1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 REGULAR MEETING OF THE § 6 TEXAS LOTTERY COMMISSION § THURSDAY, FEBRUARY 11, 2010 § 7 8 9 COMMISSION MEETING 10 THURSDAY, FEBRUARY 11, 2010 11 12 BE IT REMEMBERED THAT on Thursday, 13 the 11th day of February 2010, the Texas Lottery 14 Commission meeting was held from 9:04 a.m. to 15 1:50 p.m., at the Offices of the Texas Lottery 16 Commission, 611 East 6th Street, Austin, Texas 78701, 17 before CHAIRMAN MARY ANN WILLIAMSON and COMMISSIONERS 18 DAVID J. SCHENCK and J. WINSTON KRAUSE. The following 19 proceedings were reported via machine shorthand by 20 Aloma J. Kennedy, a Certified Shorthand Reporter of 21 the State of Texas, and the following proceedings were 22 had: 23 24 25 2 1 APPEARANCES 2 3 CHAIRMAN: Ms. Mary Ann Williamson 4 COMMISSIONERS: 5 Mr. David J. Schenck Mr. J. Winston Krause 6 GENERAL COUNSEL: 7 Ms. Kimberly Kiplin 8 DEPUTY EXECUTIVE DIRECTOR: Mr. Gary Grief 9 DIRECTOR, CHARITABLE BINGO OPERATIONS: 10 Mr. Philip D. Sanderson 11 INTERNAL AUDIT DIVISION DIRECTOR Ms. Catherine A. Melvin 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 1 TABLE OF CONTENTS 2 PAGE 3 PROCEEDINGS - THURSDAY, FEBRUARY 11, 2010......... 9 4 AGENDA ITEM NO. I - Meeting Called to Order....... 9 5 AGENDA ITEM NO. II - Report, possible discussion and/or action on the lottery 6 operations and services procurement, including but not limited to the 7 Gartner contract(s)............................... 22 8 AGENDA ITEM NO. III - Consideration of and possible discussion and/or action, 9 including adoption, on amendments to 16 TAC §402.201 relating to Prohibited Bingo 10 Occasion.......................................... 13 11 AGENDA ITEM NO. IV - Consideration of and possible discussion and/or action, 12 including adoption, on amendments to 16 TAC §402.203 relating to Unit Accounting.............. 15 13 AGENDA ITEM NO. V - Consideration of and 14 possible discussion and/or action, including adoption, on new rule 16 TAC 15 §402.212 relating to Promotional Bingo............ 16 16 AGENDA ITEM NO. VI - Consideration of and possible discussion and/or action, 17 including adoption, on amendments to 16 TAC §402.401 relating to Temporary License............ 17 18 AGENDA ITEM NO. VII - Consideration of and 19 possible discussion and/or action, including adoption, on amendments to 16 TAC 20 §402.402 relating to Registry of Bingo Workers........................................... 18 21 AGENDA ITEM NO. VIII - Consideration of and 22 possible discussion and/or action, including adoption, on amendments to 16 TAC §402.405 23 relating to Temporary Authorization............... 19 24 25 4 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. IX - Consideration of and possible discussion and/or action, 4 including adoption, on amendments to 16 TAC §402.101 relating to Advisory Opinions............ 20 5 AGENDA ITEM NO. X - Consideration of and 6 possible discussion and/or action, including adoption or withdrawal, on new 7 rule, 16 TAC §402.104 relating to "Gambling Promoter" and "Professional Gambler" and/or 8 on amendments to 16 TAC §401.153 relating to Qualifications for License..................... 132 9 AGENDA ITEM NO. XI - Report by the 10 Charitable Bingo Operations Director and possible discussion and/or action 11 on the Charitable Bingo Operations Division’s activities, including updates on 12 HB 1474 implementation, Bingo Advisory Committee nominations, status of licensees, 13 rulemaking and form revisions, audits, pull-tab review, special projects, 14 allocations, and upcoming operator training....... 142 15 AGENDA ITEM NO. XII - Report, possible discussion and/or action on lottery sales 16 and revenue, game performance, new game opportunities, advertising, market research, 17 trends, and game contracts, agreements, and procedures........................................ 145 18 AGENDA ITEM NO. XIII - Report, possible 19 discussion and/or action on transfers to the State and the agency’s budget status.......... 158 20 AGENDA ITEM NO. XIV - Report, possible 21 discussion and/or action on the 5% biennial budget reduction for the 2010-2011 biennium....... 160 22 AGENDA ITEM NO. XV - Report, possible 23 discussion, and/or action on Lottery Operations and Services Contract 24 Amendment No. 8 credit calculation................ 164 25 5 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XVI - Report, possible discussion and/or action on the 81st 4 Legislature....................................... 