the daily affairs of 21 the company. 22 So those are the two issues where we 23 received some push back. I am not concerned about 24 them. You -- Lieutenant Riordan was more directly 25 involved in the negotiations about what would be 0041 1 produced and what wouldn't and what we would do in lieu 2 of the information that we sought. 3 But -- and he can express his opinion on 4 how he feels about it. But I am not concerned that 5 what occurred was actually a conscious effort to 6 conceal relevant information. 7 COMMISSIONER COX: So I hear you say it's 8 not a conscious effort. Notwithstanding it not being 9 conscious, do you think that the things that you did 10 not receive significantly affected the scope of your 11 work? 12 MR. THOMPSON: To be honest with you, 13 sir, at the beginning, I did. And -- but that's not 14 the conclusion that I hold today. 15 When I first heard that many of the 16 people who own an interest in De Agostini, in fact, 17 some people who owned a significant interest, were not 18 going to be subject to our full investigation, I was 19 very concerned. 20 And -- but at that time, I guess I was 21 more suspicious and thought that what could be 22 motivating that would be a desire to just, you know, 23 prevent the Lottery Commission from finding out things 24 about those people that De Agostini did not want the 25 Lottery Commission to know. 0042 1 I haven't found anything that backed up 2 that suspicion. And the representation by the 3 representatives of De Agostini regarding the way the 4 company works, as I said, have been independently 5 verified by other documents and other sources. 6 So no, I don't -- I don't believe that 7 what happened has compromised this investigation from 8 the standpoint of determining whether the transaction 9 is unduly harmful to the Lottery Commission or whether 10 the new owners of the lottery operator will be 11 unsuitable. 12 I don't believe that those compromises 13 with respect to the access to information have 14 significantly negatively affected our ability to 15 perform our evaluation. 16 COMMISSIONER COX: I heard you say at one 17 point that the three companies had been cooperative. 18 And then after that, I heard you specifically say De 19 Agostini and Lottomatica were very cooperative. 20 Would it be fair to read into that that 21 GTECH was not always so cooperative? 22 MR. THOMPSON: Sir, that -- that -- that 23 was very observant of you and that was intentional on 24 my part. 25 But the reason that I worded it that way 0043 1 is that today I think that the various parts of or 2 members of your team can tell you confidently that they 3 have basically concluded their reviews of De Agostini 4 and Lottomatica but not of GTECH. 5 And so the reason for the hold back there 6 was just that I don't believe that the -- we regard the 7 review of GTECH as being complete. From my standpoint, 8 the volume of documents produced by GTECH was 9 considerable. 10 It's a very large company with a number 11 of dealings around the world. And not surprisingly, 12 our request for information generated a very large 13 volume of documents. And the DPS investigators, I 14 believe, still have some interviews and investigations 15 left to perform with respect to GTECH. 16 So the reason that I did not specifically 17 address GTECH in that comment is that the report is not 18 done and I cannot -- well, I can tell you today that we 19 have received very good cooperation with respect to 20 producing information, including large volumes of 21 information. 22 I'm not yet able to evaluate the total 23 performance of GTECH in response to our investigation. 24 COMMISSIONER COX: And finally, with 25 respect to your expression of concern about the 0044 1 25-percent ownership of the Luxembourg corporation, are 2 you or is the Attorney General going to address how we 3 deal with that? 4 MR. THOMPSON: Yes, sir. And -- and my 5 understanding is that Lottomatica has already made 6 certain commitments with respect to a way to address 7 that. If, in fact, those commitments are made and 8 upheld, I believe that they would be very effective in 9 overcoming the issues that I identified with respect to 10 Luxembourg. 11 In Luxembourg, my understanding is that 12 issues of stock can be -- can be issued in bare form, 13 which is among the many laws in Luxembourg that might 14 make it difficult to track ownership of a company by 15 the traditional means. 16 However, as I stated, you have very broad 17 rights under your contract with GTECH to access to 18 information regarding, not only GTECH, but its owners. 19 And we believe that you can exercise those contractual 20 rights to overcome the problems created by the 21 corporation in Luxembourg of the owner of a portion of 22 GTECH stock. 23 COMMISSIONER COX: Thank you, Mr. 24 Chairman. 25 CHAIR CLOWE: Thank you for those 0045 1 answers, Mr. Thompson. They were good questions and 2 very complete answers. 3 And I would ask you the same question I 4 asked Mr. Edens if, in your opinion, at this point 5 based on the work that you've done in this 6 investigation, you have found anything that in your 7 mind takes this proposed transaction to a level of 8 being unsuitable or unfit. 9 MR. THOMPSON: No, sir. I didn't find 10 anything of that sort. 11 CHAIR CLOWE: You have, as individuals 12 and as representatives of your law firm, been engaged 13 in this activity as employees of the Attorney General. 14 Your firm has been employed with the Attorney General. 15 You've had numerous meetings with I'm 16 sure a great many people. In this process, has anyone 17 inside or outside of the Lottery Commission, including 18 the commissioners, approached you and in any way 19 attempted to influence your investigation and the 20 outcome, your resulting report? 21 MR. THOMPSON: No, sir. Commissioner, 22 I'm very happy to report that nothing like -- 23 absolutely nothing like that ever happened. No one has 24 ever approached me during this process with any attempt 25 I think to improperly influence me. 0046 1 Everyone was very helpful with 2 information. And no one that I spoke to ever appeared 3 to be -- to have an agenda or a direction in which they 4 were trying to push my firm or our conclusions. 5 CHAIR CLOWE: Mr. Edens, your answer 6 would be the same? 7 MR. EDENS: Yes, it is. And I'll also 8 add that the commissioners have urged us to make a very 9 thorough investigation and perform a very thorough due 10 diligence in connection with this acquisition. We have 11 tried to do that job. 12 CHAIR CLOWE: Mr. Mattax, I'd like to 13 talk to you for a moment about this law firm. Each of 14 these gentlemen have qualified themselves as experts, 15 whether they wanted to be known by that title or not. 16 How did we come to choose this law firm? 17 MR. MATTAX: Thank you. Let me introduce 18 myself. My name is David Mattax. I'm chief of the 19 Financial Litigation Division of the Office of the 20 Attorney General. I've been chief of that division for 21 about nine years. I've been with the Attorney General 22 since 1992. 23 Prior to that, I was in private practice 24 with a law firm called Hunt and William engaged in 25 corporation litigation, including litigation involving 0047 1 nuclear power plants. 2 I'm the attorney for the Lottery 3 Commission. My division is assigned to represent the 4 Lottery Commission. And let me tell you the approach I 5 took in this investigation prior and then I'll get to 6 directly answering your question. 7 I felt my role would be to be the lawyer 8 for the Lottery Commission and to provide advice to the 9 commission with respect to this transaction. 10 However, I took it upon myself to also 11 operate in a different role. And that would be more of 12 a role sort of as a, if you will, supervisory role and 13 just sort of looking over all the transaction to see if 14 I thought things were being organized or if anything 15 additional could be done to make sure that we had the 16 proper resources and the proper investigations going 17 on. 18 And I concluded that we, in fact, did. 19 One of the things that the Attorney General decided was 20 -- when this transaction first started, was that it 21 would be appropriate to get experience in mergers and 22 acquisitions. 23 Although my division does do financial 24 litigation, something of this magnitude we thought it 25 would be appropriate to go hire an outside counsel to 0048 1 look at the transaction from a mergers and acquisitions 2 standpoint. 3 And as you heard today, the attorneys 4 involved in this investigation from Graves Dougherty 5 are, in fact, experts in mergers and acquisitions. 6 Therefore, we discussed with the Lottery 7 Commission, with the executive director, hiring an 8 outside counsel to do that. And the commission 9 actually was the person who did hire them. They were 10 approved by the Attorney General, but the commission 11 did hire them. 12 And that's how that -- that came about. 13 And so I think that, as you can tell from the 14 thoroughness of the report, they've been able to 15 analyze the transaction, basically concluded it's not 16 an unusual transaction. The market seems to think it's 17 sound. And that's basically how they became involved. 18 CHAIR CLOWE: So in your opinion, they 19 were the right firm and had the right individuals with 20 the right experience and the right knowledge to do the 21 job that they've done. 22 MR. MATTAX: Yes, I believe that's true. 23 CHAIR CLOWE: And I believe it was your 24 additional task to oversight their billings and 25 oversight the payment of monies to them. 0049 1 MR. MATTAX: That's correct. 2 CHAIR CLOWE: And at this point in time, 3 approximately how much money have they billed for their 4 services? 5 MR. MATTAX: I don't have that figure 6 with me right now, but I can certainly provide that to 7 the commission. 8 CHAIR CLOWE: At some point in time in 9 the future, I'd like to make that part of this public 10 record. 11 MR. MATTAX: Correct. And to follow up, 12 my reviews of the billing showed nothing that I found 13 to be unusual. I thought that they were very 14 reasonable. I don't have any issues with their 15 billings. 16 CHAIR CLOWE: Well, just to have it all 17 in the open, because someone will ask sooner or later. 18 MR. MATTAX: And I should note, again, I 19 think it was mentioned that, as part of this 20 investigation, we made it clear to GTECH that they 21 would be paying for it. 22 And so we are being reimbursed or the 23 Lottery Commission is being reimbursed for this money. 24 So our -- and I am, in fact, paying those bills as if 25 we were paying them ourselves and making sure they are 0050 1 accurate and reasonable. 2 But ultimately, GTECH is reimbursing the 3 commission for those funds. 4 CHAIR CLOWE: Well, I'd like for you to 5 expand on that. How did that funding come about? 6 MR. MATTAX: Well, when this 7 investigation started, the Lottery Commission 8 approached GTECH and explained that, since this was 9 something that we had to do with respect to getting the 10 transaction, doing a suitability review, that this 11 would obviously encompass some expense but it should 12 not be an expense borne by the taxpayers of Texas. 13 This was something that GTECH wanted to 14 do and Lottomatica wanted to do. And therefore, it 15 was, in our view, incumbent upon GTECH to fund the 16 suitability review that we would be required to 17 perform. And GTECH, in fact, agreed to do that. 18 And what has happened is they have placed 19 money with the Lottery Commission to be used for this 20 investigation. And that would be to reimburse the 21 expenses of and the cost of the Department of Public 22 Safety, as well. 23 And then, as -- as we get bills in, then 24 we submit those to GTECH. And then they replenish that 25 fund. So we continue to have that money there. 0051 1 And there has not been an issue with 2 respect to that. GTECH certainly understands that we 3 have to do the suitability review for this contract to 4 continue. And they've been willing to pay to get that 5 done. 6 But I should make it very clear that they 7 have no control whatsoever. The fact that they are 8 providing the money is for -- is in the nature of 9 reimbursement. In other words, they're not directly 10 paying anyone's bills. 11 They're simply reimbursing the commission 12 for that fund. GTECH has absolutely zero control over 13 anything that anyone has done here. This has been a 14 completely independent investigation. 15 CHAIR CLOWE: I appreciate the abundance 16 of information regarding that. And my understanding -- 17 and you correct me if I'm wrong -- is, if this is GTECH 18 and Lottomatica's deal, it's their cost. 19 And we would not allow the taxpayers of 20 Texas to pay for the expertise that was needed to be 21 brought to bear in the outside counsel and the 22 Department of Public Safety. So you have monitored the 23 expenses and controlled that aspect of it. But the 24 state of Texas has not paid any monies. 25 MR. MATTAX: That's correct. And we will 0052 1 be reimbursed for any expenses. 2 CHAIR CLOWE: Further, Mr. Thompson, you 3 stated that you had worked for the Lottery Commission, 4 your firm had, at times in the past. 5 MR. THOMPSON: Yes, sir. 6 CHAIR CLOWE: And I want to state for the 7 record -- and Commissioner Cox, you'll remember this -- 8 that, at a point in time, I was employed by the State 9 Bar of Texas. And I sought legal counsel at that time 10 to ascertain if, in fact, my employment by the State 11 Bar, while I was serving as a commissioner, in any way 12 constituted a conflict of interest. 13 And legal counsel gave me legal advice 14 that that was not a conflict. At that point in time, I 15 think it was late 2003 or early 2004, I engaged your 16 firm to represent me in those employment negotiations. 17 I was employed as a management adviser. 18 And you did, for a period of time -- to my knowledge, 19 you were not representing the Lottery Commission on 20 other matters at that time and there was no conflict 21 between my sitting as a commissioner and your 22 representation of me, as an individual, going into 23 employment of the State Bar of Texas. 24 Further, we concluded that employment 25 arrangement. You billed me. I paid you in full. And 0053 1 that relationship came to an end. 2 MR. THOMPSON: Yes, sir. 3 CHAIR CLOWE: And that relationship that 4 we had as attorney/client has in no way entered into 5 any other relationship between your firm and myself, 6 either in my public or my private position. 7 MR. THOMPSON: No, sir. That -- all of 8 that is correct. I was -- I was personally involved in 9 that matter because of the experience that I had had 10 before negotiating contracts between private 11 individuals or corporations and governmental agencies 12 and the experience dealing with some conflict issues 13 involving state agencies. 14 You're correct that that representation 15 did precede this. It did not occur simultaneous with 16 any representation of the Lottery. In each instance 17 where I have represented the Lottery, it was pursuant 18 to a contract that was entered into between the Lottery 19 Commission and my firm. 20 The two occasions before were Vinson & 21 Elkins. This time it's Graves, Dougherty, Hearon & 22 Moody. The way -- Mr. Mattax didn't mention this 23 detail. 24 But the way that process worked is that 25 we learned that the Lottery Commission was seeking 0054 1 proposals from outside -- from firms to provide legal 2 counsel in these areas. In each of those instances, my 3 firm submitted a proposal. 4 It's not exactly a competitive bidding 5 process because it's a contract for professional 6 services. And the cost information was submitted 7 separate from the information regarding the 8 qualifications of the firm. 9 I don't know how many different law firms 10 submitted proposals this time around, but I do know 11 that we were in competition with other firms. I also 12 understand that you were not involved, commissioner, in 13 the selection of the successful bidder in that process. 14 After we were notified by the Lottery 15 Commission that we had presented the proposal with the 16 best set of qualifications, the Lottery Commission 17 started negotiating with us on price. And the Lottery 18 Commission, as usual, came to discounted rate. 19 And -- and so that is the means by which 20 I'm here today and by which Graves Dougherty is 21 providing outside legal services to you today. 22 CHAIR CLOWE: Very good. Any questions, 23 Commissioner Cox? 24 COMMISSIONER COX: No, sir. 25 CHAIR CLOWE: Anything further from you 0055 1 gentlemen at this point in time? 2 MR. EDENS: No. 3 CHAIR CLOWE: Thank you both very much. 4 Let's take a short five-minutes recess, if we may. And 5 then we'll ask the lieutenant and sergeant with the 6 Department of Public Safety to come forward. 7 (Recess from 10:08 a.m. to 10:16 a.m.) 8 CHAIR CLOWE: We'll come back to order. 9 Gentlemen, we're happy to have you here with us this 10 morning and we look forward to your report. I see by 11 your identification that you are both commissioned 12 police officers. 13 And lieutenant, I believe -- will you 14 lead off and give us your background and history, 15 please? 16 MR. RIORDAN: Yes, sir. Thank you for 17 allowing us to come before you this morning. My name 18 is Mark Riordan. I'm a lieutenant with the Department 19 of Public Safety Criminal Intelligence Service. I've 20 been employed by the department some 31 years. I'm an 21 Austin native Houston resident. 22 MR. MANNING: Cliff Manning. I'm a 23 sergeant with the DPS Criminal Intelligence Service. 24 I've been so employed for over 12 years, stationed in 25 Houston. And I'm not a Houstonian. 0056 1 MR. RIORDAN: I do have a written version 2 of our summary that we're going give you this morning 3 that I would like to pass on to you. I won't be 4 reading from it. We'll be referring to it, however. 5 The -- my new Dell Computer crashed on 6 Monday. And Sergeant Johnnie Jezierski spent all day 7 yesterday getting this ready for me today. I want to 8 thank him for that. 9 The Department of Public Safety began 10 this -- this background investigation, this 11 administrative investigation in late January at the 12 request of the Lottery Commission. 13 And we have historically had the task of 14 doing background investigations for state -- state 15 agencies, for governor appointments, for our own 16 agency, for other agencies that are highly regulated, 17 such as the Racing Commission. 18 And we have -- my agency or my service, 19 actually, the Criminal Intelligence Service, has been 20 the go-to agency for those criminal -- those 21 administrative background investigations. And we've 22 done many, many, many over the years both on 23 individuals and on corporations, brand new corporations 24 and long-term, existing corporations. 25 And so we have that experience locally 0057 1 and are perfectly comfortable doing these. We do them 2 all the time. 3 However, it was true what Patrick said 4 and that was, at the beginning of this assignment, it 5 was a huge, daunting task because, with only a very few 6 exceptions, we have not done anything such -- in such a 7 global nature. We have not done anything of such size. 8 And we, in fact, were tasked with doing 9 this on, not only Lottomatica, but also its parent 10 company, De Agostini, the other company, Invest Games, 11 that you heard about, and GTECH. And so it has been 12 and continues to be a huge task. 13 But through the expertise of Patrick's 14 group, through the expertise of Ms. Kiplin and her 15 office, of David Mattax with the Attorney General's 16 Office, who have all made this task much easier and 17 also through the expertise of five of the best 18 investigators my department has to offer, we've done 19 you an excellent job. 20 And I'm happy to say that most of them 21 are in the audience today behind me to stand behind 22 this interim report. 23 As I said, we began this task in late 24 January in addition to our normal organized crime 25 investigations, counterterrorism investigations. This 0058 1 has not been a full-time assignment for most of the 2 investigators. 3 Initially and -- initially, myself -- I 4 was brought on board to begin the process. But as I 5 said, we assigned five of the best investigators my 6 agency has to offer. 7 Sergeant Cliff Manning, who works with me 8 in Houston was assigned as our case agent. Sergeant 9 Johnnie Jezierski also is in Houston, Sergeant David 10 Jones of San Angelo, Sergeant Mark Leger in Beaumont, 11 Sergeant Carlton Scott in Austin, and then Jennifer 12 Miears, our crime analyst in Houston, and Rita Monk, my 13 administrative assistant in Houston. 14 All are tops in their games, tops in 15 their field and the best we have to offer, a combined 16 investigative and law enforcement experience of some 17 145 years. And so we put together a quality team. 18 Since the end of January, we have -- as a 19 team, we have covered some 2,700 hours of time spent on 20 this investigation. And we began by calling every 21 state in the United States that GTECH has a contract 22 with and many of the foreign countries. 23 And we developed early reputation -- not 24 reputation but relationships with state police 25 investigators and with other lottery investigators in 0059 1 these other states. And those relationships continue 2 to this day. 3 And we -- we knew early on, even though 4 we were tasked with doing this independently, that we 5 had a huge task ahead of us. But we also knew early on 6 we were going to need some advice, some assistance from 7 people all over the United States and now, in fact, all 8 over the world. 9 And I'm happy to tell you that we -- we 10 are continuing to work with many, many of those 11 investigators, state police investigators, to provide 12 you the very best -- very best that you've asked for. 13 In addition to state -- state police 14 agents and lottery investigators in the United States, 15 we've also made contact with and worked with federal 16 investigators here. We've made contact with foreign 17 diplomats, with law enforcement in many foreign 18 countries, with business people in foreign countries 19 that are not related in any way, shape or form to the 20 gaming industry. 21 And, again, we continue those 22 relationships. And those people have been invaluable 23 in this investigation. 24 We have traveled extensively. We sent 25 four investigators to Milan, Italy in that area to 0060 1 investigate De Agostini. Also, the majority of the 2 board members of Lottomatica live in and around and 3 work in and around Milan. 4 We sent two investigators to Rome. 5 Myself and Sergeant Jezierski went to Rome and 6 interviewed and practically lived at Lottomatica for 7 several days but also interviewed many government 8 officials in Italy, as well as our Milan team, many 9 foreign diplomats, American diplomats at the American 10 embassies and business people in Italy and elsewhere. 11 We have traveled in the United States to, 12 of course, Rhode Island and Massachusetts, New York, 13 Pennsylvania, Minnesota, Nevada, and many other states 14 in the Northeast and the Midwest in the furtherance of 15 this investigation. 16 And as our investigation continues, 17 particularly in concluding our look at GTECH, we have 18 more travel ahead of us and are prepared to do it. 19 I think it would be safe to say that, up 20 until now in the past few months, we've interviewed 21 hundreds of people in the furtherance of this 22 investigation worldwide. As I said, however, we are 23 continuing. 24 We're here today to provide you with 25 information on Lottomatica and on De Agostini and 0061 1 Invest Games that we were tasked to do which, in the 2 initial meetings, was the character and ethics of the 3 companies involved and of the people involved. 4 And we are continuing an investigation of 5 GTECH. And we'll be very happy to provide that report 6 in the future to you. 7 An interesting dynamic today because, 8 while I have rehearsed this -- this statement today and 9 this presentation, I brought Sergeant Manning to sit 10 next to me, who has not rehearsed it and who is fresh 11 and is much more apolitical and will be available to 12 answer your questions. And perhaps questions you 13 haven't even heard of, he knows the answer to, haven't 14 even thought of. 15 But anyway, I intend to give a summary 16 and then we'll both be available for questioning. And 17 as I said, my -- most of my team is in the audience. 18 So I'm sure they'll be ready to step up to the plate. 19 CHAIR CLOWE: Would you point them out to 20 us, please? 21 MR. RIORDAN: Yes, sir. I sure will. 22 Sergeant David Jones from San Angelo, Rita Monk, my 23 administrative assistant, and Sergeant Johnnie 24 Jezierski. 25 CHAIR CLOWE: Very good. Thank you all 0062 1 for being here. 2 MR. RIORDAN: The -- we begin by 3 explaining or giving you information on De Agostini. 4 And before I start, I have to say that we -- we -- a 5 lot of what we do is in trying to piece together 6 information. 7 And some of the things that we find 8 important are not -- are what is not said, what's not 9 provided, in other words, what's kept from us. Some of 10 the things we find important also is what's told or 11 found by one group. And we compare and contrast that 12 to what we find out. 13 And so we have kept somewhat separate 14 from Patrick and Rod, who just gave their presentation, 15 on purpose. Even though we worked with them, we needed 16 information from them, they needed information from us, 17 we specifically did not really work closely together 18 because, frankly, I wanted to see what they were 19 getting and contrast that to what we were getting. 20 And I have to tell you before I start 21 that -- that their presentation looked good to me. And 22 I didn't see anything that we didn't also learn and 23 aren't able to confirm. So good job. 24 However, the interesting dynamic in this 25 is that they are looking at the business transaction 0063 1 and the very specific, minute details of the money 2 transactions. 3 And we really didn't concern ourselves 4 with that at all because our concern was what we 5 were -- is what we were tasked for, and that is the 6 ethics and character of the company and the people 7 involved, the history, which you can find a lot about 8 ethics and character in the history. 9 We looked at those transactions as far as 10 not necessarily how they're being made, but who is 11 making them and who is behind them. And so that's 12 the -- that's the dynamic that we bring to the table to 13 this -- of this administrative look. 14 And so I'd like to start with De 15 Agostini. And the reason we start with De Agostini is 16 because, even though the news media has -- has referred 17 to this as a reverse merger where the small company, 18 Lottomatica, buys the large company, GTECH, in fact, in 19 the -- in the -- when you're talking about the 20 financial foundation of this transaction, this is a De 21 Agostini transaction. 22 De Agostini is a much larger company than 23 GTECH. I believe their annual revenue is some five or 24 six times that of GTECH. They are the parent company 25 of Lottomatica, own the majority portion of 0064 1 Lottomatica. 2 Members of De Agostini's board of 3 directors are a majority of the board of directors of 4 Lottomatica. And I believe they are expected to remain 5 so, if this planned acquisition goes through. 6 And we've been told that, for instance, 7 at Lottomatica, no major company decision is made 8 without first going through De Agostini. And so this 9 is very much a De Agostini-orchestrated acquisition, 10 even though it is through their subsidiary, 11 Lottomatica, or by their subsidiary, Lottomatica. 12 De Agostini is headquartered in Novara, 13 Italy. It was originally founded in the very start of 14 the 20th century, in the early 1900s by Giovanni De 15 Agostini. His -- he kept the company. His -- his 16 family kept the company. 17 It was a publishing business, maps and 18 encyclopedias. It was purchased by the Boroli family 19 in the mid 1940s, 1946 I believe. And through the 20 years, their foundation has been their publishing arm. 21 And as I said, maps, textbooks, 22 encyclopedias. They did door-to-door sales. They have 23 been very well-known, very well-respected in Italy this 24 entire time and remain so to this day. 25 They are very much into children's texts. 0065 1 And they understand there that publishing is one of the 2 foundations of their company, one of the -- what they 3 call the four pillars of their company. 4 They have, however, branched out over the 5 years. And the biggest expansion has come since the 6 1990s. And they have entered into many business 7 transactions up until this day where they own many, 8 many companies in a broad spectrum of business sectors. 9 They employ some two thousand people or 10 so. They have field offices in many cities and conduct 11 business in some 33 countries. 12 As I said, they have set their company up 13 probably informally, would you say, into four pillars. 14 And that is: 15 Publishing, which is what they -- what 16 they cut their teeth on and what their company got 17 started with; 18 Insurance, which can be -- the publishing 19 part of that can be represented through De Agostini 20 Editore, their insurance company, which is Toro 21 Assicurazioni, which is their insurance company that 22 they own; 23 De Agostini Invest which is, of course, 24 as you can imagine, their acquisitions and holdings 25 company; 0066 1 And then Lottomatica. 2 I have to say that their primary 3 financial foundation is expected to be Toro and 4 Lottomatica and especially with -- if this acquisition 5 occurs, the new Lottomatica. The insurance company and 6 their gaming industry will be their financial 7 foundations. 8 But they consider their personal -- what 9 people know them as most of all is the publishing end 10 of their company. De Agostini Editore, as I said, is 11 their -- their publishing part of their company. They 12 have many divisions under that. 13 They're involved in many, many different 14 things in their publishing industry. They publish in 15 13 languages and in 30 countries. They do so through 16 direct sales of published items, through, as I said, 17 door-to-door sales. 18 They have periodicals of various and 19 sundry subjects. They have textbooks. Maps is a big 20 part of their country. I believe they're excited about 21 China and Russia and those burgeoning business arenas 22 who will need that type of product. 23 Toro, the insurance company, is a rather 24 large insurance company in Italy. That's the fourth 25 largest insurer in Italy. They purchased that company 0067 1 from Fiat which is, of course, the automobile 2 manufacturer. 3 They are -- the insurance company itself 4 is very old. It's -- it had its start in the early 5 1800s. So it is a very well-established, very old 6 insurance company in Italy, very well-known. 7 They have a network of some 1,100 8 agencies all over the country in that insurance. 9 Recently, they've been publicly-listed on the Milan 10 Stock Exchange. 11 De Agostini Invest is the investments end 12 of the company. They focus on high-growth industry 13 that they purchase, innovation, new companies. They 14 are -- they also invest in financial -- the financial 15 sector, as well, and industrial products in Italy. 16 They are very much or they very much 17 monitor the launch of new companies in order to, you 18 know, further their business and acquire new companies. 19 A very -- that's a very active arm of their company. 20 Lottomatica, as I said, is one of their 21 four pillars and is to be one of their financial 22 foundations for their company for the future. 23 Lottomatica itself began operations in 1993 when they 24 were awarded the contract -- which, in Italy, is called 25 a concession -- with the government, with the Italian 0068 1 Finance Ministry. 2 And they were awarded that concession to 3 run the Italian National Online Lottery known as Lotto. 4 Lotto itself, the game, is known through hundreds of 5 years of Italian history. The modern computerized 6 version of it, however, can get its start back to 1993. 7 When I say the word online, I want to -- 8 I want to clarify that. In Italy, online means it's 9 computerized and on a network, not that it's on the 10 Internet. 11 Lotto, the -- this concession, this 12 mainstay of their gaming, brings in about or accounts 13 for about 80 percent of their revenue. So the Lotto 14 game is their bread and butter. They -- they are very 15 proud of that game. I can tell you that. 16 De Agostini moved in and purchased 17 Lottomatica in about -- well, in 2002 or thereabouts, 18 right at the start of 2002. Prior to De Agostini's 19 purchase, Lottomatica had the concession for Lotto. 20 But the company was not very 21 well-managed. Plans for the future were not very 22 complete. And their network and their -- their 23 terminals were not as up-to-date as they could be. 24 De Agostini and those individuals that 25 they hired to come on board at that time are very proud 0069 1 of the fact that they have created a very current, very 2 successful management process. They have updated and 3 -- the computer network and made it a very secure 4 network. They manage -- in contrast to Texas's 5 terminals, they have some 44 thousand terminals 6 throughout Italy that they have networked. 7 And for them, it's a very successful 8 operation. They're very, very proud of that fact. 9 The -- the terminals in Italy are -- and you'll hear 10 the term and understand the term Tobacconist. In 11 Italy, that is their convenient store. 12 That would be the American or the Italian 13 equivalent of our convenient store, not to be confused 14 perhaps with, in America, our convenient store is 15 always associated with gas pumps and the like. And 16 that's not necessarily the case in Italy. 17 They are corner shops, corner convenient 18 stores on every street corner. On every street might 19 have one or two or three. And they're called 20 Tobacconists. And their terminals are in those. 21 They consist of or they provide three 22 main services to Italian citizens: Lottery, the Lotto. 23 They also have scratch-offs as -- as we do; they also 24 do sports betting and they do those through those 25 terminals; and then they provide commercial services. 0070 1 Commercial services run the gamut from 2 government services, like collecting of taxes, car 3 taxes, car licenses, television taxes. You can go to 4 the -- to the Lottomatica terminals in these 5 Tobacconist shops and purchase all of those and pay for 6 all of those through the terminal. 7 For the purpose of their network, it's my 8 understanding that those are perhaps separate -- 9 separate terminals in these Tobacconist shops but some 10 of them may be combined. 11 They also provide concert ticket sales 12 and sports ticket sales through these terminals. 13 That's one of their -- one of their big business. They 14 see the commercial service as being one of the growth 15 areas of their industry in -- in Italy. 16 And frankly, should this planned 17 acquisition occur, they see the opportunity, the 18 potential for those commercial services to be spread 19 all over the United States and in those countries where 20 GTECH -- GTECH offers some of those same commercial 21 services in other areas. 22 Lottomatica very much believes that the 23 spread of those commercial services throughout is one 24 of their financial futures. 25 Lottomatica is -- has a very small 0071 1 portion of the video gaming industry, our crude term 2 perhaps, slot machine industry. Their video gaming 3 industry is just getting off the ground, just being 4 networked through their network so that they can 5 guarantee the security of the industry. 6 And they're very proud of the fact that 7 they are putting that network into place. And they 8 hope to -- they -- they believe and very strongly -- 9 and when I say they, we interviewed many, many -- many, 10 many people. 11 And I can tell you that we were surprised 12 that their company -- internally, I mean, they -- they 13 love their company and what they've been able to do. 14 They believe, by increasing their presence in all these 15 Tobacconist shops, by creating this network, by 16 creating this huge -- this huge number of terminals, 17 that they have been very instrumental in diminishing, 18 and in some places completely wiping out, the black 19 market in gaming and scratch-off tickets and all of 20 that. 21 They believe that, because they have done 22 that in the Tobacconist shops, they've also diminished, 23 in a lot of areas completely ended, the black market in 24 cigarettes and -- counterfeit cigarettes, counterfeit 25 taxes. They believe they've been instrumental in doing 0072 1 that. 2 And they very much look forward to doing 3 that with the video gaming industry in Italy and 4 bringing that same kind of security and that same kind 5 of end to those illegal operations in Italy by -- by 6 their secure networks and their secure machines. 7 About two years ago, the Lottomatica 8 management -- at the urging of De Agostini, who had a 9 tremendous amount of investment cash available to their 10 investments, Lottomatica officials began looking at the 11 purchase of -- of companies with the eye towards moving 12 global. 13 Their operation, as it currently stands, 14 is in Italy. They have made a couple of attempts over 15 the years to move outside of Italy that didn't pan out 16 because of the economy at the time. And -- but they 17 very much realize that expanding globally is important 18 to them. 19 They also very much realize that 20 expanding their company beyond what they have in Italy 21 is important because this concession to operate the 22 Italian lottery ends in 2016. And, at the completion 23 of that, there's obviously no guarantee that they'll 24 continue to be that provider for that contract. 25 And so that very much is an end date for 0073 1 them that they -- that they have got to handle in their 2 future planning. 3 The -- on a trip, a business trip to 4 GTECH -- and I believe it was for their video gaming. 5 They were looking at their video gaming. Lottomatica 6 officials began the idea -- began kicking around the 7 idea to purchase GTECH. 8 And over the past two years, that has 9 been a transaction that's been ongoing and, of course, 10 as you know, culminated with the offer that's currently 11 on the board. 12 As De Agostini is a very well-respected 13 company in Italy, so is Lottomatica. We literally 14 went -- everywhere we went, everyone knew Lottomatica 15 and respected Lottomatica. 16 One of the reasons that we were able to 17 glean from our discussions with even people on the 18 street was that they have a government contract. And 19 in Italy, that's a very important thing for a business 20 to have a government contract. And it means to the 21 citizens of Italy that they are a notch above, a cut 22 above the regular Italian companies. 23 The -- upon their purchase of -- upon De 24 Agostini's purchase of Lottomatica, they did also buy 25 into a company problem that has been mentioned. And 0074 1 that has culminated in an antitrust suit that was filed 2 against the company. 3 There were some complaints to the 4 Competition Authority in Italy concerning an agreement 5 between Lottomatica and Sisal, which is a competitor of 6 theirs, that, even though Lottomatica had the exclusive 7 right to Lotto, the other games are -- they have no 8 such exclusive right. And so they do have competitors 9 in that business in that industry. 10 Lottomatica and Sisal were entering into 11 an agreement for various parts of their -- I don't 12 recall off the top of my head the actual product that 13 they were providing. But they entered into this 14 agreement with Sisal. 15 And as a part of this agreement, there 16 were some other companies perhaps that were left out of 17 the ability to be able to -- to also be a part of this 18 contract and be a part of this particular entry. They 19 complained to the Competition Authority and the 20 investigation was begun by the Competition Authority in 21 July of 2003. 22 And once again, it involved the claim of 23 collusion between Lottomatica and Sisal. And 24 ultimately, they were found guilty of having entered 25 into an anti-competitive agreement. Sisal was fined 0075 1 2.8 million Euro and Lottomatica was fined eight 2 million Euro. 3 They appealed. I say they. Lottomatica 4 appealed this conviction and the conviction was upheld 5 or the decision of the suit was upheld. And they are 6 now in the middle of their second and final appeal for 7 this. 8 They -- Lottomatica officials represent 9 this as -- as being a condition that occurred prior to 10 De Agostini's purchase of the company. However, there 11 were agreements with Sisal just as there are 12 agreements -- as Lottomatica explained to us, just as 13 there are agreements with other companies to do 14 business and they enter into agreements with other 15 companies to do business. 16 There were agreements with Sisal that 17 perhaps they failed to follow the letter of the law. 18 And, in particular, I think one that they -- they 19 failed to file within the appropriate time limit with 20 the -- with the state agency that oversees them. 21 And ultimately, it's possible that this 22 conviction will be upheld and that the fine will stand. 23 But to explain to the commission at this time, that has 24 not been ultimately decided. 25 CHAIR CLOWE: Did they pay the fine? 0076 1 MR. RIORDAN: They have already paid the 2 fine, yes, sir, as is their practice over there. It's 3 -- they're awaiting the final judgment. 4 COMMISSIONER COX: So the eight million 5 was a fine and not a judgment in a civil suit? It was 6 a criminal sanction? 7 MR. RIORDAN: The -- 8 MR. THOMPSON: It's administrative. 9 MR. RIORDAN: It's an administrative 10 sanction. 11 COMMISSIONER COX: Okay. 12 MR. RIORDAN: It's not -- no, sir. It's 13 not a criminal charge. It would be -- it's an 14 administrative sanction with an administrative agency. 15 It's an agency in -- in -- the 16 Competition Authority in Italy is kind of an 17 all-inclusive agency. They have -- they're 18 administrators. They're investigators. They also have 19 administrative judges. And so it's -- it's within that 20 realm that this was done. 21 The appeal -- the second appeal, as I 22 recall -- is that to the criminal? The second appeal 23 also is an administrative appeal. 24 COMMISSIONER COX: So there -- 25 MR. RIORDAN: It is a final appeal. 0077 1 COMMISSIONER COX: There are no criminal 2 charges or criminal renditions, if you will, involved 3 here. This is strictly an administrative matter? 4 MR. RIORDAN: That's correct. That's 5 correct. 6 The transaction, as -- as you've heard 7 from the law firm before us, involves Invest Games. 8 And we wanted to look at Invest Games very closely. 9 As I said, the dynamic we bring to the 10 table is we have -- we have different reasons for 11 needing to know things about these companies and one of 12 which is how can we in law enforcement after the fact 13 obtain information. 14 So that's how we entered into this. As 15 an example, we wanted know how we in law enforcement 16 can get information on these Italian companies. And so 17 one of the things that we did was visited with CERVED 18 at the urging of the American embassy, which is the 19 Italian version of Dun & Bradstreet. 20 It's a business reporting agency. A lot 21 of public information is available that perhaps we are 22 used to getting from one source, maybe the SEC, may be 23 available in Italy but from many different sources. So 24 it makes it a bit more difficult. 25 In the -- in the realm of Invest Games, 0078 1 we were very concerned because this is a Luxembourg 2 corporation. We know that international business 3 routinely uses -- routinely has holding companies or 4 paper companies in countries that have favorable tax 5 laws. 6 And the implications to that, frankly, 7 don't concern us if they're following those tax laws. 8 The implications for us and that we looked at were on 9 the availability of information. So we went at Invest 10 Games with that in mind. 11 We've been told that, if this planned 12 acquisition occurs, that Invest Games will ultimately 13 own 25 percent of this newly-created company, 14 Lottomatica, this overall company which -- which, in 15 our consideration, is a substantial portion of the 16 company. It's a major -- it's a major part of the 17 ownership. 18 In our interviews, we were told that the 19 purpose for this company was to divest assets due to 20 the favorable tax laws concerning selling assets, 21 divesting assets in Luxembourg. 22 They were quick to tell us that no such 23 sales are planned or thought of, but it's there should 24 it need to be done, whether it be to sell off a portion 25 of one of these companies that is not profitable or to 0079 1 sell off a portion of one of these companies, perhaps 2 to finance the transaction and pay off some debt that 3 was incurred. 4 Invest Games has told us -- and through 5 that, I mean the board of directors, those that are 6 going to be on Invest Games -- that Invest Games 7 itself, the company, will not be involved in the 8 day-to-day operation of the new company and it has not 9 been involved in the acquisition of GTECH. 10 They have told us that they will provide 11 an annual statement. And that annual statement will be 12 available through Luxembourg through the agency in 13 Luxembourg that handles those annual financial 14 statements. 15 They've also told us that -- or I say 16 they. Lottomatica officials have told us that all of 17 Invest Games will be reported on a consolidated 18 financial statement. The financial statements that 19 they provide through the company, Lottomatica, will be 20 consolidated statements and will include everything 21 there is to know about Invest Games. They've told us 22 that verbally. 23 GTECH officials have also told us 24 verbally that everything that they will be doing will 25 be reported. And that's a verbal statement to us. 0080 1 We believe ultimately, based upon what 2 we've seen, that the financial statement information 3 that we're used to seeing and used to getting will be 4 available through Lottomatica. 