165 5 AGENDA ITEM NO. XVII - Consideration of and/or report, possible discussion and/or 6 action on external and internal audits and/or reviews relating to the Texas Lottery 7 Commission, and/or on the Internal Audit Department’s activities........................... 9 8 AGENDA ITEM NO. XVIII - Report, possible 9 discussion and/or action, including extension on the agency's on the agency’s 10 statistical consulting services contract.......... 11 11 AGENDA ITEM NO. XIX - Report, possible discussion and/or action, including 12 amendment on the agency’s instant tickets and services primary and secondary contracts...... 12 13 AGENDA ITEM NO. XX - Report, possible 14 discussion and/or action on the agency’s contracts......................................... 12 15 AGENDA ITEM NO. XXI - Report, possible 16 discussion and/or action on GTECH Corporation....................................... 165 17 AGENDA ITEM NO. XXII - Report by the 18 Executive Director and/or possible discussion and/or action on the agency’s 19 operational status, agency procedures, and FTE status.................................... 166 20 21 22 23 24 25 6 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXIII - Consideration of the status and possible entry of orders in: 4 A. Docket No. 362-10-0208 – Mirror Lake Texaco Star 21 5 B. Docket No. 362-10-1409 – Quik Break Food Store 6 C. Docket No. 362-10-1404 – C&C Grocery 7 D. Docket No. 362-10-1405 – Tres Amigos 8 E. Docket No. 362-10-1406 – The Big Red Barn 9 F. Docket No. 362-10-1407 – West Wind Mini Market 10 G. Docket No. 362-10-1408 – Spanky’s Smokin Quick Stop 11 H. Docket No. 362-10-0985 – Tezel Food Mart 12 I. Docket No. 362-10-0983 – 1st Food & Bakery 13 J. Case No. 2010-298 – Village Market............................ 166 14 AGENDA ITEM NO. XXIV - Public comment............. 182 15 AGENDA ITEM NO. XXV - Commission may meet in 16 Executive Session: A. To deliberate the appointment, 17 employment, and duties of the Executive Director pursuant to 18 Section 551.074 of the Texas Government Code. 19 B. To deliberate the duties and evaluation of the Deputy 20 Executive Director pursuant to Section 551.074 of the Texas 21 Government Code. C. To deliberate the duties and 22 evaluation of the Internal Audit Director pursuant to Section 23 551.074 of the Texas Government Code. 24 25 7 1 TABLE OF CONTENTS (continued) 2 PAGE 3 D. To deliberate the duties and evaluation of the Charitable 4 Bingo Operations Director Pursuant to Section 551.074 5 of the Texas Government Code. E. To deliberate the duties of the 6 General Counsel pursuant to Section 551.074 of the Texas 7 Government Code. F. To deliberate the duties of the 8 Human Resources Director pursuant to Section 551.074 of the Texas 9 Government Code. G. To receive legal advice regarding 10 pending or contemplated litigation pursuant to Section 551.071(1)(A) 11 and/or to receive legal advice regarding settlement offers 12 pursuant to Section 551.071(1)(B) of the Texas Government Code and/or 13 to receive legal advice pursuant to Section 551.071(2) of the Texas 14 Government Code, including but not limited to: 15 First State Bank of DeQueen, et al. v. Texas Lottery 16 Commission Texas Lottery Commission v. 17 Leslie Warren, Texas Attorney General Child Support Division, 18 Singer Asset Finance Company L.L.C., and Great-West Life & 19 Annuity Insurance Company Gametech International et al. 20 v. Greg Abbott Employment law, personnel law, 21 procurement and contract law, evidentiary and procedural law, 22 and general government law Lottery Operations and Services 23 procurement and/or contract Mega Millions game and/or 24 contract............................. 141 25 8 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXVI - Return to open session for further deliberation and 4 possible action on any matter discussed in Executive Session.............................. 142 5 AGENDA ITEM NO. XXVII - Adjournment............... 182 6 REPORTER'S CERTIFICATE............................ 183 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 9 1 P R O C E E D I N G S 2 THURSDAY, FEBRUARY 11, 2010 3 (9:04 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN WILLIAMSON: I would like to 6 call the meeting of the Texas Lottery Commission to 7 order. Today is February the 11th, 2010. The time is 8 9:04. 9 Commissioner Krause is present. We are 10 waiting on Commissioner Schenck, but we do have a 11 quorum. Since we are waiting for Commissioner 12 Schenck, we will do a few other items before we go 13 back to our first item. 14 AGENDA ITEM NO. XVII 15 CHAIRMAN WILLIAMSON: So we will be 16 going to Item No. XVII, Cat Melvin, report on the 17 internal audits. 18 MS. MELVIN: Good morning, 19 Commissioners. For the record, Catherine Melvin, 20 Director of the Internal Audit Division. Good 21 morning. 22 Commissioners, I have one item of update 23 this morning. We received notification from the State 24 Auditor's office that they would be auditing the Texas 25 Lottery Commission. They would be beginning an audit 10 1 this month. 2 We held an entrance conference earlier 3 this week at which, Chairman, you were present. And 4 the auditors laid out their scope and objectives. 5 They indicated to us that they are in a very 6 preliminary stage of their audit, and so that 7 objective may change slightly. But if you don't mind, 8 I would like to read from their notification letter 9 the stated objective of that audit. 10 "The audit objective is to determine 11 whether the Texas Lottery Commission's Charitable 12 Bingo Operations Division has controls to verify that 13 proceeds are distributed for charitable purposes in 14 compliance with state laws and agency rules. Our work 15 will include the automated systems and processes that 16 support the function being audited and that we will 17 conduct the audit in accordance with Generally 18 Accepted Government Auditing Standards." 19 They anticipated that the work would 20 continue through the spring and possibly with a report 21 towards the end of the summer 22 And that concludes my update. If you 23 have any questions, I would be happy to try to answer 24 those. 25 CHAIRMAN WILLIAMSON: Thank you. 11 1 Commissioner, do you have any questions? 2 COMMISSIONER KRAUSE: No, ma'am. 3 CHAIRMAN WILLIAMSON: All right. Thank 4 you. 5 AGENDA ITEM NO. XVIII 6 CHAIRMAN WILLIAMSON: Mike Fernandez, we 7 are going to go on to your item. I believe that is 8 XVIII. 9 The next item is report, possible 10 discussion and/or action, including extension on the 11 agency's statistical consulting services contract. 12 MR. FERNANDEZ: Good morning, Madam 13 Chairman, Commissioners, Mr. Grief. My name is Mike 14 Fernandez. I'm the Director of Administration. 15 I have three briefing items for the 16 Commission this morning. The first, Item No. XVIII, 17 is to inform you of staff's intent to execute a 18 one-year extension on a contract with Eubank & Young, 19 our statistical consultants. So we wanted to advise 20 you of that change. 21 I will be happy to answer any questions, 22 Commissioners. 23 CHAIRMAN WILLIAMSON: Commissioner? 24 COMMISSIONER KRAUSE: I am so advised. 25 MR. FERNANDEZ: Yes, sir. 12 1 CHAIRMAN WILLIAMSON: All right. Just, 2 go ahead, Mike, and do all of your items. 3 MR. FERNANDEZ: Thank you very much. 4 AGENDA ITEM NO. XIX 5 MR. FERNANDEZ: Item No. XIX again is a 6 briefing item. And staff wanted to advise you of its 7 intent to amend our current contracts with our instant 8 ticket providers, our printers, SGI and Pollard 9 Banknote. There are going to be two changes in those 10 contracts. One is going to be to allow them to print 11 smaller print runs for five and $10 price points, and 12 that's to enable us to work in the state fair on 13 certain games and promotional activities. 14 The second one is to amend the contracts 15 to allow both SGI and Pollard to move equipment for us 16 when we're doing second chance drawings, when they 17 have those events at various festivals and state 18 fairs. So we wanted to advise you that we're now 19 preparing amendments to those two contracts. 20 AGENDA ITEM NO. XX 21 MR. FERNANDEZ: And then lastly, Item 22 No. XX is our quarterly contracts report which is our 23 standard report that we provide to the Commission 24 every quarter for your review and questions. 25 Those are the three briefing items I 13 1 have for you this morning. 2 CHAIRMAN WILLIAMSON: Thank you. 3 Commissioner, do you have any questions? 4 COMMISSIONER KRAUSE: Thanks for your 5 report. 6 MR. FERNANDEZ: Yes, sir. 7 AGENDA ITEM NO. III 8 CHAIRMAN WILLIAMSON: All right. Now, 9 we will jump back to Item No. III. This is with 10 Ms. Joseph, and these are some more of our bingo rules 11 that we will be considering. 12 MS. JOSEPH: Good morning, 13 Commissioners. For the record, my name is Sandra 14 Joseph, Special Counsel. 15 Items III through IX are all rulemaking 16 items. In each of them, the staff is recommending 17 that the draft rule be adopted as a final rule. All 18 of these rules have been published for public comment. 