5 But once again, that's a verbal statement 6 to us backed up by some of the things that they've 7 already done that I'll explain in a few minutes. And 8 so that remains a concern for us and we're bringing 9 that up. 10 Some important points that I want to -- 11 that I want to bring forward to you before I go over 12 some serious -- not serious but major considerations 13 that we have that we wanted to point out to you, this 14 is a financial purchase of GTECH by Lottomatica through 15 the financial foundation and power of De Agostini. 16 But to put this planned company into 17 proper perspective, GTECH officials will manage this 18 overall company. Their CEO will be the CEO of a 19 newly-combined company. 20 It's been explained to us -- and nothing 21 from any of our interviews has found anything 22 different -- that the current structure and operation 23 of GTECH will remain as it currently is and the current 24 structure of Lottomatica, which is an Italian company 25 operating completely within Italy, will remain in that 0081 1 respect under the operation of or under the -- under 2 the guise or the -- not guise but management of Marco 3 Sala, as their chief operating officer. 4 So Lottomatica -- the current Lottomatica 5 will remain a wholly Italian company for several 6 reasons. One is the importance of that concession or 7 contract that's ongoing. They want to make sure 8 there's nothing that will jeopardize that. 9 But also, they recognize and they've told 10 us -- and they being De Agostini officials and 11 Lottomatica officials have told us that the management 12 expertise of GTECH in handling a global corporation is 13 already in place and it makes good business sense to 14 then leave that in place. 15 The -- we've also been told -- and we 16 really tried to get this answer confirmed through 17 numerous interviews. We've been told that currently no 18 operation of Lottomatica, as it currently stands, will 19 be brought over and affect in any way what's happening 20 in Texas. 21 So in the foreseeable future, in other 22 words, in the immediate future, nothing that 23 Lottomatica does currently in Italy will pertain to 24 what happens here in Texas. This will still be run by 25 the GTECH operation that's -- that's currently in 0082 1 place. 2 We want to bring about to you some major 3 issues that we've uncovered in our investigation. And 4 once again, be aware of our -- our background in this. 5 We're concerned about the availability of 6 information. We are also concerned, as we were 7 directed, about the character and ethics of the people 8 involved. And so that was two major areas for us that 9 we wanted to look into. 10 We visited with CONSOB. CONSOB, the 11 initials C-O-N-S-O-B, is the SEC counterpart in Italy. 12 We visited with them. And they currently require -- 13 it's a new requirement of theirs -- that company 14 reports be provided to them, those that are required to 15 be provided to CONSOB, will be provided in English, as 16 well as Italian, which I think you can understand the 17 change in the global economy and how they recognize 18 that that's just something that has to be. 19 However, what's important to us is that 20 CONSOB considers the Italian version of all these 21 documents to be the one the companies are held 22 accountable to in Italy. And so for legal purposes, 23 the Italian version of these documents is what's -- 24 what applies, not the translated version into English. 25 And so I think that creates an issue that 0083 1 perhaps we wanted to bring forth to you to possibly 2 address at some point in the future. The language 3 version of this is important. 4 In a related consideration to that, the 5 cost of translating documents is extremely expensive. 6 And the cost is related proportionate to whether or not 7 it's conversational Italian all the way up to 8 court-certified translation -- excuse me -- 9 conversational English or up to court-certifiable 10 translations. 11 One translation service quoted us a price 12 of 15 cents per word. So the word "the" translated 13 from Italian to English would cost 15 cents, 14 astronomical amounts of money. And I think that's a 15 consideration that we'd like to bring forward to you 16 that is something that will have to be overcome. 17 The other situation involving CONSOB, 18 which was important to us to bring forward to you 19 today, is the availability of documents. And the 20 availability of documents that -- for instance, that we 21 currently get from the SEC on corporations, is 22 extremely limited publicly compared to what we get 23 here. 24 In fact, if you were to go to CONSOB's 25 Web site -- and there is an English version of their 0084 1 Web site -- and do searches for all these companies, 2 you'd get very, very little. 3 Unfortunately, that's all you will 4 continue to get. Even though you are entered into a 5 contract with them, they told us you will get what's 6 publicly available and nothing else, which is -- which 7 is very little. 8 We perhaps had hoped that the SEC would 9 have a contract or an interagency agreement or MOU, 10 memorandum of understanding, with CONSOB where we could 11 go to SEC and get information. And, in fact, they have 12 some 52 or so of those agreements. 13 However, those only applied to dually 14 listed companies, companies listed in Italy, as well as 15 America, that we would be able to get that information. 16 And that's not going to be -- it's my understanding 17 that that's not going to be the case should this 18 planned acquisition occur. 19 We also visited with the Italian version 20 of the Lottery Commission that is known by the word 21 Monopoli. And the same is true there. The 22 availability of information from them is extremely 23 limited. 24 And so when we -- in our interviews with 25 these company officials, we wanted to see how that 0085 1 could be overcome. Well, and let me further add Invest 2 Games into that mix, the availability of that 3 information, obviously. 4 Senior management at Lottomatica has told 5 us, of course, as I already said, that information will 6 be on consolidated reports. And they have a -- file a 7 report on the six months in addition to the annual 8 report that is extremely detailed also. That -- so 9 they believe that we will get a tremendous amount of 10 information through their consolidated reports. 11 However, we provided them or received a 12 long list of what is required to be sent to CONSOB and 13 provided that to Lottomatica officials and asked them 14 how can we get this information on a regular basis, all 15 of this that you give to CONSOB, how can we get it. 16 Of course, we had already -- we already 17 knew that CONSOB wasn't going to give it to us. And 18 after looking at that document, their answer was: 19 We'll translate it to English and put it all on our Web 20 site and we can perhaps even provide you with a way to 21 be notified by e-mail when there's an update to any of 22 that information. 23 And, in fact, Lottomatica's Web -- 24 Lottomatica that currently exists, the Italian company, 25 their Web site in English is extremely detailed. And 0086 1 you'll find a lot of this information on their Web 2 site. And they -- they're very proud of their English 3 version of their Web site, I might add. 4 The same verbal promise to give 5 information came from GTECH officials. However, as a 6 Department of Public Safety officer, I want to caution 7 the commission that, you know, verbal promises are just 8 that, verbal promises. 9 Notwithstanding their already attempts to 10 comply and barring any kind of legally-binding 11 agreement, I would be suspect that that type of verbal 12 promise would be... 13 As has already been spoken by the law 14 firm, there were some omissions to the De Agostini 15 board of directors minutes. And those omissions were 16 reported to us to be very specific discussions about 17 the acquisitions of companies, about the -- for 18 instance, some of the information that they didn't 19 supply to us had to do with what they would be willing 20 to pay for a company, perhaps what kind of offer they 21 would be willing to make. 22 And under -- it was represented to us, 23 under Italian law, those types of discussion are not 24 required to be in writing in the minutes. However, 25 they have promised to provide us with, in summary form, 0087 1 with those areas where there are omissions. 2 We have not received that yet. But 3 that's in the works, in my understanding. And I have 4 to say that -- that I very much understand the 5 confidentiality of that information. And we don't have 6 any information to the contrary about what may be in 7 those minutes. 8 However, I can certainly understand their 9 not wanting to give us publicly that type of 10 information. I can understand that. 11 As has also already been told to you by 12 the law firm, De Agostini did not provide personal 13 disclosure forms for individual shareholders who held 14 more than three percent stock in the company. There 15 are no individual shareholders of Lottomatica that own 16 three percent or more, other than the company that was 17 mentioned. 18 Their explanation to us made sense to us. 19 And in our interviews with everybody involved, we 20 believed that they were being forthcoming. And we 21 believed that what they were telling us was the truth. 22 COMMISSIONER COX: So to clarify that 23 one, lieutenant, that says that they told you that 24 these limited shareholders were not active in the 25 business. And as you observed the business in 0088 1 operation, you did not see any of them active in the 2 business? 3 MR. RIORDAN: That's exactly correct. 4 And the -- this -- this limited shareholder situation 5 is -- is something that's coming. This new B&D Holding 6 is -- according to the company, is to be completed by 7 the end of 2006. 8 It will -- it will formalize and legalize 9 what has been over the years informal. And that is 10 that there are certain few members of the family who -- 11 families who manage the company and the rest have 12 nothing to do with the company. 13 We saw nothing to the contrary. To 14 clarify also, when this issue came about, I discussed 15 this with my command staff at length about this -- this 16 not disclosing personal information. 17 I have to say that we were provided with 18 their -- of course, their identifiers. We knew who 19 they were. But the full disclosure form that everybody 20 else gave they did not. I say these -- these 21 shareholders who do not participate in the company did 22 not. 23 And my agency is comfortable with the 24 fact that they believe we can -- we could have 25 determined elsewise in our investigation, if it came to 0089 1 light that some of them were, in fact, involved in 2 management. And we did not find anything. And we were 3 confident that that was the case. 4 There are two individuals that I want to 5 tell you about that we have information concerning. 6 One is Lorenzo Pellicioli, the chairman of De Agostini, 7 the chairman of Lottomatica, expected to be the 8 chairman -- remain the chairman of the newly-created 9 company if the acquisition goes through. 10 Of course, he has in his capacity owned 11 many, many companies, been involved in the operation 12 and management of many, many companies, on the board of 13 directors of many, many companies. 14 And one of these such companies was 15 purchased by his company and the stockholders, 16 shareholders agreed to the purchase. It was, as I 17 recall, a one-to-one share price type transaction. 18 Several banks oversaw this transaction 19 and approved the transaction and the transaction 20 occurred. At some point later, a prosecutor in Italy 21 -- and I believe it was in Turin, if I remember right, 22 stated that the price was not fair and, in fact, 23 charged Mr. Pellicioli with a charge of insider 24 trading. 25 And -- and that charge was filed against 0090 1 him in 2001, some five years ago. And it remains on 2 the books. 3 Now I caution the commission not to read 4 anything into the time length here because that may not 5 be so important. It may still be an active case. That 6 is one of the details that we are still trying to 7 confirm and get information on. And we'll report the 8 conclusion of that to you. 9 There has been no furtherance of that 10 case. It has sat on the books since 2001. And the 11 current status of it is it's still there filed against 12 Mr. Pellicioli. 13 Mr. Antonio Belloni is on the board of 14 directors of De Agostini. Of course, once again, being 15 a member of that family and a member of those business 16 transactions, has been involved in many, many companies 17 over the years. 18 He was involved in a shipping company 19 many years ago back in the 1980s and was -- was, I 20 believe, asked by the government to consider a contract 21 with some -- some needy countries, Third World 22 countries, if you will. 23 And he entered into that contract. And 24 in the process of that, however, he was contacted by 25 members of the Socialist Party at that time and was 0091 1 more or less extorted. And he did agree to pay them 2 money in order for this contract to continue. 3 And, in fact, he did provide them with 4 what they asked for. At the end of that contract, he 5 ceased having those types of relations with those 6 people. 7 In 1993 in Italy was a huge change 8 throughout the country because of a lot of early-on 9 corruption came to light. And when all this came to 10 light, Mr. Belloni stepped up, went to the local 11 prosecutor and fully disclosed everything that he had 12 been involved with back in the 1980s -- 1985 or so I 13 think is when all that started -- and fully disclosed 14 all that to the Italian prosecutors, assisted in their 15 investigation in their case. 16 Because, however, he was involved, he was 17 charged at that time with being involved. However, in 18 it -- the action was never commenced. And in 2001, a 19 judgment was entered in Italy dismissing all charges 20 against him. 21 Those are the only two members of either 22 one of these three companies -- Invest Games, 23 Lottomatica, De Agostini -- that we currently have this 24 information on. And as I said at the start, we're 25 continuing with our look at GTECH. 0092 1 However, I also have to caution you that 2 information continues to come in on De Agostini and 3 Lottomatica. And we'll report any updates when we 4 receive it. 5 At this time, we're open to questions. 6 COMMISSIONER COX: Mr. Chairman, early on 7 in this process, I shared the concern Mr. Thompson has 8 expressed that, given the complexity of this 9 transaction, where everybody was and how rapidly action 10 seemed to be needed, that it was a daunting task. 11 And I attended the initial organizational 12 meeting where the team first came together with Mr. 13 Mattax and with the Graves Dougherty folks and with the 14 folks from the Department of Public Safety. 15 Department of Public Safety was 16 represented at that meeting by a number of very high 17 officers. It was very clear from the start that 18 Department of Public Safety had a high level of 19 interest in this undertaking. 20 And it's very clear to me that we have 21 had the first team and that they have accomplished in 22 what is a relatively short period of time a remarkable 23 amount of work. And I for one am very grateful for 24 that. 25 CHAIR CLOWE: Absolutely. 0093 1 COMMISSIONER COX: Lieutenant, I have a 2 couple of questions. On the Invest Games situation, 3 and Luxembourg, as I understand from Patrick, that 4 there are two advantages of Luxembourg. One is privacy 5 and one is tax advantages. 6 Clearly, you could take advantage of one 7 without the other. Do you think we have any reason to 8 concern -- to be concerned that they will try to take 9 advantage of both and take -- try to conduct a 10 tax-advantage transaction with an unidentified party? 11 MR. RIORDAN: Commissioner, I defer to 12 Sergeant Manning, who went to Luxembourg and can tell 13 you firsthand. 14 COMMISSIONER COX: All right. 15 MR. MANNING: Quite honestly, I'm not 16 real sure how to answer that question. But that was a 17 concern of ours from the -- from the very beginning, if 18 De Agostini or Lottomatica would be in a position to 19 move one of the owner or one of the managers that one 20 of the Lottery Commissions didn't agree with and hide 21 them in Luxembourg or use it to sell off pieces of the 22 company to enable to finance it. 23 As far as the financing aspect of it is 24 concerned, I conducted over 26 interviews of my own in 25 De Agostini. And they appear to be in a position to 0094 1 afford this transaction without any problems at all. 2 And while I was in -- Sergeant David 3 Jones and I were in Luxembourg, the information was 4 readily available to us. Everything we asked for was 5 presented to us. 6 So I'm not -- I'm not sure whether or not 7 it's going to be as much of a privacy issue as maybe it 8 was in the past. We made some contacts there that made 9 readily available to us anything we asked for. 10 COMMISSIONER COX: Mr. Mattax or Graves 11 Dougherty, do y'all have any concerns that we're not 12 adequately protected or aren't able to call forward 13 information on potential owners of Invest Games? 14 MR. MATTAX: Let me go ahead and digress 15 here and talk on a more global basis about this 16 information issue, because both Graves Dougherty and 17 the Department of Public Safety have raised some issues 18 with respect to what continuing information the Lottery 19 Commission will be able to receive. 20 Let me make it -- start off by making it 21 clear. I don't know if it's been stated, but this 22 transaction will in no way affect the current contract 23 the Lottery Commission has with GTECH. That contract 24 will remain in place as is. 25 This transaction will not change that. 0095 1 One of the provisions in our contract with GTECH 2 specifically provides and GTECH agreed that, quote, 3 during the term of the contract and any renewal 4 thereof, it -- as in GTECH -- shall be obligated to 5 provide such information about its officers, directors, 6 employees and owners -- owners, as well as all 7 information about its subcontractors' officers, 8 directors, employees and owners as the Texas Lottery 9 Commission may prescribe. 10 To that end, I have drafted a letter for 11 consideration by the Lottery Commission. I think 12 probably the executive director, you know, either he or 13 his designee, if they so wish, could send this letter 14 out. 15 And if I may, let me go ahead and hand it 16 up. We can go over it -- go over it right now. 17 And during the course of the 18 investigation, it became clear that there would be 19 situations where we would not automatically necessarily 20 get information, the Lottery Commission would not get 21 information it had received in the past. 22 And so having had the discussions with 23 Department of Public Safety and also with Graves 24 Dougherty, I identified some areas -- I'm working with 25 them -- that I thought we needed to clarify that, if 0096 1 this transaction, in fact, goes forward, this is 2 information the Lottery Commission will expect to 3 receive. 4 Let me go through that. The first is 5 with respect to all the filings on CONSOB. And again, 6 CONSOB is the equivalent of the SEC in Italy. And as 7 was indicated, CONSOB will not share the information 8 with us but Lottomatica has represented that they'll 9 put that information on their Web site, put it in 10 English. 11 So the first requirement in the 12 prescription, if you will, would be that all filings 13 made by Lottomatica with the CONSOB shall simultaneous 14 with filing be made available by GTECH in English to 15 the Lottery Commission via electronic transmission to 16 the Lottery Commission or publication on Lottomatica's 17 Web site. 18 So this is basically a directive from the 19 Lottery Commission pursuant to their contract. This is 20 what you will do. 21 Secondly, for purposes of all dealings 22 with the Texas Lottery Commission, the English version 23 of all such filings will be controlling. Again, this 24 then will eliminate -- certainly for purposes of 25 Italian regulatory function, the Italian version will 0097 1 be controlling. 2 But for purposes of our contract 3 monitoring or any things that need to be done in Texas, 4 the Lottery Commission will -- we'll let them know that 5 it's the English version that's going to be 6 controlling. 7 So then that way it will allow us to 8 continue to get the same types of information, though 9 the information on CONSOB is going to be very detailed 10 and -- and as already indicated, they currently have it 11 on their Web site. 12 But this then will just be a 13 formalization that you will continue to provide it and 14 secondly, a formalization that we will hold you to the 15 English version. So make sure that the English version 16 is accurate because that's what we're going to hold you 17 to. 18 Secondly, GTECH shall inform the Texas 19 Lottery Commission within three business days of any 20 change in the ownership of the merged entity that 21 results in a single person or entity holding three 22 percent or more of the merged entity. 23 Now the reason I used the word merged 24 entity is that, in the future, they may change the name 25 of that merged entity. But bottom line is what GTECH 0098 1 merges into, the company -- currently, it's going to 2 probably end up being GTECH Holdings, as was described 3 earlier. 4 But whatever the name of it is, you will 5 tell us who is going to have more than three percent 6 ownership and whatever those changes are. And that, 7 again, is a prescription that we're requiring of them. 8 Three, all regulatory filings required to 9 be made by Invest Games, a Luxembourg company, shall 10 simultaneous with filing be made available by GTECH in 11 English to the Texas Lottery Commission via electronic 12 transmission to the Texas Lottery Commission or 13 publication on the Lottomatica Web site. 14 Again, the verbal representation made was 15 that this information will be made available to us. 16 Again, this is a formalization and instruction to 17 GTECH, pursuant to our contract, this shall be done. 18 Four, GTECH shall inform the Texas 19 Lottery Commission within three business days of any 20 change in ownership of Invest Games S.A. that results 21 in a single person or entity holding three percent or 22 more of Invest Games. 23 Again, another concern raised was, well, 24 do we know will Invest Games will be used -- because it 25 has 25 percent ownership of GTECH Holdings, the future 0099 1 GTECH company, somehow the ownership or direction and 2 control would somehow be hidden company within that 3 25-percent company. 4 The point of number four is to not let 5 that happen. There's no indication that's going to 6 happen. The Department of Public Safety officers have 7 indicated their discussions and conversations with the 8 De Agostini group and the Lottomatica group don't 9 indicate that's the point and that's not the reason for 10 the company. 11 But this prescription that we're going to 12 give the GTECH will ensure that we do know who the 13 owners of Invest Games are if they change. 14 And five, GTECH shall inform the Texas 15 Lottery Commission within three business days of any 16 change in the officers, directors, or senior management 17 personnel with responsibility over lottery operations 18 or management structure of De Agostini SpA and, if 19 formed, B&D Holding di Marco Drago & C. S.a.P.A. 20 As was indicated, the intent is to 21 formalize the current informal structure of the De 22 Agostini group into a formal structure called B&D 23 Holding Company whereby you'll have limited partners 24 and general partners. 25 And the point of this is simply to say, 0100 1 whatever you call it, whether it continues to be De 2 Agostini or becomes B&D Holding, if anything changes 3 from what you've told us, you need to tell us within 4 three business days. 5 And it would be my recommendation -- let 6 me go ahead and finish reading the letter. It is my 7 understanding that these requirements have been 8 discussed as representatives of Lottomatica, just so 9 that it's clear that Lottomatica understands this is 10 what's going to happen. 11 And then please acknowledge receipt of 12 this notice by signing below and returning the original 13 to me. And I would recommend that it be addressed to 14 Mr. Turner, because he will -- he's not only the CEO 15 here, but he'll be the CEO -- proposed CEO of 16 Lottomatica. 17 My belief is that we have the absolute 18 right to require this type of information pursuant to 19 our current contract. And I believe the letter should 20 be sent. 21 I should let the commission know that I 22 have discussed with the general counsel of GTECH a 23 letter of this nature. And my understanding is that 24 this will not be an issue. 25 And so a letter of this form or, if other 0101 1 information would be requested, that could also be 2 done. But my suggestion would be that, in order to 3 assure that the representations that have been made 4 about the information the Lottery Commission will 5 continue to get, that that be formalized through this 6 letter prescribing the information we intend to get. 7 And it's my belief, based on my 8 conversation with GTECH, we will get the information. 9 COMMISSIONER COX: Now Lieutenant 10 Riordan, you indicated earlier that a number of things 11 of this nature had been agreed to orally. But you said 12 oral agreements are worth what we're worth. 13 And does this document seem to put in 14 writing an agreement to cover all those things that 15 were orally represented to you? 16 MR. RIORDAN: Well, my concern is that 17 you ultimately get every CONSOB filing, every 18 government-required filing. And because this addresses 19 that, if it's agreed to, then -- then I see it as being 20 one answer to that issue, yes, sir. 21 COMMISSIONER COX: Mr. Mattax, you think 22 it addresses those concerns? 23 MR. MATTAX: Right. And I want to make 24 it clear that, although I have had discussion with 25 GTECH and I believe that GTECH is not going to have any 0102 1 issues with this, this is a dictate from the commission 2 pursuant to the existing contract. 3 We're saying that, because the ownership 4 is changing, we are going to require this information. 5 I did, obviously, want to get with GTECH to make sure 6 they wouldn't have any issues with it. 7 But this is something that, as far as I'm 8 concerned pursuant to the contract, we can dictate and 9 receive. And it's my understanding we will get the 10 information. 11 COMMISSIONER COX: Mr. Chairman, just one 12 more question. With respect to Mr. Pellicioli and 13 these -- I think you characterized them as insider 14 trading charges? 15 MR. RIORDAN: Yes, sir. 16 COMMISSIONER COX: Now are those criminal 17 charges? 18 MR. RIORDAN: Yes, they are. 19 COMMISSIONER COX: Those are criminal 20 charges? And this matter has not come to trial? 21 MR. RIORDAN: Yes, sir. It's our 22 understanding that it is pending. However, we -- 23 because of differences in the Italian law and our law, 24 we don't have a clear idea of its status. 25 COMMISSIONER COX: So it may or may not 0103 1 result in a trial? 2 MR. RIORDAN: That's correct. 3 COMMISSIONER COX: Do you have any 4 indication what De Agostini might do were Mr. 5 Pellicioli to be found guilty in this matter? 6 MR. RIORDAN: Let me defer to Sergeant 7 Manning again because he spent the most time 8 interviewing those individuals. 9 MR. MANNING: De Agostini has a very 10 strong reputation in Italy. And I asked questions such 11 of this nature to many of the -- well, all the upper 12 management staff of De Agostini. 13 And they assured me, in matters such as 14 this, that individual would no longer be associated 15 with De Agostini in any way, form or fashion. And if 16 you'd like, I'll give you the exact quote they gave me. 17 COMMISSIONER COX: I'll leave that to 18 your choice. But even though Mr. Pellicioli is at the 19 highest level of the corporation, you sense that there 20 will be zero tolerance with criminal matters? 21 MR. MANNING: Yes, sir. I feel that way. 22 They consider themselves a very transparent company 23 with a very strong reputation. And this, I believe, 24 would reflect poorly on De Agostini. 25 And I don't think that's going to be 0104 1 tolerated with that company. And I feel that he would 2 be replaced rather quickly. 3 COMMISSIONER COX: Thank you, Mr. 4 Chairman. 5 CHAIR CLOWE: Well, first, I want to 6 applaud what you said, Commissioner Cox, in regard to 7 the job the Department of Public Safety has done. And 8 we certainly had the first team, no doubt about that. 9 I'm appreciative of the time and effort 10 that you put into this. And we want to thank you on 11 behalf of the commission. 12 I do have a few questions. But before I 13 get into those, I'd like to give the reporter a short 14 break. And we'll call you back in about five minutes, 15 if we may, and get into my questions. 16 (Recess from 11:28 a.m. to 11:37 a.m.) 17 CHAIR CLOWE: We'll come back to order. 18 I want to continue on with my initial remark expressing 19 appreciation for the work you and your team have done, 20 Lieutenant Riordan. 21 And I want to say that I think Mr. 22 Thompson made a very succinct remark relative to the 23 path that we have taken, as opposed to that which maybe 24 some other interests have taken, of employing private 25 investigators and relying on information that's 0105 1 available through various public sources. 2 Not only am I praising of the Department 3 of Public Safety, but of the technique that you have 4 explained to us in detail that you employed of actually 5 taking investigators to the scene to Milan and to Rome 6 and to various other locations, wherever they might be, 7 and conducting this investigation. 8 And I think that's the way to find out 9 what's going on, to look at people eyeball to eyeball, 10 and ask questions. And you have told me in the 11 briefing that you and other members of this team gave 12 me that you went unannounced to various locations and 13 walked in on meetings and surprised people. 14 And at first, they were shocked and 15 perhaps not too pleased. But over a period of time, 16 there was an adjustment to that. And they reacted 17 positively in the end to your inquiries and your desire 18 for information. 19 To me, that's the kind of thing that I 20 like to hear when I'm doing due diligence. I wonder -- 21 you said that you contacted many other states and other 22 enforcement agencies and officials. 23 Were you contacted by any other states or 24 any other entities in regard to this proposed 25 transaction? 0106 1 MR. RIORDAN: Prior -- prior to our 2 getting involved, the answer is no, not to my 3 knowledge. After we got involved and made the initial 4 calls, I realized and I hoped that we would be called 5 back perhaps by investigators. 6 And that was the case. So we have been 7 called out of the blue by investigators, some with 8 lottery commissions, some with the state police. And 9 we've met with them, talked to them, given them tips 10 and pointers on perhaps who to interview and who to 11 talk to and shared that kind of information. 12 We've done that with many states, yes, 13 sir and, I might add, a few foreign countries. 14 CHAIR CLOWE: My sense is, Commissioner 15 Cox, that we've done it again. 16 COMMISSIONER COX: Yes, sir. 17 CHAIR CLOWE: We have been more thorough. 18 We have been more detailed. We have gone to greater 19 lengths than anybody else that we're being made aware 20 of. And I'm pleased about that. 21 COMMISSIONER COX: I think -- I think we 22 have done what the people of Texas expect us to do. 23 CHAIR CLOWE: I told you, Lieutenant 24 Riordan, that the DPS was one of my two most admired 25 public agencies. And, you know, this just seems to 0107 1 bolster that opinion. 2 We are yet today on this agenda to hear 3 from the State Auditor's Office regarding an audit that 4 they have done on our security operation. And I never 5 miss a chance -- you know, I'm a multitasker. 6 As a result of that audit, and if it 7 turns out that it's beneficial, I would like to just 8 tell you and your department that we'd like to have a 9 continuing relationship with you, not only on this 10 matter -- and I think it's certainly called for here -- 11 but possibly on other matters where this agency has 12 needs for the kind of skills and talents and abilities 13 that are in your department. 14 And we would like to broaden our 15 relationship with you. And I'd like to ask you to be 16 the liaison so that, at some point in time, we might 17 sit down and talk with you about our security 18 operation, which is very important to us. 19 And you know, in my mind, we're almost 20 like a treasury department here. We're printing what 21 amounts to dollar bills and we're handling currency of 22 a sort. And we have many kinds of security activities 23 beyond probably what is a normal state agency. 24 In the past, we internalized it. And we 25 had, at one time I think, 32 or 33 certified peace 0108 1 offers. And we changed that direction, if not the 2 first part of this year, the last part of last year. 3 And I think, counselor, this is on the 4 agenda under the report of the State Auditor's Office 5 and our security operations. And we're waiting -- 6 they're waiting patiently. And we're appreciating 7 their waiting to come before us and talk about that. 8 But I think there's an opportunity here 9 for us to move closer to you-all and hopefully utilize 10 the expertise and the professionalism that you've 11 demonstrated in this report here today. 12 So I just, in that regard, want to give 13 you an early heads-up that we want some more of what 14 you have to give. And we'll pay for it. 15 And David, do you have any idea what the 16 cost is in regard to the work the Department of Public 17 Safety has done for us? 18 MR. MATTAX: No. I don't have those 19 numbers now. I'm not sure where they stand on the 20 bills. But I would assume, with 27 hundred hours of 21 work involved in this and traveling as much as they 22 did, it wouldn't be -- it will be substantial. 23 But again, with respect to that, that 24 will be charged back to GTECH. But, you know, I would 25 echo the fact that I've been quite impressed with what 0109 1 I've seen with respect to the Department of Public 2 Safety. 3 They got on this in a hurry and got up to 4 speed in a hurry. And they just basically did what you 5 needed to do and just went hands-on and met the people 6 face-to-face to get an idea of are these people people 7 we want to deal with in Texas. 8 And I think that the answer is yes. 9 CHAIR CLOWE: I was going to ask Mr. 10 Edens a question relative to the issue of the 11 Luxembourg entity and the 25-percent ownership. And I 12 was going to ask about what, in his opinion, 13 constituted a change in control, which would be the 14 factor that would trigger our entry into any 15 transaction, whether it was visible or invisible. 16 But I think Mr. Mattax has covered that 17 base in the draft letter that he has given the 18 commission. And he has set a threshold of three 19 percent, which is certainly fair to the commission in 20 regard to a change of control action, and a three-day 21 period of notification, which is certainly fair to the 22 commission. 23 So in my mind, unless you disagree with 24 what I've said, I'm satisfied in regard to my questions 25 about change in control. And you're not indicating any 0110 1 disagreement? 2 MR. EDENS: No, sir. 3 CHAIR CLOWE: Okay. For the record, 4 Graves Dougherty has signified that they do not 5 disagree with that understanding on my part. 6 Now gentlemen, I want to ask you the 7 question that I asked the attorneys. 8 During this entire process, has anyone 9 from either within the commission or outside of the 10 commission in any capacity approached you or any 11 members of your team in what you consider to be an 12 attempt to influence you in any way in regard to the 13 work you were doing and the report that you would 14 ultimately be making? 15 MR. RIORDAN: No, sir. No one. 16 MR. MANNING: No, sir, not at all. 17 CHAIR CLOWE: Very good. Commissioner, I 18 think that covers everything unless you have -- 19 COMMISSIONER COX: I have just one more 20 question -- 21 CHAIR CLOWE: Very good. 22 COMMISSIONER COX: -- that I missed 23 earlier. Mr. Edens or Mr. Thompson, I think, commented 24 that 58 percent of Lottomatica is owned by De Agostini 25 and that the other 42 percent included a Fidelity at 0111 1 about three percent. 2 What's the rest of that 39 percent? Is 3 that a thousand individuals that own tiny interests or 4 is that institutions that own 2.9 percent? What's -- 5 what does that stockholder base look like outside of 6 the De Agostini 58-percent interest? 7 MR. RIORDAN: There are some few 8 corporations and business entities in that ownership 9 and then many, many thousands of individual 10 shareholders. 11 COMMISSIONER COX: Well, were there any 12 of those that attracted your attention because of the 13 guideline that you established or for any other reason? 14 MR. RIORDAN: No, sir. None that we know 15 of, no. 16 COMMISSIONER COX: Thank you, Mr. 17 Chairman. 18 CHAIR CLOWE: And then Mark, the last 19 question is that, for you and the sergeant and your 20 team, you did not make any determination to this point 21 in your investigation that there was any reason for you 22 to conclude that the results of this transaction would 23 be unfit or unsuitable in regard to the terms and 24 conditions of our contract with GTECH? 25 MR. RIORDAN: We have no such conclusion 0112 1 up to this point, no, sir. 2 CHAIR CLOWE: Thank you very much. Mr. 3 Mattax, I think we're to you now. 4 MR. MATTAX: Well, thank you, Mr. 5 Chairman. I think, at this point, you've heard from -- 6 from the outside counsel who analyzed the transaction. 7 You've heard from the Department of Public Safety, 8 who's conducted the suitability review. 9 And I think that the conclusions one can 10 draw from this, which I agree with, are that there's 11 nothing unusual about the transaction. 12 The market seems to have accepted the 13 transaction. Indeed, the oversubscriptions to the 14 loans would indicate that the market believes that the 15 financial health of the companies is sufficient to pay 16 back those loans. So the transaction does not appear 17 to have any unusual implications in a negative way. 18 It appears that the ultimate control 19 group, the De Agostini group and the members of that 20 family, are concerned with their appearance. They are 21 concerned with their ethics. 22 Although there are some remaining issues 23 to be resolved, there's nothing at this point in time 24 to impact any or challenge the suitability that the 25 ultimate control group is going to be acquiring the 0113 1 GTECH contract. 2 I think it's important to note that that 3 investigation will continue. It's important, I think, 4 to -- to also recognize that any continuing 5 investigations, with respect to any change of 6 ownership, either currently going on or in the future, 7 we would anticipate and expect GTECH to pay for those 8 investigations. 9 But at this point in time, there does not 10 appear to be any indication that this transaction, if 11 it goes forward with Lottomatica acquiring GTECH, will 12 negatively impact the operations of the Texas Lottery. 13 The contract with the Texas Lottery that 14 the Texas Lottery has with GTECH gives the Lottery the 15 absolute right to terminate that contract in the event 16 that it makes a determination it's no longer in the 17 Lottery's interest. 18 At this point in time, I do not believe 19 there is any indication that this transaction with 20 Lottomatica will have any impact negatively on the 21 Texas Lottery. 22 And, therefore, it would be my 23 recommendation that the commission take no action with 24 respect to this and that we will continue to report, 25 with respect to additional information and any 0114 1 information gathered by any other states. 2 And should that recommendation change, we 3 would be back before the commission. But at this 4 point, I see no reason for the commission to take 5 action with respect to this transaction. 6 CHAIR CLOWE: I always try to follow the 7 advice of my lawyer. Who would you recommend sign this 8 letter to Mr. Turner? 9 MR. MATTAX: Well, I believe that the 10 executive director should make that decision. 11 CHAIR CLOWE: And counselor, did you have 12 some items that you wanted to clarify the record on? 13 MS. KIPLIN: Yes, Mr. Chairman. You 14 asked the question regarding the outside counsel 15 billings. 16 And to date, we've received three 17 billings totalling about a hundred thousand dollars. 18 And we have paid 36 -- pardon me -- 66 thousand of 19 that. There's one billing that's still outstanding. 20 CHAIR CLOWE: And was there another item 21 relative to a statement that Mr. Thomas made? 22 MS. KIPLIN: Mr. Thompson? 23 CHAIR CLOWE: Thompson, I mean. 24 MR. MATTAX: I believe the issue there 25 was with respect to the contract and the way that it 0115 1 was bid out. 2 MS. KIPLIN: Yes, I'm sorry. Yes. The 3 contract for outside counsel was a competitive 4 procurement. We did receive several different 5 proposals. 6 Those were evaluated consistent with the 7 agency's practice, in terms of an evaluation committee 8 and were reviewed and ultimately approved by the Office 9 of Attorney General. 10 CHAIR CLOWE: Great. You don't mind that 11 amplification? 12 MR. THOMPSON: That clarification is 13 fine, sir. 14 MS. KIPLIN: I do agree with Mr. 15 Thompson. After that, we did negotiate his rates and 16 his partner's rates down. 17 CHAIR CLOWE: Very good. Well, then that 18 concludes this item on our agenda. And we thank 19 you-all very much. 20 AGENDA ITEM NO. XII 21 CHAIR CLOWE: Next I'd like to go to item 22 number 12, consideration of, possible discussion and/or 23 action on external and internal audits and/or reviews, 24 including the agency's lottery security audit relating 25 to the Texas Lottery Commission and/or the Internal 0116 1 Audit Department's activities. 2 And gentlemen, we welcome you. And we 3 apologize for the delay. But as you've seen, because 4 you've been here and you've been very patient, we've 5 been very busy. Thank you for being here. 6 MS. HERNANDEZ: Good morning, 7 commissioners. For the record, I'm Dale Hernandez with 8 the Internal Audit Division. I'm here this morning on 9 behalf of Catherine Melvin, who is unable to attend. 10 The Internal Audit Division has no new 11 items of update. However, the State Auditor's Office 12 is here to discuss the results of their recently-issued 13 security audit. And a copy of that report is included 14 in your notebook under tab 12. 15 I would like to introduce the SAO 16 representatives here today. Beside me is Mr. Greg 17 Adams, who is the project manager. Next to him is 18 Ralph McClendon, who is the audit manager. And also 19 Mr. Rex Griffin from Jefferson Wells is here. 20 CHAIR CLOWE: Very good. Gentlemen, 21 thank you for coming. And again, we apologize for you 22 having to be here so long. But we are now at your 23 call. 24 MR. ADAMS: Thank you, Mr. Chairman. Mr. 25 Chairman, Mr. Cox, as Dale said, my name is Greg Adams 0117 1 and I was the project manager for this audit. 2 And this audit, as you know, was released 3 a couple weeks ago back in May 2006. And we produced 4 two reports: The public report, which is available on 5 our Internet site; and the confidential report, which 6 has solely been distributed to the two of you. 7 And, of course, we keep copies for our 8 own use. The only way that we will allow people to 9 access them outside of my organization is if they sign 10 a confidentiality agreement first. So it's our 11 intention to keep the integrity of the confidentiality 12 of sensitive information that we've dealt with. 13 The objective of the audit was to fulfill 14 requirements from the Texas Government Code Section 15 466.020 Subsection E. That statute, as you're aware, 16 requires a comprehensive biannual examination of all 17 aspects of lottery security. 18 The statute specifies 13 areas, such as 19 the security of lottery drawings and the security of 20 distribution of tickets which must be reviewed. 21 In addition to that, we also investigated 22 concerns regarding the commission's business resumption 23 and disaster recovery site. And we determined the 24 effect of the reorganization of the commission's 25 Security Division. 0118 1 Our overall conclusion of the audit was 2 that security over the Texas Lottery is generally 3 satisfactory. But the Texas Lottery Commission should 4 correct certain significant security-related 5 weaknesses, particularly in the area of system access. 6 We identified multiple areas in which the 7 commission could improve monitoring. Just to kind of 8 hit the finding -- the findings from the report at a 9 high level, four main -- five main areas of finding 10 we'll talk about. 11 First of all, as I said earlier, the fact 12 that overall the security of the Texas Lottery is 13 generally satisfactory, that's good news. 14 Secondly, that the commission doesn't 15 sufficiently document and enforce policies and 16 procedures to protect its automated resources, 17 including policies and procedures regarding 18 administrator and special access accounts, network 19 access passwords and user authentication, intrusion 20 protection, and antivirus maintenance. 21 A third area is the commission does not 22 effectively monitor its vendors, including ensuring the 23 contracting -- the contracted lottery operator 24 adequately protects its automated systems and ensuring 25 that it -- that proper criminal background checks are 0119 1 performed on lottery operator employees. 2 A fourth area is that the commission does 3 not have sufficient controls to prevent -- to prevent 4 persons who are statutorily ineligible to play the 5 Texas lottery from winning prizes through the Texas 6 Lottery. 7 And the final area that I'll touch on, 8 although certainly there are a lot more areas in the 9 report, is that the resumption of lottery games after a 10 disaster is completely dependent on the contracted 11 lottery operator which maintains all systems that run 12 lottery games. The commission has procedures that 13 enable it to resume the operation of internal 14 administrative systems in a timely manner. 15 To address these findings, we made the 16 following recommendations, again, on a high level. 17 First of all, the commission should improve security 18 over its computer, data communications, databases and 19 systems by improving documentation and enforcement of 20 policies and procedures. 21 Second, the commission should improve its 22 monitoring of vendors. 23 And finally, the commission should 24 improve its disaster recovery procedures. 25 Mr. Chairman, Mr. Cox, that concludes my 0120 1 summary of this audit. And I or the other gentlemen up 2 here will be more than happy to answer any questions 3 that you have at this time. 4 COMMISSIONER COX: Mr. Adams, thank you 5 for that report. There are certainly some matters 6 there about which we had significant concern. 7 And your report that our disaster 8 recovery site is -- I won't put words in your mouth -- 9 but I heard generally adequate and that our 10 reorganization caused you no concerns. Those -- those 11 words are very reassuring. 12 MR. ADAMS: Yes, sir. 13 COMMISSIONER COX: Was there any 14 disagreement with your findings at the end of the day 15 from management? 16 MR. ADAMS: No. Management was very 17 proactive in working with us. If we had misunderstood 18 something or they had more facts that we needed to 19 consider, they brought those to light. 20 But I'll say especially Mr. Grief and Mr. 21 Sadberry wanted to make sure that they addressed our 22 concerns and that they implemented our recommendations. 23 And especially Mr. Grief was -- could not have been 24 stronger in expressing that. 25 COMMISSIONER COX: That's exactly what we 0121 1 want to hear. Do you have specific or general concerns 2 that, in the event of a disaster, GTECH would not be in 3 a position to recover rapidly or properly? 4 MR. ADAMS: Would you like to answer 5 that? 6 MR. McCLENDON: My name is Ralph 7 McClendon. I'm the audit manager here. And we did a 8 good bit of the work with the disaster recovery sites. 9 We were able to obtain evidence where 10 almost monthly GTECH switches over from one site to 11 another site, generally testing their disaster recovery 12 capabilities. 13 And so I -- we did not see -- I don't 14 know if Rex did -- did not see anything that indicated 15 that there would be any issues with the GTECH disaster 16 recovery process. 17 COMMISSIONER COX: So your recommendation 18 was that we monitor that more closely, not that you had 19 any specific concern that the procedures were 20 inadequate? 21 MR. ADAMS: We had some specific concerns 22 but not overall. Rex? 23 MR. GRIFFIN: I would concur with Ralph 24 on that. However, obviously, we -- we never had the 25 chance to go to the off-sites of the disaster recovery 0122 1 to see how they controlled their systems once it 2 arrived there. 3 So while we saw no big issues per se, 4 there are additional things that you may want to look 5 into. 6 MR. ADAMS: There are some specific 7 issues in the confidential report that you might want 8 to look at. But overall, I would say that we found 9 disaster recovery at GTECH overall satisfactory. 10 MR. GRIFFIN: Satisfactory. 11 COMMISSIONER COX: Mr. Chairman, those 12 are my questions. 13 CHAIR CLOWE: I want to thank both of you 14 and, as well, yourself from Jefferson Wells. There was 15 a lot of attention devoted to this. As you know, it 16 was the subject of an Oversight House Committee 17 hearing. 18 It was in the media and there were 19 contentious charges made about it. And I'm so happy 20 that we have the state auditor to come in and take an 21 objective look at these issues. 22 And the briefing that you gave me and 23 Director Sadberry was very, very helpful, very 24 professional, very objective. And it serves as a 25 guidepost for improvement in the future. 0123 1 And that's what we're focused on. We 2 certainly want to ask -- answer any question that 3 anybody has who has a right to know and protect the 4 security of this agency. But with that as a base, we 5 want to move forward and improve. 6 And you have been very helpful in that 7 process. And I just can't thank you enough for the 8 professionalism and for the competency and the accuracy 9 of your audit. And that's what we're talking about in 10 this agency currently in auditing, the competency and 11 the accuracy of auditing. 12 And you've given us that on this audit, 13 so we thank you. 14 COMMISSIONER COX: And I would add 15 fairness, Mr. Chairman. 16 CHAIR CLOWE: Absolutely. 17 COMMISSIONER COX: We appreciate it very 18 much. 19 MR. ADAMS: Thank you, sir. 20 CHAIR CLOWE: Thank you-all very much. 21 AGENDA ITEM NO. XIV 22 CHAIR CLOWE: We now are going to move to 23 item 14, I believe it is. We have individuals from the 24 public who are here and have been patient and wish to 25 be involved in those items. 0124 1 So let's move to item 14, consideration 2 of the status and possible entry of orders in two 3 cases: Thompson Allstate Bingo and Moore Supplies, 4 Inc. represented by the letters A and B. 5 Mr. White, is it your desire to take 6 these cases up one at a time or together? 7 MR. WHITE: I think one at a time would 8 be better because there are significant differences. 9 CHAIR CLOWE: And will you want to take 10 up Thompson Allstate Bingo first? 11 MR. WHITE: Yes, sir. 12 CHAIR CLOWE: Very good. 13 MR. WHITE: For the record, my name is 14 Stephen White. I'm chief of enforcement. 15 The allegation against Thompson Allstate, 16 a bingo distributor, is that they engaged in price 17 fixing with Gametech International, Inc., a bingo 18 manufacturer, in violation of Texas Bingo Enabling Act 19 Section 2001.556. 20 The investigation did not find that 21 Thompson and Gametech engaged in price fixing, as that 22 term is used in the antitrust laws to the extent the 23 prices were actually affected by the acts of Thompson 24 and Gametech. 25 In fact, this case was reviewed by the 0125 1 head of the Antitrust Division of the Attorney 2 General's Office for that purpose. And the Attorney 3 General's Office declined to take the case to pursue 4 potential violations of the antitrust laws. 5 However, the evidence did show that 6 Gametech was requiring Thompson to submit its proposed 7 constructs with conductor organizations prior to 8 entering into those contracts with conductor 9 organizations. 10 This conduct, although perhaps not price 11 fixing, again, as that term is used in antitrust laws, 12 is a violation, in the opinion of the staff, of Section 13 2001.556, which states, quote, the price of bingo 14 supplies and equipment in the competitive marketplace 15 shall be established by the manufacturer, distributor 16 or supplier and may not be established in concert with 17 another manufacturer, distributor or supplier. 18 The Attorney General has interpreted this 19 provision to mean that Section 2001.556 prohibits all 20 express and implied -- and I'm quoting from the formal 21 Attorney General's opinion here -- prohibits all 22 express and implied price fixing agreements, regardless 23 of their effect. 24 This provision is concerned less with 25 free enterprise and competitive pricing than with 0126 1 strict regulation of manufacturers and distributors of 2 bingo equipment and the relationships with persons who 3 conduct bingo, end quote. 4 Based on this interpretation of the 5 Attorney General, I believe there is a violation, the 6 evidence did show a violation of Section 2001.556 by 7 virtue of the fact that Gametech and Thompson were 8 exchanging pricing information. 9 There are significant mitigating factors 10 in this case, specifically that there's no evidence 11 that Gametech ever instructed Thompson, after reviewing 12 their proposed contracts or price information, not to 13 go through with the contract, at least we couldn't find 14 any evidence of that. 15 There was one case where Gametech, you 16 know, basically discovered an error in the proposed 17 contract and, you know, notified Thompson of the error. 18 That was the only incidence that had to do with it, 19 just pretty much a straightforward mistake in 20 calculations as opposed to pricing is too low, we can't 21 agree to this. 22 Additionally, there's no evidence that 23 Thompson's actions resulted in prices being affected 24 but only that Thompson and Gametech were setting prices 25 in concert with each other in violation of the strict 0127 1 prohibitions of the statute. 2 In addition to these mitigating factors, 3 there are potential problems with the case should it 4 not be resolved in the agreed order, specifically, 5 although the staff does feel confident, based on the 6 Attorney General's opinion that the mere act by a 7 distributor of submitting pricing information to a 8 manufacturer for approval constitutes a violation of 9 2001.556, this section does not specifically prohibit 10 such conduct. 11 Further, there are currently no rules 12 defining what sort of conduct constitutes setting 13 prices in concert with another manufacturer or 14 distributor. 15 And there are no agency decisions or 16 written policies that state what specific conduct 17 constitutes a violation of that provision. 18 In other words, going to trial, the judge 19 may say, you know, the statute is currently -- that 20 they, the manufacturers and distributors, have been 21 placed on notice of what specific conduct constitutes a 22 violation of that provision is my concern. 23 The post settlement agreement requires 24 Thompson to pay 12 thousand dollars to the commission, 25 as well as prohibiting Thompson from engaging in 0128 1 specific conduct which could be construed as setting 2 prices in concert with another manufacturer or 3 distributor. 4 The proposed agreed order, even though it 5 does not make a finding that Thompson violated 6 2001.556, I believe is a considerable step in the right 7 direction and the start of creating a documented agency 8 policy in regard to Section 2001.556. 9 It would be the first time that a 10 disciplinary action has been taken against a 11 distributor for violation of this provision. And 12 therefore, I recommend that you adopt the proposed 13 order. 14 COMMISSIONER COX: Mr. White, what -- as 15 I understand this, Gametech is a manufacturer and then 16 Thompson is a manufacturer's representative for a 17 distributor. 18 MR. WHITE: A distributor, a licensed 19 distributor. 20 COMMISSIONER COX: Licensed distributor? 21 Now I can think of some reasons why a manufacturer 22 might want to review contracts that its distributor is 23 making. Perhaps they want to be sure that the 24 distributor isn't overdescribing the capability of the 25 product or something like that. 0129 1 Is it the case that the manufacturer is 2 just prohibited from looking at these contracts? 3 MR. WHITE: No, sir. And that's the 4 point I was, you know, making, that there's nothing in 5 the statute or we have no rule that specifically says, 6 you know, a manufacturer cannot review ahead of time 7 proposed contracts of its distributors. 8 But the staff feels that, you know, a 9 reasonable reading of the provision, you know, quoting 10 the Attorney General, that this is a strict prohibition 11 against manufacturers and distributors setting prices 12 in concert with each other. 13 And it's a strict regulatory statute. We 14 feel that that in itself constitutes a violation. 15 COMMISSIONER COX: So I think I heard you 16 say that it isn't a violation but it is a violation. 17 MR. WHITE: Well, that specific conduct 18 -- nowhere does it say that specific conduct is a 19 violation. I guess the staff's position, it is a 20 violation that -- we interpret it, the staff, to say it 21 is a violation. 22 CHAIR CLOWE: That's where I am, as well. 23 And I'm unclear. We're talking about a settlement here 24 for some action that may be illegal but we can't prove 25 that it's illegal. I think that's what you said to us. 0130 1 MR. WHITE: Well, we can prove the acts 2 occurred. What I cannot guarantee is that the Court 3 will agree with the staff's position that those acts 4 constitute a violation of the law. 5 CHAIR CLOWE: Well, where does that put 6 us in a situation like this, if it occurs again and 7 again and again and again? What's the cure? 8 MR. WHITE: Well, I think the cure is 9 either through a formal rule to say -- make it real 10 clear a distributor -- you know, a manufacturer cannot 11 review pricing information, you know, prospective 12 pricing information of a distributor or we can do it 13 through ad hoc adjudication such as this agreed order 14 where, like I said, I think it's a good first step. 15 There is not a specific finding in the 16 agreed order. You know, Thompson does not admit that 17 there was a violation. But we lay out our position 18 that it is. 19 If the order is adopted by the 20 commission, I believe that lays the groundwork that the 21 commission has taken the position that this sort of 22 conduct is a violation of the statute and so the 23 industry is now put on notice that, you know, if you 24 continue to engage in this sort of conduct, we're going 25 to consider it a violation of the act. 0131 1 COMMISSIONER COX: Well, Mr. White, I've 2 been in the manufacturing business. And I've had 3 manufacture representatives and distributors. 4 And I considered it a sound business 5 practice, on the part of myself, the manufacturer, to 6 review those contracts to be sure that they didn't have 7 errors, if you will, as a backstop to the distributor 8 but, in particular, to be sure that the products 9 weren't being sold into a situation for which they were 10 inappropriate or the language describing the 11 capabilities of the instruments wasn't significantly 12 different than what I knew the capabilities to be. 13 So again, I can see sound business 14 reasons why a distributor would want to see those 15 contracts that have nothing to do with pricing. And I 16 would be very concerned about imposing sanctions for 17 what I think is a sound business practice. 18 MR. WHITE: Yes, sir. And I guess, to 19 some extent -- you know, the documents that were 20 actually exchanged were probably -- they weren't -- 21 these aren't big, long contracts with lots of language 22 in it. 23 I mean, basically what was being 24 submitted to the manufacturer was the pricing 25 information and nothing else. So, you know, I -- I 0132 1 can't say for certain. 2 But I think the documents and the 3 evidence do suggest that Gametech was reviewing pricing 4 information and was concerned with the prices. 5 COMMISSIONER COX: That isn't what it 6 says here. Unless you can interpret this for me, it 7 says: Prior to and subsequent to entering into the 8 February 23, 2001 contract with Gametech, Thompson 9 submitted its proposed customer contracts and 10 addendums, including pricing information, to Gametech 11 for approval. 12 Now I just heard you say that they sent 13 nothing but pricing information. 14 MR. WHITE: Well, I didn't -- I didn't 15 say nothing but pricing information. I mean, the 16 contract -- you know, the only thing that's -- it 17 doesn't take much to make a contract. 18 So that's why that term was used. I 19 think that, you know -- I mean, basically, it's, you 20 know, the number of devices and the price per unit, 21 which is what these contracts consisted of. I mean, 22 they're a couple lines. 23 COMMISSIONER COX: So they're not three 24 pages of small print that just a few blanks are filled 25 in on with a couple of addenda that describe the 0133 1 products more generally or anything like that? 2 MR. WHITE: No. No, sir. I think 3 they're better described as a memorandum saying now I'd 4 like to place 20 devices in this bingo hall at 20 5 dollars per use per occasion. 6 CHAIR CLOWE: Mr. Atkins, can you add 7 anything to this? 8 MR. ATKINS: Well, the only thing that 9 I -- 10 CHAIR CLOWE: Within the record. 11 MR. ATKINS: Yes, sir. The -- I'm pretty 12 sure this was in the record. The only thing I would 13 add to what Mr. White just added were the documents 14 that I reviewed, the memoranda that he referred to, 15 were the ones saying, as Mr. White described, I'd like 16 to place 20 units of this device in this hall, is that 17 okay. 18 So it was, again, I think seeking 19 approval of -- from Gametech for the pricing that had 20 been negotiated between the distributor and the 21 conductor. 22 CHAIR CLOWE: That constituted the 23 illegal act? 24 MR. ATKINS: Yes, sir. 25 CHAIR CLOWE: In the opinion of the 0134 1 investigator or the auditor? 2 MR. ATKINS: (Nodding) 3 CHAIR CLOWE: Commissioner Cox, we have 4 two individuals who have filled out witness affirmation 5 forms who wish to comment on this. Would you hear from 6 them now? 7 COMMISSIONER COX: Absolutely. 8 CHAIR CLOWE: I'll call them in the order 9 I received them. Caroline Scott, please. Ms. Scott, 10 are you an attorney? 11 MS. SCOTT: I am, sir. 12 CHAIR CLOWE: Great. So you understand 13 how to stay within the record? 14 MS. SCOTT: Yes, sir. 15 CHAIR CLOWE: We're happy to have you 16 here. And do you wish to speak in favor of this 17 proposed settlement? 18 MS. SCOTT: Yes, Mr. Chairman. I -- 19 CHAIR CLOWE: Great. We're happy to hear 20 from you. 21 MS. SCOTT: I'm Caroline Scott with the 22 law firm of Gardere, Wynn and Sewell. And I apologize 23 I have a cold. And so I'm a little horse. 24 CHAIR CLOWE: Unnecessary. 25 MS. SCOTT: I want to say, first of all, 0135 1 that your staff has been very professional, Mr. White, 2 Ms. Kiplin, the investigators, Mr. Atkins and all 3 involved. And we appreciate their professional conduct 4 as we've gone through this process. 5 This is actually the second of two 6 investigations of Thompson Allstate Bingo. And, of 7 course, they were also contacted during the 8 investigation of Gametech which was concluded in 2005. 9 So over the past five years, there have 10 been three investigations that they've been subject to. 11 And we are currently up to 10 open record requests 12 relating to these matters that have been filed with the 13 Lottery Commission. 14 So it's taken up a great deal of staff 15 time and state resources, as well as Thompson Allstate 16 Bingo time and resources. And we feel very strongly 17 that this is the time to bring this matter to a close. 18 Let me first address the point that you 19 raised, Commissioner Cox, regarding the agreements and 20 how extensive they were and the need for a manufacturer 21 perhaps to review distributor agreements. 22 I think that you are making some of the 23 points, not in so many words but in general, that we 24 have also made that there are reasons for manufacturers 25 and distributors to talk about their business together 0136 1 and that that's what's occurred and nothing more 2 sinister than that has occurred. 3 We understand the staff position, but we 4 do have a fundamental disagreement about the 5 interpretation of the -- of the statute involved. And 6 I think we've been very clear with each other in those 7 discussions. 8 We don't think there's been any illegal 9 conduct. The reason that Ms. Thompson, as president of 10 Thompson Allstate, is willing to settle this today, 11 though, is it has just been a very long, expensive and 12 tiresome process. And this is a price she's willing to 13 pay to get some peace and put this to rest. 14 I think, in terms of the agreed 15 settlement and consent order, one of the reasons we're 16 willing to live with what the staff has proposed 17 related to submitting contracts and so forth is that 18 that would not actually be prohibited. 19 The only thing that, as I understand it, 20 relating to the submission of contracts from the 21 distributor to the manufacturer, would be that you 22 would not be -- you would -- the distributor would not 23 submit pricing information in advance of the contract 24 being executed. 25 But the distributor could still submit 0137 1 information to the manufacturer. The manufacturer 2 could still request that for their review for other 3 business purposes, including such things as making sure 4 there weren't overpromises or some of the other issues 5 you've raised. 6 So I hope that addresses that point. And 7 I think it's workable from a business standpoint. 8 A couple of other quick points I'd like 9 to make: I don't think either Lottery Commission staff 10 nor we are especially happy with this document. But 11 both of us have given up a fair amount and been willing 12 to compromise. 13 And that is usually the sign, as I'm sure 14 you're aware, of a good compromise that nobody walks 15 away feeling just really thrilled. I want to say and I 16 want to say very emphatically that Thompson Allstate 17 Bingo sets fair prices and does not set those prices in 18 concert with anyone. 19 Ms. Thompson and her staff are very proud 20 of her business and what they've accomplished. And 21 she's very concerned about treating her customers 22 right. She came before you-all in 2005 during the 23 Gametech case and talked about what she had seen 24 transpiring in the industry over -- over the years that 25 she had been involved with bingo and, particularly, 0138 1 electronic bingo. 2 And the history supports what she said, 3 that in 1999 prices were something like five and a half 4 dollars. And they have declined. As of last summer, 5 we were talking about $3.41 and they have declined 6 further in 2006. 7 The point I'm making is, it's a 8 competitive market. You've got 16 total manufacturers 9 and seven electronic manufacturers licensed in your 10 marketplace. There is no one dominant player. And the 11 customers, the charities, can go wherever they want for 12 their equipment. 13 In Ms. Thompson's case, the equipment 14 they lease they sign contracts that they can walk away 15 from with 30 days notice. They are not exclusive 16 contracts. They are not required to use solely 17 Gametech products. They can use anybody -- they can 18 use any mix of products in their -- in the bingo halls. 19 So some of the -- some of the price -- 20 some of the facts, the trend towards the decreasing 21 prices out there in the marketplace, the fact that 22 charities can and do use equipment from multiple 23 manufacturers, the fact that the complaint that started 24 all this has come from a competitor and did not come 25 from any of the charities and, in fact, the charities 0139 1 have been very quiet throughout this process. 2 So those are some of the points I'd like 3 to make. I know that you will be hearing from at least 4 one individual who's opposed to this settlement. If 5 it's appropriate and you need any clarification, I 6 would be happy to come back up and respond to questions 7 after that. 8 And, of course, I'm happy to respond to 9 any questions right now. 10 COMMISSIONER COX: I hear you saying that 11 you did a cost/benefit analysis and it doesn't make 12 sense to go forward. 13 MS. SCOTT: That's correct. 14 CHAIR CLOWE: I kind of hate to see 15 something settled on that basis. I like justice. And 16 I don't think splitting the baby is justice. 17 Let's hear from Mr. Hieronymus. And 18 thank you, Ms. Scott, for being here and helping us 19 with this. 20 MS. SCOTT: Sure. 21 CHAIR CLOWE: If you would, just stay 22 seated. Steve, come around and sit on Steve's other 23 side there. And you're here -- 24 MR. HIERONYMUS: You can mark me against 25 now that I know what it is. 0140 1 CHAIR CLOWE: Okay. I -- you're against 2 this settlement. And you're not an attorney, but you 3 understand staying in the record, I think. And tell us 4 what your interest is in this so we can understand why 5 you're here to begin with. 6 MR. HIERONYMUS: For the record, my name 7 is Steven -- with a V -- Hieronymus. And I can spell 8 it for you later. 9 My interest is because I filed the 10 original complaint back in September of 2001 and 11 have -- probably the only reason we're even here today 12 is because I have stuck at it, as I believe both the 13 chairman and Commissioner Cox are aware. 14 I have had to follow up, follow up, 15 follow up, both on the Gametech matter and this matter. 16 And it has gone on a very long time. 17 It was of interest to note, in the 18 investigative report, that the case against the two 19 distributors was not actually officially opened for the 20 investigative report until March 8 of 2005 yet the 21 complaint was filed in September of 2001. 22 I found that to be of interest. I 23 recently met with your internal auditor in going over a 24 number of issues. And she also caught that point, so 25 there were -- there is an issue there. 0141 1 I'm also concerned that -- that a choice 2 was made sometime between March and May of 2005 to 3 separate the distributor case from the Gametech case. 4 And I find that very troubling. I think other people 5 that have looked at that -- because you can't price fix 6 with yourself. 7 And I think it helped -- truthfully, I 8 think it helped facilitate the submission of the 9 Gametech settlement that we were -- begin last year -- 10 CHAIR CLOWE: Now we're here on Thompson. 11 MR. HIERONYMUS: I understand that. 12 CHAIR CLOWE: Let's just talk about 13 Thompson. 14 MR. HIERONYMUS: The separation -- 15 CHAIR CLOWE: I understand that in your 16 mind. But the record that we're on here is Thompson. 17 MR. HIERONYMUS: Sure. Mr. White made a 18 comment about -- he appropriately discussed that there 19 is two AG opinions. The law has been on the books for 20 a very long time. There was two AG opinions. 21 And he did make a comment that I take 22 exception to. He said a court has not ruled as to 23 that, and that is not true. A federal court has ruled 24 that any attempt by a manufacturer to in any way affect 25 the price that a distributor charges, which means 0142 1 approving minimums or anything else, that would be a 2 violation under Texas law. 3 So a federal court has made that 4 determination. That is a published federal opinion. 5 It is not a State of Texas court, but it is a federal 6 court. 7 The violations I've -- you know, I guess 8 I can't go thoroughly into the report itself. But the 9 details in the report, the administrative report which 10 I do have a copy of, is extensive. 11 Obviously, both are aware that I have 12 been privy because a lot of the documents came out of 13 the litigation issue that I have with Gametech. So I 14 have seen a great deal of the evidence, though not all 15 of it. 16 And it is significant. It's very overt. 17 And the -- in the report, it clearly talks about 18 approval of pricing. The investigative report 19 reiterates that over and over and over. 20 So the question that you asked, is it 21 having to do with other contractual items, the report 22 very much focuses on approval of the pricing. 23 CHAIR CLOWE: So you're against the 24 proposed settlement. What are you asking this 25 commission for? 0143 1 MR. HIERONYMUS: Well, I will get to 2 that. There's a couple of other things I do want to 3 mention. 4 And this is testimony from Mr. White and 5 Mr. Atkins. We were talking about the damages and what 6 damages were really impacted. Well, Mr. White told you 7 on June 24th of last year -- and this was referencing 8 the Gametech case but he refers to the distributors. 9 After extensive investigation, staff 10 concluded that there was a violation by Gametech and 11 evidence shows Gametech was setting the floor price for 12 which it would not allow its distributors to lease 13 bingo equipment. 14 Commissioner Cox then addressed a 15 question to Mr. Atkins referring to the testimony of 16 Mr. Stewart of the Hance firm representing Gametech. 17 CHAIR CLOWE: Now -- now wait a minute. 18 Is that in the Thompson record? 19 MR. HIERONYMUS: It's -- it's pertaining 20 to what we were talking about on damages. 21 CHAIR CLOWE: Well, I don't think it's 22 going to be proper for you to quote from another action 23 if it's not directly in the Thompson record. Can you 24 confine your remarks to this record? 25 MR. HIERONYMUS: Well, as to you -- Mr. 0144 1 White talked about those documents or the games or was 2 there any illegal games or Ms. Scott or Mr. White, but 3 testimony -- 4 CHAIR CLOWE: Counselor, help me on this. 5 Are we in the record or not? 6 MS. KIPLIN: Well, this is -- this is a 7 proposed agreed order before you. There's been no 8 record created at the -- at the State Office of 9 Administrative Hearing. 10 And I think what Mr. Hieronymus is 11 wanting to lay out is that, in the consideration of the 12 Gametech matter, in terms of setting prices with 13 distributors, that there were damages that were 14 calculated. 15 My concern is that it goes beyond the 16 scope of this particular action as it relates to a 17 single distributor. And so I think it -- 18 CHAIR CLOWE: And that's where my mind 19 is. 20 MS. KIPLIN: Right. 21 CHAIR CLOWE: And I guess I misspoke when 22 I said that we're in -- we're not in the record. We're 23 not within the scope -- 24 MS. KIPLIN: We're not within the -- 25 CHAIR CLOWE: -- of this agenda item. 0145 1 And I think, in all fairness, Steve is reaching out to 2 make his point. 3 MS. KIPLIN: Yes. 4 CHAIR CLOWE: And -- and that's not fair 5 to this issue, in my mind. And I know that, Steve, you 6 have issues. And I'm respectful of that. But I think 7 we got to be fair to all involved in this discussion. 8 We're here to talk about a proposed 9 settlement regarding the commission and Thompson. And 10 you've got to be narrow in your remarks to be proper. 11 MR. HIERONYMUS: How do I respond to the 12 question that there wasn't significant damage to the 13 charities if I can't -- 14 CHAIR CLOWE: I think that they -- 15 MR. HIERONYMUS: -- refer to testimony? 16 CHAIR CLOWE: Well, I can't coach you on 17 that. But if you disagree with that, you can say that 18 you disagree. 19 MR. HIERONYMUS: Well, I disagree with 20 it. And I would hope that you would go back and read 21 the record of -- 22 CHAIR CLOWE: Yeah. 23 MR. HIERONYMUS: -- testimony both in 24 front of you and in front of the licensing committee 25 because it's dramatically different. 0146 1 CHAIR CLOWE: Would it be beneficial to 2 the commission to send this to SOAH? 3 MS. KIPLIN: I think it's up to the 4 commission to decide whether you want to reject -- in 5 doing that, what you would be saying is we're rejecting 6 the proposed agreed order and we want to have a 7 contested case initiated. 8 And I think that's well within the 9 commission's decision, if you want to do that. I will 10 say that -- but one of the reasons that parties settle 11 is exactly as you've seen. It's somewhat remarkable. 12 You have Ms. Scott representing the 13 respondent, who adamantly says there was no price 14 fixing. The staff is saying we have evidence of price 15 fixing. 16 And that's -- that's why you settle 17 cases, where there is a reasoned judgment in both 18 parties' views that the outcome of an agreed order is 19 satisfactory, based on the parties' positions. 20 But to answer your question, do you want 21 to sent it to SOAH, you can. One of the things that is 22 always taken into consideration when -- not as a single 23 and not to the exclusion of other factors certainly 24 that were considered, when staff makes a decision to 25 attempt to try to settle or if they're approached to 0147 1 try to consider a settlement, is the use of resources 2 and the time. 3 You heard Ms. Scott indicate that on 4 behalf of her own client, in terms of wanting to go 5 forward, if we -- 6 CHAIR CLOWE: Sure. 7 MS. KIPLIN: -- decided to do that, we 8 would launch full-out discovery. It would -- it would 9 be a cost to both parties -- 10 CHAIR CLOWE: Sure. 11 MS. KIPLIN: -- to develop this record. 12 CHAIR CLOWE: Sure. 13 MS. KIPLIN: But to answer your question, 14 it is within the discretion of this commission. 15 CHAIR CLOWE: Steve, I didn't mean to cut 16 you off. And I'd like to let -- 17 MR. HIERONYMUS: I'll skip to my 18 recommend -- you know, I was -- I think it would be of 19 benefit, particularly because this issue has been a 20 hot-button issue now. I think it would benefit you to 21 send this to SOAH and allow a full and public hearing. 22 And then you have a record before you 23 that would give you better guidance in knowing how to 24 proceed. 25 CHAIR CLOWE: That's what you -- 0148 1 MR. HIERONYMUS: That would -- 2 CHAIR CLOWE: That's what you're asking. 3 MR. HIERONYMUS: Would be my first 4 recommendation. Alternatively, you know, if there's a 5 settlement, to even consider a settlement that does not 6 acknowledge that they participated in an illegal price 7 fixing scheme with Gametech, with the language that's 8 here, I think is extremely detrimental to this 9 commission. 10 I think it's -- it's not fair to other 11 licensees that work very hard to stay in compliance 12 with the law. And -- and then to not properly 13 regurgitate the ill-gotten gains, as Commissioner Cox 14 referred to last year -- which you don't have anything 15 in front of you that -- and I'm not now allowed to tell 16 you anything, I guess. 17 But there is substantial, you know, 18 ability to calculate that. And I think that any 19 settlement that doesn't do that is a problem. 20 CHAIR CLOWE: Okay. 21 MR. HIERONYMUS: And one final thing, I 22 guess, which has to do with my interest in this, 23 Ms. Scott has testified -- and this is previously, but 24 it is pertaining to her -- that this has been a huge 25 cost and -- cost to Jane and her business and 0149 1 resources. 2 I would like to certainly compare costs 3 of -- to her client to what I have simply because I 4 refuse to participate in an illegal scheme. I'd be 5 happy to compare those costs. 6 And I would hope that you would -- if you 7 do entertain a settlement, that you would require that 8 admission and regurgitation of all appropriate amounts. 9 CHAIR CLOWE: Okay. 10 MR. HIERONYMUS: That's all I have to say 11 about Thompson. 12 CHAIR CLOWE: Now we have another chair 13 that's vacant here. And is Ms. Amy Tabor, is it? 14 MS. TABOR: That's right. 15 CHAIR CLOWE: Would you come forward, 16 please, ma'am? 17 MS. TABOR: Oh, I'm here to speak about 18 the Moore Supplies matter, which is on a different 19 issue. 20 CHAIR CLOWE: Okay. I see that you -- 21 MS. TABOR: So it might be more 22 appropriate later. 23 CHAIR CLOWE: Yeah. I see that Ms. Tabor 24 has responded that she's here for item 14 and she 25 didn't say A or B. And I just thought you wanted to 0150 1 jump in on this one. 2 MS. TABOR: No. I'm happy to sit back 3 and let able counsel at the table -- 4 CHAIR CLOWE: Very good. 5 MS. TABOR: -- handle this issue. 6 CHAIR CLOWE: Very good. So we'll leave 7 the chair empty. Commissioner, where are you on this? 8 COMMISSIONER COX: Well, Mr. Chairman, I 9 don't like splitting the baby in half either. But 10 Ms. Thompson seems to find herself in a situation where 11 she can't win and she can't break even. And I think 12 she ought to be able to get out of the game. 13 CHAIR CLOWE: Yeah. I go along with 14 that. How do you satisfy the interest that Mr. 15 Hieronymus has expressed and the issue of, well, we 16 settled it because we didn't know how to do anything 17 else? 18 COMMISSIONER COX: Well, I think the way 19 I would address that is that, if the State thought this 20 was a slam dunk, we'd be at SOAH right now. 21 CHAIR CLOWE: Uh-huh. 22 COMMISSIONER COX: And probably if 23 counsel thought she could get it thrown out on summary 24 judgment or whatever the administrative equivalent of 25 that is, she'd be saying let's go. 0151 1 CHAIR CLOWE: Uh-huh. 2 COMMISSIONER COX: It looks to me like, 3 as Ms. Kiplin said, we would be committing the State 4 and Ms. Thompson to spend a bunch of money. And these 5 folks tell us we don't know what's going to happen 6 because our case isn't so good that we aren't willing 7 to settle for a relatively small amount of money and 8 our case isn't so good that we're going to fight it 9 instead of paying this amount of money. 10 So I -- it would be nice if there were 11 somebody who wanted to pay for that. But these parties 12 seem to think they don't want to pay for it. 13 CHAIR CLOWE: And are you comfortable in 14 reaching this kind of decision -- assume that I make a 15 motion to accept the staff recommendation. 16 Are you comfortable that, if that motion 17 passed by the commission that, allowing this 18 compromise, justice would be served adequately? 19 COMMISSIONER COX: I guess, if you look 20 at a term justice on an absolute basis and say that it 21 involves no practical consideration, I think that would 22 say that any case that isn't prosecuted to the 23 completion would not serve justice. 24 But I think every day we're faced with 25 decisions as to whether the benefit of going further 0152 1 would be justified by the cost. And so I think, to the 2 extent that justice must be considered along with the 3 cost/benefit analysis relating to it, yes, I would be. 4 CHAIR CLOWE: So that's a practical 5 solution and it adequately serves justice in a 6 realistic way? 7 COMMISSIONER COX: Yes, sir. 8 CHAIR CLOWE: Counselor, what do we do 9 about this weakness in the position of prosecuting this 10 type of action? 11 MS. KIPLIN: Well, we are moving forward, 12 in terms of preparing and drafting a rule. I will tell 13 you that we visited with the division chief of the 14 Antitrust Division. And we heard Mr. White refer to 15 that individual, Mark Tobey. 16 And we've consulted with him on both of 17 these cases. And we've also consulted with him, in 18 terms of the rule. We're going to take his 19 recommendation, in terms of having that rule really 20 focus on the actions of the parties and making that 21 clearer what does constitute acting in concert to set 22 prices so that we have a clear -- a more clear policy 23 on that. 24 That will ultimately be your policy when 25 it comes before you, should you decide that you want to 0153 1 adopt that rule. And I think that's really where we 2 are -- in connection with this particular matter that's 3 before you. 4 We say submitting pricing information to 5 the manufacturer for approval, we believe that's acting 6 in concert to set prices. And you've heard the 7 respondent say we don't -- we don't say that -- we 8 don't agree. 9 So we're hoping that that will hopefully 10 give clear direction on that. And Ms. Joseph, Sandy 11 Joseph, assistant general counsel, is assigned to that 12 rulemaking. Ultimately, it will be your policy, in 13 terms of how you -- how you want to proceed. 14 CHAIR CLOWE: And I think we need to get 15 into that. 16 MS. KIPLIN: Yes. 17 CHAIR CLOWE: And clarify and remove this 18 enigma where people just settle off because we can't do 19 any better. And I think Commissioner Cox well-defined 20 it and I agree with what he said. 21 MS. KIPLIN: Well, I will say staff would 22 not be presenting this order for your consideration if 23 staff did not believe that price fixing occurred, the 24 acting in concert with the -- with the manufacturer to 25 set prices. 0154 1 The issue is at what cost, at what 2 resources, recognizing that we are -- would be making 3 that argument and we would be putting on evidence to 4 try to support that. But at the end, it's subject to 5 interpretation. 6 So you must know that we wouldn't -- we 7 don't bring cases to your consideration should we not 8 believe that there was an act. Now you heard the other 9 side say absolutely not. And that's why it's the 10 matter of a proposed agreed order and not moving 11 forward. 12 CHAIR CLOWE: But you see, the problem 13 that I have with that answer is that you have another 14 party saying I was damaged greater than to that extent 15 and I want equity. And I'm hearing that and I'm 16 understanding it. 17 And to me, clarification of the rule and 18 clear definition so that there's something that 19 everybody can be judged by equally and fairly is the 20 answer. 21 COMMISSIONER COX: Amen. 22 MS. KIPLIN: Yes. 23 CHAIR CLOWE: We're back to competency, 24 accuracy and fairness. 25 COMMISSIONER COX: Absolutely. 0155 1 MS. KIPLIN: And we're proceeding in 2 that -- in that work. 3 CHAIR CLOWE: Okay. I move the adoption 4 of the staff recommendation. 5 COMMISSIONER COX: Second. 6 CHAIR CLOWE: All in favor, please say 7 aye. 8 COMMISSIONER COX: Aye. 9 CHAIR CLOWE: Aye. 10 Proposed? No. 11 The vote is two-zero. 12 Next we'll take up case number 2006-1077, 13 Moore Supplies Inc. And Ms. Tabor, if you'd like to 14 come forward, please. We'll hear from Mr. White first. 15 And Mr. Hieronymus, you have an appearance in this 16 case, as well. 17 MR. HIERONYMUS: You can just mark me 18 down as a no and I'm not going to say anything else. 19 CHAIR CLOWE: Okay. Thank you for your 20 appearance. Mr. White, will you lead off with your 21 explanation, please? 22 MR. WHITE: Yes, sir. Again, the 23 complaint in this case was one of price fixing between 24 Moore Supplies Inc., another bingo distributor, and 25 Gametech International. 0156 1 The difference in this case and Thompson 2 is, at the conclusion of the investigation, we could 3 not find sufficient evidence of price fixing and, more 4 specifically, a violation of 2001.556 of setting prices 5 in concert with. 6 Unlike the Thompson case, it does not 7 appear that Moore Distributing was submitting its price 8 information or proposed contracts to Gametech, at least 9 we could find no evidence. 10 Perhaps it was being done verbally, but 11 there's nothing in writing and there was no admission 12 by the parties. 13 COMMISSIONER COX: You say perhaps it was 14 done orally. Do you have any evidence -- 15 MR. WHITE: No, sir. 16 COMMISSIONER COX: -- it was done orally? 17 MR. WHITE: No, sir. So the bottom line 18 is the -- we weren't able to -- could not substantiate 19 a violation of 2001.566 setting prices in concert with 20 another manufacturer or distributor. 21 However, during the course of the 22 investigation, it was discovered that Moore Supplies 23 was negotiating the lease of these electronic devices 24 with unauthorized persons, specifically the bingo hall 25 managers of the commercial lessors who were not 0157 1 associated with the conductors. 2 And that is a violation of 2001.407, 3 which prohibits a distributor furnishing or leasing 4 bingo supplies to a person other than a licensed 5 authorized organization. 6 And that is the violation that we 7 initiate the action against Moore Supplies. And 8 through negotiations, they admitted they -- a violation 9 in the agreed order and agreed to pay 45 hundred or -- 10 excuse me. 11 It was not an admission of violation. 12 But I think the staff did conclude there was a 13 violation. And Moore Supplies agreed to pay a $4500 14 administrative penalty for that violation. 15 Now the mitigating factors in this case 16 are, I believe, this violation could be construed as -- 17 I use the term technical violation to the extent it is 18 pretty clear that, even though these bingo managers 19 were not authorized to accept these bingo devices or 20 negotiate on behalf of the conductor organizations, it 21 was clear that the devices were going to be used by 22 licensed conductor organizations for legal bingo 23 purposes as opposed to what I think probably the 24 primary purpose of that prohibition in the statute, you 25 know, to prohibit bingo equipment supplies ending up in 0158 1 the hands of, you know, somebody who was going to be 2 conducting an illegal bingo. 3 So that is, I think, a large mitigating 4 factor and reason for settlement. Staff would again 5 urge that you adopt the proposed settlement. 6 COMMISSIONER COX: Okay. Now there is a 7 specific law that you say has been violated? 8 MR. WHITE: Yes, sir. 9 COMMISSIONER COX: Tell me what that law 10 says. 11 MR. WHITE: I have it verbatim in here. 12 It states a licensed distributor may not furnish by 13 sale, lease or otherwise bingo equipment or supplies to 14 a person other than a licensed authorized organization, 15 another licensed bingo distributor or a licensed -- or 16 a person authorized to conduct bingo under Texas 17 Occupational Code 2001.551(b)(3) or (4). 18 COMMISSIONER COX: Okay. Now what if I 19 told you if I believe -- that I believe that that law 20 was intended to keep a distributor from selling to 21 somebody who was not associated with a licensed 22 operation, that is some kind of illegal operation, and 23 was not intended for the purpose that you're describing 24 or whatever to differentiate between the operator of 25 the hall and the charity? 0159 1 MR. WHITE: I'm not sure if I initially 2 disagree with you. And that's why I sort of indicated 3 that was sort of my belief that the -- at least the 4 primary purpose. I'm not sure it's the exclusive 5 purpose, but -- 6 COMMISSIONER COX: But do you have any 7 reason to believe that it -- that you're using it for 8 primary, secondary or tertiary purpose for which it was 9 passed or is it just your interpretation that it might 10 have been meant to apply to something like this? 11 MR. WHITE: Well, I guess I'm not sure if 12 it's my job to try to speculate as to what the 13 legislative intent was in passing this statute. 14 COMMISSIONER COX: Don't you think that 15 the legislative intent is important to interpreting a 16 statute? 17 MR. WHITE: Well, not when it's clear on 18 its face. I mean, I -- 19 COMMISSIONER COX: But I don't think it's 20 clear on its face. 21 MR. WHITE: Well, but to answer your 22 question, you know, I think there could be another 23 basis besides what I, you know, agree with you was 24 probably the primary purpose to make sure these devices 25 and equipment don't get in the hands of somebody who's 0160 1 going to be conducting illegal bingo. 2 But there seems to be a concern that very 3 often conductor organizations aren't involved in 4 conducting bingo as much as they should be. They turn 5 their business over to, you know, commercial lessor, 6 let the commercial lessor handle the business for them. 7 Commercial lessors' interests are not the 8 same as the conductor organizations. The commercial 9 lessors are in the money-making business. And by -- 10 COMMISSIONER COX: While this is all 11 interesting, but is it relevant? 12 MR. WHITE: Well -- 13 COMMISSIONER COX: Is there any 14 prohibition against somebody having a commercial hall 15 and helping the charities making make money, using his 16 expertise and his capital to help the charities make 17 money for charitable purposes? 18 MR. WHITE: No, sir. 19 COMMISSIONER COX: Do you have a bias 20 against their doing that? 21 MR. WHITE: No, sir. 22 COMMISSIONER COX: Then why are we here? 23 MR. WHITE: Because there was a violation 24 of a statute. We received a complaint. It was 25 investigated. And, you know, I -- I'm not sure -- I 0161 1 don't believe it's the staff position to decide which 2 laws they're going to enforce and which laws they're 3 not and when they're going to enforce them and when 4 they're not. 5 COMMISSIONER COX: Perhaps we need to 6 provide some clarity in that area, Mr. Chairman. 7 CHAIR CLOWE: Billy, could you help us 8 with this? 9 MR. ATKINS: Well, Commissioner Cox, I 10 guess I'd have to respectfully disagree with your 11 interpretation. I believe that the reason for the 12 language that's in the act is to set some relationships 13 as to who can and cannot be involved with the purchase, 14 lease, otherwise of this equipment that is used for the 15 conduct of bingo. 16 And I don't think it's limited to just 17 individuals who are not licensed or may otherwise be 18 conducting an illegal. I believe it sets up a chain 19 that goes manufacturer-distributor-conductor and 20 doesn't include anyone else and, in this case, 21 commercial lessors. 22 So it's -- it's -- it's not that there's 23 anything inherently evil to the commercial lessor. 24 It's just I don't believe that the act envisioned the 25 commercial lessor being involved in that particular 0162 1 function. 2 COMMISSIONER COX: Okay. Now Steve, you 3 and Billy disagree because you said the primary purpose 4 is probably to keep it from -- keep the distributor 5 from selling to illegal organizations but the secondary 6 purpose might be to keep them from selling to the 7 commercial lessors. 8 Billy seems to see it much more clearly 9 than you do, that it was clearly intended to keep the 10 commercial lessor out of the chain of operation. 11 Why don't you and Billy debate that for 12 us. 13 MR. WHITE: Well, I think -- I'm not sure 14 if we're that far off in what I considered a, quote, 15 secondary. Again, I said up front I'm speculating. I 16 don't know what the exact purpose of this statute was. 17 COMMISSIONER COX: Well, I just -- Mr. 18 Chairman, I have difficulty that he's sitting there 19 speculating, offering us a negotiated agreement here 20 and he's speculating about what the intent of the 21 statute was. 22 CHAIR CLOWE: I understand. Anything 23 further, Mr. Atkins? 24 Ms. Tabor, thank you for being here. 25 MS. TABOR: Thank you. 0163 1 CHAIR CLOWE: And we'd like to hear from 2 you. Are you an attorney? 3 MS. TABOR: Yes, I'm an attorney. 4 CHAIR CLOWE: I thought you were. 5 MS. TABOR: Yes. 6 CHAIR CLOWE: You are appearing in favor 7 of this settlement, are you? 8 MS. TABOR: I am. I'm appearing -- 9 CHAIR CLOWE: Steve, give her the mike so 10 she can be on the record, please. 11 MS. TABOR: Yes, commissioner. I'm 12 appearing in favor of this settlement. My name is Amy 13 Tabor. And I'm with the firm of Baker Botts in 14 Houston. I'm here representing Moore Supplies. 15 We had a discussion earlier today about 16 why people settle cases and we talked about how 17 sometimes people settle cases because it's simply too 18 time consuming and expensive to litigate them. 19 And I share your concern that that 20 doesn't always serve the interest of justice. But that 21 is the practical reality. And because of the practical 22 realities of this case, the time and expense that this 23 investigation has taken up, the additional time that a 24 hearing at SOAH would take up, I think that it's in the 25 best interest of my client to approve this settlement. 0164 1 Moore Supplies has always worked very 2 hard to comply with the law as they understand it. And 3 they have always interpreted the provision 2001.407(b), 4 which prohibits the furnishing of bingo or supplies to 5 any unlicensed organization, in the way that 6 Commissioner Cox suggested the plain language of the 7 statute reads, which is that this is a provision 8 designed to keep unlicensed people from playing bingo 9 and to discipline distributors who are facilitating 10 illegal bingo games or illegal gambling. 11 And I want to be very clear that Moore 12 Supplies is very, very careful that all of their 13 customers, every one they bill for bingo equipment, is 14 a licensed charity. And they take their compliance 15 with the law very seriously. 16 And it's already been explained. But for 17 the record, I want it to be completely clear that 18 paragraph six of this order makes it plain that there 19 is no allegation in this case that my client furnished 20 bingo equipment to any illegal bingo operation. 21 This is, as Mr. White said, more an issue 22 of a technical violation and an issue of differing 23 interpretations of the statute. As I interpret the 24 statute, it prohibits selling or leasing bingo 25 equipment to an unlicensed organization. And that did 0165 1 not happen. 2 Moore Supplies distributes electronic 3 bingo equipment. As you know, this equipment is 4 installed in halls that are owned by commercial 5 lessors. It has to be installed in those halls so that 6 charities can use the equipment for their charitable 7 bingo games. 8 And in order to distribute the equipment, 9 my client has to deal with people in the halls because 10 these are expensive machines. They require 11 electricity. They require telephone connections. They 12 require security. They require tracking of inventory 13 to be certain that all of the machines are where 14 they're supposed to be. 15 And Moore Supplies always understood that 16 the people it dealt with were authorized to represent 17 charities in all of those dealings with Moore Supplies. 18 Now the investigative division has taken the position 19 that people who are not primary operators of charities 20 are not authorized to deal with distributors. 21 We disagree with them about that. We 22 don't see anything in the statute that prohibits a 23 charity from authorizing someone who is not a primary 24 operator to deal with the distributor. 25 But we are willing to settle this matter, 0166 1 again, because of the time and expense that it would 2 take to litigate this at SOAH. 3 The division has also taken the position 4 that it is a violation of 2001.407(b) to furnish bingo 5 equipment, to have a unlicensed person sign a form 6 acknowledging the installation of bingo equipment at 7 some of these halls. 8 Again, we disagree with that. But these 9 are differing legal positions and we are willing to 10 compromise this matter in the effort of putting it 11 behind us. 12 The question that Commissioner Clowe 13 asked earlier about justice I think is a good one. 14 Here I think justice is best served by allowing my 15 client, who has always worked hard to stay within the 16 law and who will work with the -- Mr. Atkins, Mr. 17 White, the Bingo Division going forward, to stay within 18 the division's interpretation of the law and to clarify 19 that law so that everyone knows what's expected of them 20 and what the boundaries are. 21 I think justice is going to be best 22 served by allowing him to go back to his business and 23 to serving his customers. 24 CHAIR CLOWE: Thank you, Ms. Tabor. I 25 think you did a good job stating your client's 0167 1 position. And I appreciate your precise presentation. 2 Commissioner, would you indulge me? I'd 3 like to spend some more time on this case and I'd like 4 to pass it until our next meeting. 5 COMMISSIONER COX: Absolutely. 6 CHAIR CLOWE: Thank you. We'll pass this 7 case and ask that it be put on the agenda for the next 8 meeting, Mr. White. 9 MR. WHITE: Yes, sir. 10 CHAIR CLOWE: Commissioner Cox, I haven't 11 done a very good job of getting us through this agenda 12 so far today. 13 COMMISSIONER COX: Mr. Chairman, I think 14 you're doing an admirable job. 15 CHAIR CLOWE: Well, I'm trying. But it's 16 almost one o'clock and we have a lot on the public 17 agenda. But we have some items on the executive 18 session that I think maybe we ought to move into. 19 And unless you object, I'm prepared to 20 move that we go into executive session. 21 COMMISSIONER COX: No objections, sir. 22 CHAIR CLOWE: Is there anybody else here 23 from the public? I'd like to see if there's anyone who 24 wants to make a comment before we go into executive 25 session. 0168 1 For those of you that are on the agenda, 2 and there are many of you, I'd say that we're going 3 into executive session. We'll be there at least an 4 hour. Maybe that will give you time to get a bite of 5 lunch and come back within an hour, an hour and a half, 6 something like that. 7 And when we see that we're drawing to a 8 conclusion of executive session, we'll let -- Gary, 9 could we notify you and you get the word out? 10 MR. GRIEF: We'll do that. 11 AGENDA ITEM NO. XVIII 12 CHAIR CLOWE: All right. At this time, I 13 move the Texas Lottery Commission go into executive 14 session to deliberate the appointment, employment, 15 evaluation and/or duties of the executive director, 16 acting executive director and/or deputy executive 17 director, to deliberate the duties, evaluation of the 18 Charitable Bingo Operations director and Internal Audit 19 director and deliberate the duties of the general 20 counsel pursuant to Section 551.074 of the Texas 21 Government Code, to receive legal advice regarding 22 pending or contemplated litigation and/or to receive 23 legal advice pursuant to Section 551.074(1)(A) or (B) 24 of the Texas Government Code and/or to receive legal 25 advice pursuant to Section 551.071(2) of the Texas 0169 1 Government Code, including but not limited to Gametech 2 International et al. versus Greg Abbott et al., Cynthia 3 Suarez versus Texas Lottery Commission, Shelton Charles 4 versus Texas Lottery Commission and Gary Grief, Stephen 5 Martin versus Texas Lottery Commission, employment law, 6 personnel law, procurement and contract law, 7 evidentiary and procedural law and general government 8 law. 9 Is there a second? 10 COMMISSIONER COX: Second. 11 CHAIR CLOWE: All in favor, please say 12 aye. 13 COMMISSIONER COX: Aye. 14 CHAIR CLOWE: Aye. 15 The vote is two-zero. 16 The Texas Lottery Commission will go into 17 executive session. The time is 12:59 p.m. Today is 18 May 7th, 2006. 19 (Executive Session from 20 12:58 p.m. 2:45 p.m.) 21 CHAIR CLOWE: We will come back to order. 22 The Texas Lottery Commission is out of the executive 23 session. The time is 2:45 p.m. 24 Is there any action to be taken as a 25 result of executive session? 0170 1 AGENDA ITEM NO. II 2 CHAIR CLOWE: If not, we will move to 3 item two on the agenda, report, possible discussion 4 and/or action on lottery sales and revenue, game 5 performance, new game opportunities, market researches 6 -- research and trends. 7 You are not Kathy Pyka. 8 MR. NAVARRO: I am not. She's much more 9 good lookin' than I am and smarter. Good afternoon, 10 commissioners. For the record, my name is -- good 11 afternoon, commissioners. For the record, my name is 12 Benito Navarro. 13 I'm reporting this afternoon on behalf of 14 Kathy Pyka, who could not be with us today. The 15 presentation is forthcoming. 16 Our first chart this morning or this 17 afternoon reflects revenue from sales and net revenue 18 to the state through the week ending May 6th, 2006. 19 Total sales through the 36-weeks period amounted to 2.6 20 billion while estimated revenue to the state for the 21 same period was 672.1 million. 22 Fiscal year 2006 reflect a $95.7 million 23 increase over fiscal year's 2005 sales while net 24 revenue to the state reflects a 2.1 percent increase as 25 compared to the $658.2 million figure for the same 0171 1 period in fiscal year 2005. 2 Prize expense as a percent of sales is 3 62.7 percent above the current period in the same time 4 frame a year ago. 5 Next graphic. The next slide includes 6 fiscal years 2006 year-to-date sales by game. As noted 7 on slide -- on the slide above, 75.1 percent of sales 8 or two billion was from instant tickets with 7.7 9 percent of sales or two point -- $202.5 million from 10 Pick 3 followed by 6.4 percent and 175 million dollars 11 from Lotto Texas, 5.58 percent and 153.8 million from 12 Mega Millions. 13 The following slide simply provides a 14 graphical representation of $2.6 billion in sales to 15 date by game. Next graphic. 16 MR. TIRLONI: Good afternoon, 17 commissioners. For the record, my name is Robert 18 Tirloni. I am the products manager for the commission. 19 This next slides shows our instant sales 20 year-to-date, two billion dollars, broken down by price 21 point. We continue to see the five-dollar price point 22 as the leader, followed closely by the two-dollar price 23 point. 24 Commissioner Cox, you asked for a -- some 25 more detail about this last month, when new price 0172 1 points were introduced and the impact on existing price 2 point. We haven't forgotten about that. It's in the 3 works and I expect we're going to have it for the June 4 meeting. 5 COMMISSIONER COX: Great. 6 MR. TIRLONI: I have some update 7 information for you on the Lotto Texas game launch. 8 Sales did start as scheduled on the Sunday the 23rd. 9 Our first drawing for the new revised six-of-54 game 10 was on Wednesday, the 26th of April. 11 The jackpot for that drawing was 33 12 million. There was not a jackpot ticket sold. And the 13 next drawing was on Saturday, April 29th for an 14 advertised $36 million jackpot. 15 There was a jackpot ticket sold for that 16 drawing. That ticket was sold in Lubbock. So we 17 started back at our starting amount of four million. 18 We're currently at eight million for tonight. 19 And the marketing efforts continue for 20 this game change. Advertising is still running. It 21 will run up until the beginning of early June. We 22 currently have retailer promotions in place. 23 And there was a direct mail piece that 24 went out to approximately a million households in Texas 25 in early May. And that -- there's a coupon that's part 0173 1 of that direct mail piece. If the player spends five 2 dollars on Lotto Texas, they get a free two-dollar 3 scratch-off. And that coupon is valid through June 4 15th. 5 And we'll be monitoring the redemption of 6 that. So far it's just under three-percent redemption 7 which, for direct mail, is a pretty good redemption 8 rate. And as I said, it's still pretty early on. So 9 we'll continue to provide you more information on that, 10 as well. 11 We're very early into our Lotto Texas 12 matrix change. And I don't know that we can draw any 13 conclusions yet, but we're providing this information 14 to you-all today. 15 And basically, this is Lotto Texas draw 16 sales for the first two drawings in the roll cycle. 17 And I think it's good because it kind of gives us a 18 long-term perspective or a history of what's happened 19 to the game over time. 20 And it takes us through matrix changes. 21 So I'll point some things out. So, for example, this 22 gold-colored column shows that the sales for the four 23 and the six-million-dollar jackpot combined -- and this 24 is in July of 2000 -- were approximately 8.1 million. 25 This was the last roll cycle under the 0174 1 six-of-50 game before we changed the game for the first 2 time and went to the six-of-54. So this was the last 3 roll cycle that started under the six-of-50. 4 This is the first roll cycle that began 5 under the six-of-54. And then, as we progressed 6 through time, that was in early -- that was in summer 7 of 2000. As we approach April of 2003 right before we 8 made the change to the bonus ball, you can see that the 9 sales for now four and five-million-dollar jackpots was 10 7.5 million. Again, this was the last roll cycle that 11 started under the six-of-54 game. 12 We made the matrix change in May of 2003. 13 And then this column depicts the sales for the four and 14 five-million-dollar jackpots in June 2003, this being 15 the first roll cycle that started under that game. And 16 it progresses on. And this is where we are at this 17 point in time. 18 We're going to continue to monitor sales 19 and monitor the performance of the game. As I said, 20 it's still real early. We're only about four or five 21 drawings into the new six-of-54 game. And we'll 22 continue to provide you updates. 23 COMMISSIONER COX: So we got a little 24 bounce whereas, when we went to the bonus ball, we were 25 negative from the start. 0175 1 MR. TIRLONI: Yes. We saw -- when we 2 changed to that bonus ball matrix in 2003, we saw an 3 immediate -- an immediate decline. And we feel that, 4 as we've discussed in previous meetings, that this 5 change to the bonus ball matrix did drive off core 6 players. 7 We talked about Texas Two Step in the 8 meeting last month. And so I wanted to give you some 9 more information about that. After that meeting, we 10 did continue to roll. And we rolled all the way up to 11 a $2.9 million jackpot, which is the new record for 12 Texas Two Step. 13 That drawing for the 2.9 million dollars 14 was held on Thursday, April 27. And there were three 15 tickets sold for that drawing, one in San Antonio and 16 two in Longview. 17 And last month we looked at this chart. 18 And when we were looking at this -- this chart last 19 month, we were right here at this point this time. So 20 we can see that, as -- obviously, as the jackpot 21 increased, then those are these gold-colored bars -- 22 the sales increased. 23 And when we got -- when we crossed the 24 two-million-dollar jackpot level, we saw a bit of a 25 spike. Now this was a holiday weekend. This was 0176 1 Easter weekend. And we attribute this bit of a 2 decrease to that. 3 But again, if we hadn't experienced this 4 because of the holiday weekend, we would have had -- we 5 would have had some increases, again, as the jackpot 6 increased. It would have been interesting, if we had 7 rolled one more time and crossed the 8 three-million-dollar mark, if we would have seen 9 another spike as we experienced as we crossed the 10 one-million-dollar jackpot mark and then later on as we 11 crossed the two-million-dollar jackpot mark. 12 It took us 18 drawings to get to the $2.9 13 million jackpot. The sales for that entire roll cycle 14 were 12.9 million. And that roll cycle alone is making 15 up just under 39 percent of the year-to-date draw sales 16 for the Texas Two Step. 17 And a report that I saw this morning from 18 the Office of the Controller is that, Texas Two Step, 19 compared to the same amount of time in the last fiscal 20 year, is now up four percent. And I would attribute 21 that to this roll cycle. So that's positive news that 22 we're up over -- over the same time period last year. 23 Before David and Anthony talk about some 24 of the research -- I don't have a slide about this 25 because it just occurred last night. But I did want to 0177 1 let you know we did have a Mega Millions jackpot ticket 2 sold in Texas last night in El Paso. 3 The jackpot was advertised at 94 million. 4 I saw an e-mail during our break that the sales 5 actually supported $95 million jackpot. 6 MR. NAVARRO: That's correct. 7 MR. TIRLONI: And I just wanted to let 8 y'all know about that. The coverage for last night's 9 drawing for Texas alone was less than one percent. 10 CHAIR CLOWE: That's our second big 11 winner, isn't it? 12 MR. TIRLONI: Actually, that's our third. 13 CHAIR CLOWE: Third? 14 MR. TIRLONI: We've had $112 million 15 jackpot ticket, 101. And this is the third and it's 16 94. 17 MR. NAVARRO: And it was a cash value 18 option. So the value of that is approximately 53.9 19 million dollars. 20 CHAIR CLOWE: It would be interesting to 21 know if that was a resident of a Power Ball state that 22 came across and purchased a ticket. 23 MR. TIRLONI: Well, we will let you know. 24 CHAIR CLOWE: We will find out. Won't 25 we? 0178 1 MR. TIRLONI: We'll find out soon enough. 2 CHAIR CLOWE: Keep that in mind, 3 commissioner. 4 COMMISSIONER COX: Yes, sir. 5 MR. TIRLONI: And I believe Anthony and 6 David have some information to continue to share with 7 you on our research efforts. 8 MR. SADBERRY: Good afternoon, 9 commissioners. And for the record, my name is Anthony 10 Sadberry, acting executive director. 11 I have for you this afternoon the latest 12 survey information from Ipsos-Reid relating to the 13 public perception of the Texas Lottery. 14 This information was compiled in the 15 month of April. The first slide addresses the 16 question: How would you describe your overall opinion 17 of the Texas Lottery? 18 As shown, the percentage of negative 19 responses to this question increased from March to 20 April from 35 percent to 46 percent. And positive 21 responses decreased from 41 percent to 37 percent over 22 the same time period. Neutral responses decreased 23 seven percent from 24 percent to 17 percent. 24 The second slide addresses the statement: 25 The Texas lottery is operated fairly and honestly. 0179 1 From March to April, the percentage of respondents who 2 disagreed with this statement increased from 33 percent 3 to 35 percent, while those who agreed with the 4 statement decreased from 47 percent to 43 percent. 5 Those neutral with the statement increased from 20 6 percent to 22 percent. 7 I will continue to provide you with this 8 information on a monthly basis and I will be happy to 9 answer any questions. 10 At this time, unless you have questions, 11 I would like to have Dr. David Sizemore, research 12 coordinator, address some issues that were raised at 13 the April 19th commission meeting regarding survey 14 information from Ipsos-Reid. 15 DR. SIZEMORE: Thank you, Mr. Sadberry. 16 Good afternoon, commissioner, chairman. I am David 17 Sizemore, research coordinator for the Texas Lottery 18 Commission. 19 And I am pleased to present you with some 20 information with reference to your interests that you 21 expressed last month on what we were doing to 22 essentially control for or at least deal with this 23 question and how people respond to it. So I have 24 several items to present to you today. 25 First, based on your comments and your 0180 1 interests, we have essentially expanded this question 2 so that it is no longer -- the fair and honest 3 question, that is -- that is no longer an open-ended 4 response exclusively. 5 And what we've done is allow for the 6 open-ended response to keep consistency over the years, 7 which is essentially what we will have here. But we've 8 also added on to it a closed-end segment, which 9 essentially reduces the responses that people have to 10 several items. 11 Most of these are based on what people 12 have said in the past. And they include things like 13 not knowing where profits go, hearing about news media 14 stories that the lottery is unfair, and so on, simply 15 opposed to the idea of state-run lottery, things that 16 we've seen in the past. They're essentially items that 17 we've used or have had responded to or people have said 18 in the past. 19 A second item is to follow through with 20 how this might connect to media reports and 21 journalistic accounts of the Lottery itself. So we've 22 added what are, in effect, two or three pieces that 23 deal with whether this negative opinion is, in fact, 24 associated with stories that people had seen in the 25 news. 0181 1 Finally, we have worked to address 2 Commissioner Cox's concern about separating these items 3 into controllable and uncontrollable variables, which 4 we've done. And Ipsos-Reid was good enough to put this 5 together for us. 6 And I do have a slide, if you're 7 interested in seeing the responses over time. It is 8 not, however, loaded up here. So it will take a 9 minute. 10 CHAIR CLOWE: Sure. 11 DR. SIZEMORE: All right. While we're 12 uploading this material, I also have a couple of other 13 comments that are an aside from what we're doing now. 14 And that is, at this point, we're dealing internally 15 and with Ipsos-Reid with the segmentation studies that 16 are performed annually. 17 And it is our intention to work with 18 Ipsos-Reid to improve how the segmentation studies are 19 conducted, as well as how the material that is obtained 20 from those studies is actually used by the Texas 21 Lottery Commission. 22 And I have also consulted with Mr. Bobby 23 Heath about collecting media reports that are 24 associated with negative and positive press about the 25 Texas Lottery Commission. And we're now engaging in 0182 1 trying to find whatever is available. 2 Unfortunately, we do not have information 3 for the third and fourth quarters of 2005. So that the 4 gap is -- there is a gap. There are three items 5 presented here. 6 The top green line has to do with what 7 our -- we've identified as controllable variables or 8 controllable items. And I can give you a sense of what 9 some of these items are or what they include. 10 And if we wanted to define this, it would 11 be simply that these are items that we have some 12 measure -- the Texas Lottery has some measure of 13 control over which we can do something about them, in 14 terms of public perception. 15 And they include things like perceptions 16 that people have regarding money disappearing, having 17 no information that there are no winners, that winners 18 are not paid, that the odds are not favorable, that the 19 lottery is somehow mismanaged, and so on. 20 There are quite a few items actually 21 included in this segment. So the uncontrollable items, 22 which are those things that are out of our control, 23 include some of the moral positions such as gambling is 24 wrong, that it is addictive, that people should, in 25 fact, spend their money on better things, and that the 0183 1 lottery is simply not an appropriate way to raise 2 funds. 3 Finally, we included an other position 4 here because, as I said in the last commission meeting, 5 there's a tendency for respondents to essentially 6 repeat the question that's asked. So when they're 7 asked do you think the lottery is fair and honest, 8 people say no. 9 And they're asked why. And they say 10 because I think it's very unfair and dishonest. Well, 11 frankly, we didn't know how to deal with that. And we 12 put it into an other -- we put in an other category 13 that just separates it out from the rest. 14 The -- we could argue that this is good 15 news. The good news is most of the things -- most of 16 the responses that we have seem to be put into this 17 controllable section. And it seems to have been that 18 way over time. And this goes back to first quarter of 19 '04. 20 The whole idea, to some extent, of all 21 the things we're doing is trying to figure out or is to 22 try and figure out or determine if we -- how we can 23 avoid having respondents parrot the question itself so 24 it gives us a little more useful information. 25 And it is our intention to continue 0184 1 working this problem out. Thank you. Are there any 2 questions? 3 CHAIR CLOWE: Thank you. 4 DR. SIZEMORE: You're welcome. 5 CHAIR CLOWE: Anything further, 6 gentlemen? 7 MR. TIRLONI: No, sir. 8 MR. NAVARRO: I just wanted -- I just 9 wanted to clarify the record. On the cash value 10 option, the amount is actually 53.1 million dollars and 11 not 53.9 million dollars for the Mega Millions jackpot 12 that was won in El Paso last night. 13 CHAIR CLOWE: Great. Thank you. 14 AGENDA ITEM NO. III 15 CHAIR CLOWE: Next item number three, 16 report, possible discussion and/or action on transfers 17 to the state. 18 MR. NAVARRO: Good afternoon again, 19 commissioners. For the record, my name is Benito 20 Navarro presenting today on behalf of Kathy Pyka, 21 controller for the Texas Lottery Commission. 22 Tab three includes information on 23 transfers to the state. The first report in your 24 notebook reflects transfers and allocations to the 25 Foundation School Fund and the allocations of unclaimed 0185 1 prizes as of May 2006. 2 Those transfers to the state amounted to 3 685.8 million dollars through May. This represents a 4 minimal increase of the total amount transferred for 5 the same time frame fiscal year 2005. 6 The second page in your notebook includes 7 detailed information for the monthly transfer. Of the 8 685.8 million dollars transferred to the state, 658.5 9 was transferred to the Foundation School Fund with a 10 balance of 27.4 million dollars in unclaimed prizes to 11 the state. 12 The next document provides calculations 13 on monthly transfers and their indicated amounts. 14 Finally, the last document in your 15 notebook include a report of lottery sales, 16 expenditures and transfers from the fiscal years 1992 17 to date. 18 The cash transfers to the Financial (sic) 19 School Fund through May of this year totalling 685.5 20 million dollars with a cumulative total transfers of 21 8.3 billion dollars to the Foundation School Fund. 22 That is all I have to report today. Any 23 questions? 24 CHAIR CLOWE: Thank you, Ben. 25 MR. NAVARRO: Thank you. 0186 1 AGENDA ITEM NO. IV 2 CHAIR CLOWE: Next item four, report, 3 possible discussion and/or action on the procurement of 4 advertising services. Mr. Jackson? 5 MR. JACKSON: Good afternoon, 6 commissioners. For the record, my name is Tom Jackson, 7 purchasing and contracts manager for the agency. 8 Agenda item number four was included as a 9 placeholder for any questions you may have regarding 10 the advertising RFP. As you know, the responses to 11 this RFP are currently being reviewed by the evaluation 12 committee. 13 So I'm limited on the questions that I 14 can answer at this time. But if you have any general 15 questions, I'd be happy to respond. 16 COMMISSIONER COX: No, sir. 17 CHAIR CLOWE: Thank you, sir. 18 AGENDA ITEM NO. V 19 CHAIR CLOWE: Next item number five, 20 report, possible discussion and/or action on the Mega 21 Millions game and/or contract. Mr. Sadberry? 22 MR. SADBERRY: Good afternoon again, 23 commissioners. Again, my name is Anthony Sadberry, 24 acting executive director, for the record. 25 Earlier this month I attended the Mega 0187 1 Millions directors meeting hosted by the Massachusetts 2 Lottery. There were a number of items on the meeting 3 agenda. 4 Gary Peters, head of the Michigan 5 Lottery, presented the Mega Millions legal committee's 6 report about varying interpretations and possible 7 conflicting language in Section 4.2 pertaining to 8 voting rights and Section 22, the entire agreement and 9 written amendment of the Mega Millions agreement. 10 As you recall, the Texas Lottery 11 Commission provided a position paper in January 12 regarding the two provisions. The legal committee 13 report included comments from California, Illinois, New 14 York, Ohio, Texas and Virginia lotteries together with 15 proposed alternate language offered by California, Ohio 16 and Virginia. 17 The legal committee report made no 18 recommendation. As you may recall, Section 22, also 19 referred to as an entireties clause, was offered by 20 Texas and made a part of the Mega Millions agreement 21 when Texas joined the game in the fall of 2003. 22 Texas insisted on this language, 23 acknowledging both the informal alliance of the Mega 24 Millions states and the need for more formal governance 25 and structure in the game 's operation. 0188 1 In view of the large jackpots and 2 complexities of the procedures for reconciliation of 3 prize liability, the finance and operation 4 requirements, official game rules and drawing 5 procedures, the agreement itself must provide legal 6 certainty, predictability and uniformity. 7 The entireties clause is a necessary 8 safeguard and ensures no changes can be made to the 9 agreement without each party lottery's full knowledge 10 and consent. 11 In accordance with the express language 12 in the agreement, Texas maintains amendments to the 13 Mega Millions agreement must be in writing and approved 14 by all party lotteries. This view is not shared by all 15 Mega Millions states and has been the subject of much 16 discussion. 17 At the meeting, directors voted 10-two to 18 amend Section 22 and remove the requirement that 19 amendments to the agreement be in writing and approved 20 by all party lotteries and instead adopted language 21 proposed by California lottery that would make 22 additions, deletions or amendments to the agreement 23 effective upon the vote of directors and provide the 24 additions, deletions or amendments be incorporated into 25 the agreement as soon as possible after the vote and 0189 1 signed and acknowledged by the lead director and such 2 other directors as may wish to sign the document. 3 We are analyzing the vote and trying to 4 determine the impact on the commission and the 5 commission's options in connection with the vote. And 6 we'll report back to you at a future commission 7 meeting. 8 COMMISSIONER COX: Anthony, I haven't 9 read that entireties clause. Is it -- is it clear? Is 10 it unambiguous or is it just real murky and they just 11 couldn't tell what it meant so they voted to -- 12 what's... 13 MR. SADBERRY: Well, the -- the premise 14 upon which this vote was taken -- and I will -- I will 15 indicate, commissioner, that the vote was a non-record 16 vote and has no transcription, no recording or no 17 document that will reflect proceedings at this meeting. 18 So it's all from the personal recall of 19 each member in attendance. I, being one, will tell you 20 that my perception of the premise of the vote is that 21 it does not correctly reflect the intent or 22 understanding, if you will, of the party signatory to 23 the agreement at the time of its adoption. 24 That is the sense of the group who voted 25 for the amendment was that the Texas interpretation, 0190 1 which is set forth in the position paper presented by 2 the state of Texas is the position paper having 3 (inaudible) with the Texas Attorney General's Office. 4 That position paper reflects the 5 understanding of Texas, which I concur in and belief to 6 be accurate, that the Section 22, entireties clause, 7 is -- means what it says. And that is any amendment to 8 the agreement itself shall be made in writing and 9 approved by each and every, if you will, lottery 10 member. 11 The document itself, the agreement itself 12 has internal provisions which provide for certain 13 action to be taken on less than a unanimous basis and 14 sets forth in various places where the vote may be 15 majority vote or otherwise, two-thirds or fewer. 16 And the position paper -- the paper 17 presented by Texas so indicates less than unanimous 18 consent is for action items. The sense of the group is 19 that -- I glean from the discussion is that Section 22 20 was never intended to mean that amendment to the 21 agreement itself would require unanimous vote, merely 22 that whether various interpretations, some of which are 23 set forth in the legal committee's report. 24 But the general discussion is that the 25 sense of those favoring the amendment is that less than 0191 1 an entirety, less than a unanimous vote is required to 2 amend the agreement itself and the only thing that 3 requires a unanimous action is that each lottery 4 director must sign the amendment, which would indicate 5 merely that it is an accurate statement or reflection 6 or recordation of the action taken. 7 And one of the first proposals that was 8 made by motion was to adopt one of the state's 9 proposals to that effect. That, upon discussion in 10 which I participated fully, was withdrawn. 11 And it was substituted by the California 12 proposal, which varies even from the requirement that 13 all lottery directors sign the amended document. So 14 the practical effect now would be, if that were an 15 action item that were actually taken, both of which we 16 (inaudible) intention would now require only a majority 17 of the member states to amend the agreement and then so 18 many of the directors who wish to sign the amended 19 document may sign, which is not even a requirement of 20 the entirety of the signatories to the agreement that 21 takes place. 22 That is the sum and substance. I will 23 tell you that the position statement submitted by 24 Texas, and which I concur, addressed the fundamental 25 issue of whether Section 4.2 is in conflict with 0192 1 Section 22. 2 And I think dispositively it is not. 3 That is you can harmonize those two provisions, Section 4 4.2 requiring less than unanimous vote on certain 5 action items and Section 22 continue requiring 6 unanimous action and also whether, in reading Section 7 22, meaning -- legal meaning and intent and effect can 8 be given to that section without the requirement of, if 9 you will, parole evidence -- parole evidence typically 10 being the type of thing permitted and invited or 11 required by the interpretation of the document cannot 12 be made from the four corners of the document by the 13 terms themselves, you must go outside of the provision 14 to glean the understanding of the parties signatory by 15 their testimony or some other indication, extensive or 16 otherwise, of the meaning of the provision. 17 If the provision can be given legal 18 interpretation and effect by merely looking at the four 19 corners of the document in terms of the amendment -- 20 the provision itself, then it is not ambiguous law and 21 it can be given legal effect without introduction of 22 parole evidence. 23 I believe, in answer to your question, 24 that the provision is straightforward and sets forth a 25 legal meaning and intent of the signatories to the 0193 1 amendment, which became effective upon Texas joining 2 the organization, and that that meaning is that the 3 modification or amendment to the agreement itself 4 requires unanimous consent of the members reflected in 5 writing and signed by all members. 6 COMMISSIONER COX: Thank you. 7 CHAIR CLOWE: Thank you. 8 AGENDA ITEM NO. VIII 9 CHAIR CLOWE: Next item seven, report, 10 possible discussion and/or action on the agency's 11 contracts. Mr. Jackson? Sorry, number eight. 12 MR. JACKSON: Yes. You skipped number 13 seven. 14 CHAIR CLOWE: I'm sorry. Seven, yeah. 15 Go ahead. 16 MR. JACKSON: Okay. On number eight, 17 commissioner. 18 CHAIR CLOWE: Number eight. Take your 19 choice. 20 MR. JACKSON: Thank you. Again, 21 commissioners, for the record, my name is Tom Jackson. 22 CHAIR CLOWE: My choice. 23 MR. JACKSON: In your notebook under 24 agenda item number eight is a report on prime contracts 25 that has been updated for your review. I will be happy 0194 1 to answer any questions you may have. 2 CHAIR CLOWE: Once we got to it, it was 3 easy. 4 COMMISSIONER COX: I have no questions. 5 CHAIR CLOWE: Thank you, Mr. Jackson. 6 AGENDA NO. IX 7 CHAIR CLOWE: Now we'll go to number 8 nine, report, possible discussion on the agency's HUB 9 performance, including the Texas Building and 10 Procurement Commission's FY 2006 semiannual HUB report 11 and/or the agency's Mentor Protege Program. Hi Joyce. 12 How are you today? 13 MS. BERTOLACINI: Hi. Good afternoon. 14 CHAIR CLOWE: Good to see you again. 15 You've been gone. 16 MS. BERTOLACINI: Yes, I have. For the 17 record, my name is Joyce Bertolacini. I'm coordinator 18 of the TLC's Historically Underutilized Business 19 program. 20 And included in your notebooks today is a 21 series of reports that summarize the agency's HUB 22 performance for the first six months of fiscal year 23 2006. These figures are derived from statewide Texas 24 Government Procurement Commission's semiannual HUB 25 report, which was released in mid-April. 0195 1 Our overall HUB participation for the 2 first six months of FY 2006 was 24.9 percent. The 3 agency's overall participation decreased only slightly 4 from the same period in FY 2005, when the agency's 5 overall HUB percentage was 25.2 percent. 6 During this reporting period, the TLC 7 exceeded the professional services goal and increased 8 its participation in both the special trade 9 construction and commodity purchasing categories. 10 Although subcontracting payments 11 decreased somewhat, direct payments made to HUB 12 increased by over 1.6 million dollars. 13 In addition, for the first six months of 14 FY 2006, the agency attained the second highest overall 15 HUB percentage among the top eleven largest-spending 16 state agencies. 17 There are no updates on the agency's 18 Mentor Protege Program at this time. But I'd be happy 19 to answer any questions. 20 CHAIR CLOWE: Thank you, ma'am. 21 MS. BERTOLACINI: Thank you. 22 AGENDA ITEM NO. X 23 CHAIR CLOWE: Next item 10, report, 24 possible discussion and/or action on the 79th 25 Legislature. Good afternoon, Nelda. 0196 1 MS. TREVINO: Good afternoon, Mr. 2 Chairman and Commissioner Cox. For the record, I'm 3 Nelda Trevino, director of Governmental Affairs. 4 The third called Special Session of the 5 79th Legislature concluded on Monday, May the 15th. 6 During the special session, there was one bill and the 7 accompanying joint resolution filed that might have 8 impacted the agency. 9 Representative Joe Pickett filed House 10 Bill 162 and House Joint Resolution 37 relating to the 11 operation of video lottery games as part of the state 12 lottery and municipalities or counties in which the 13 voters have approved the operation of the games and by 14 certain Indian tribes on Indian land. No action was 15 taken on this legislation. 16 You previously heard about the security 17 audit report recently issued by the State Auditor's 18 Office. And I wanted to report to you that, in our 19 capacity as a resource to the legislature, members of 20 the Governmental Affairs staff visited with various 21 leadership and legislative offices to discuss the 22 findings of that report. 23 Lastly, the Governmental Affairs staff 24 continues to monitor interim House and Senate committee 25 hearings. And we will keep you posted on any 0197 1 developments related to these legislative interim 2 activities. 3 This concludes my report. And I'll be 4 happy to answer any questions. 5 CHAIR CLOWE: Thank you, ma'am. 6 AGENDA ITEM NO. 11 7 CHAIR CLOWE: Next item 11, report, 8 possible discussion and/or action on agency's strategic 9 plan for 2007 through 2011. 10 MR. ELROD: Good afternoon, 11 commissioners. 12 CHAIR CLOWE: Robert. 13 MR. ELROD: I'm Robert Elrod from Media 14 Relations Division. A third draft of the agency's 15 strategic plan for 2007 through 2011 is currently being 16 reviewed by Anthony and Gary and a final draft should 17 be available to the commission next week. 18 After we've incorporated your comments, 19 we'll request your final sign-off on the strategic plan 20 as an action item in either the first or second June 21 commission meeting. 22 That's all I have today. 23 COMMISSIONER COX: No, sir. 24 CHAIR CLOWE: Thank you, Robert. 25 MR. ELROD: Thank you. 0198 1 AGENDA ITEM NO. XIII 2 CHAIR CLOWE: Commissioner, I have 3 nothing on item number 13, consideration of and 4 possible discussion and/or action on the appointment, 5 employment of an executive director. 6 Do you have anything? 7 COMMISSIONER COX: No, sir. 8 AGENDA ITEM NO. XV 9 CHAIR CLOWE: Then we'll move on to item 10 number 15, report by the acting executive director 11 and/or possible discussion and/or action on the 12 agency's operational status and FTE status. 13 Mr. Sadberry? 14 MR. SADBERRY: Commissioners, based on 15 schedules, we are contemplating the need to reschedule 16 the second meeting in June. 17 We anticipate notifying the commissioners 18 and the public regarding the date for the rescheduled 19 second meeting at the first meeting in June on June 7, 20 2006. 21 CHAIR CLOWE: Let's be careful not to 22 have the second meeting before the first meeting. 23 Anything? 24 MR. SADBERRY: That's all I have. 25 CHAIR CLOWE: Any questions? 0199 1 COMMISSIONER COX: No, sir. 2 CHAIR CLOWE: Take a chance. 3 AGENDA ITEM NO. XVI 4 CHAIR CLOWE: Next item 16, report by the 5 Charitable Bingo Operations director and possible 6 discussion and/or action on the Charitable Bingo 7 Operations division's activities. 8 Mr. Atkins? 9 MR. ATKINS: Oh, I'm sorry, Mr. Chairman. 10 CHAIR CLOWE: Take it. Take a chance. 11 Your number just came up. 12 MR. ATKINS: Commissioners, just a couple 13 of things I'd like to draw your attention to on my 14 report. 15 One, under the vacancy in the Accounting 16 Services Department, those interviews have been 17 conducted and a recommendation made. We're awaiting 18 the results of the background investigation on that 19 position. 20 The Bingo Advisory Committee did meet 21 last Wednesday on May 10th. And we will schedule a 22 report from the BAC chair at the next meeting currently 23 scheduled for June 7th. 24 And also, under the allocations that 25 we're preparing to make for 2006, we're still on 0200 1 schedule to have those allocations made by the May 31st 2 deadline. 3 We're also going to be providing the 4 jurisdictions with notification that one of the new 5 reports that we've added to the statewide reports on 6 the bingo services center is a report that shows net 7 allocations for all cities and counties so that they 8 also will know that they have online access to that 9 information and won't have to contact us through open 10 records to obtain them. 11 And that's all I have to report. 12 CHAIR CLOWE: And Mr. Atkins, you'll be 13 coming to the commission next month with 14 recommendations relating to open positions on the BAC. 15 Will you not? 16 MR. ATKINS: Yes, sir. That will be 17 another item on there, as well as follow-up information 18 that was asked at the last meeting. 19 CHAIR CLOWE: And I think both 20 Commissioner Cox and I have interviewed those nominees. 21 MR. ATKINS: Individually. 22 CHAIR CLOWE: Individually. 23 MR. ATKINS: Yes, sir. 24 AGENDA ITEM NO. XIX 25 CHAIR CLOWE: Thank you, sir. Is there 0201 1 any other business to come before the commission at 2 this time? Commissioner? 3 Thank you all. We are adjourned. 4 (Meeting adjourned at 3:24 p.m.) 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0202 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, David Bateman, RPR, Certified Shorthand 7 Reporter in and for the State of Texas, do hereby 8 certify that the above-captioned matter came on for 9 hearing before the Texas Lottery Commission as 10 hereinafter set out, that I did, in shorthand, report 11 said 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 16 Witness my hand this the 19th day of May, 17 2006. 18 19 ___________________________________ 20 David Bateman, RPR, Texas CSR #7578 Expiration Date: 12/31/07 21 Wright, Watson & Associates Firm Registration No. 225 22 1801 North Lamar Boulevard Mezzanine Level 23 Austin, Texas 78701 (512) 474-4363 24 25 JOB NO. 060517DPB