19 A public hearing was held on December 14th. Two 20 persons appeared and offered comments generally in 21 favor of all of the rules, however offered some 22 comments for a clarification and a couple of changes 23 which I will go over with you. 24 On Item III, Item III concerns Rule 25 402.201, prohibited bingo occasion. It's recommended 14 1 that this rule be adopted without changes. 2 The purpose of this rule was to make it 3 consistent with recent legislative changes to the 4 definition of a bingo occasion. Do you have any 5 questions? 6 CHAIRMAN WILLIAMSON: Commissioner? 7 COMMISSIONER KRAUSE: No, ma'am. 8 MS. JOSEPH: I recommend that this rule 9 be adopted. 10 CHAIRMAN WILLIAMSON: I move that this 11 rule is adopted. Is there a second? 12 COMMISSIONER KRAUSE: I second. 13 CHAIRMAN WILLIAMSON: All in favor? 14 COMMISSIONER KRAUSE: Aye. 15 CHAIRMAN WILLIAMSON: Aye. 16 MS. KIPLIN: Commissioners, I've got an 17 order. Do you want me to hold orders until the end -- 18 CHAIRMAN WILLIAMSON: Please. 19 MS. KIPLIN: -- on each of these items? 20 CHAIRMAN WILLIAMSON: Yes. 21 MS. JOSEPH: And would you like for me 22 to proceed with this? 23 CHAIRMAN WILLIAMSON: Yes. Please go to 24 the next one, Sandy. 25 15 1 AGENDA ITEM NO. IV 2 MS. JOSEPH: Item IV concerns adoption 3 of 16 TAC §402.203 related to unit accounting. The 4 staff recommends that this rule be adopted with 5 changes to the proposed text. 6 In Subsection (f)(1)(D), 14 days has 7 been changed to 25 days to make it consistent with 8 Rule 402.205 which relates to the same topic and 9 provides for 25 days for units to provide information 10 to the Commission. So staff wanted to make that 11 consistent in both rules. 12 The purpose of this rule again is to 13 make it consistent with changes to the Bingo Enabling 14 Act resulting from the last legislative session. 15 Do you have any questions about this 16 rule? 17 CHAIRMAN WILLIAMSON: Commissioner? 18 COMMISSIONER KRAUSE: No, ma'am. 19 CHAIRMAN WILLIAMSON: I make a motion we 20 adopt this rule. 21 Second? 22 COMMISSIONER KRAUSE: Second. 23 CHAIRMAN WILLIAMSON: All in favor? 24 COMMISSIONER KRAUSE: Aye. 25 CHAIRMAN WILLIAMSON: Aye. 16 1 Motion passes. 2 AGENDA ITEM NO. V 3 MS. JOSEPH: Item IV (sic) is proposed 4 adoption of 16 TAC §402.212 relating to promotional 5 bingo. We do suggest one change to this rule, to the 6 text as it was proposed. 7 The purpose of this rule is to clarify 8 the requirements for conducting an exempt promotional 9 bingo game, as authorized by Section 2001.551 of the 10 Bingo Enabling Act. The new rule provides 11 definitions, restrictions, requirements and 12 notification and recordkeeping requirements with 13 regard to promotional bingo. 14 In Subsection (b)(1), the staff 15 recommends that the words "beyond name and contact 16 information" be added after "personal information." I 17 did put a handout on your desk this morning where you 18 can see that additional language highlighted in yellow 19 that it's recommended to be added. 20 That language addition is based on 21 comments that were received. That will allow 22 promotional bingo to obtain simply name and contact 23 information but no other personal information in 24 exchange for playing a game of promotional bingo. 25 Do you have any questions about this? 17 1 COMMISSIONER KRAUSE: No, ma'am. 2 CHAIRMAN WILLIAMSON: Okay. And this is 3 Item V -- 4 MS. JOSEPH: Yes. 5 CHAIRMAN WILLIAMSON: -- not Item IV. 6 And I understand that Commissioner Schenck has a 7 little input on here and we changed that to reflect 8 his concerns? 9 MS. JOSEPH: Yes. 10 CHAIRMAN WILLIAMSON: I make a motion 11 that we adopt this rule. 12 COMMISSIONER KRAUSE: Second. 13 CHAIRMAN WILLIAMSON: All in favor? 14 COMMISSIONER KRAUSE: Aye. 15 CHAIRMAN WILLIAMSON: Aye. 16 The motion passes. 17 Then Item VI. 18 AGENDA ITEM NO. VI 19 MS. JOSEPH: Item VI is proposed 20 adoption of amendments to 16 TAC §402.401 relating to 21 temporary license, with one change to the proposed 22 text as it was published. 23 The change is to simply delete the word 24 "total" before "number of temporary licenses 25 requested," to clarify that the licensee does not have 18 1 to request all of their temporary licenses at one 2 time. So that's a simple clarification. 3 These amendments also were proposed to 4 make the rule consistent with changes to the Bingo 5 Enabling Act and also to remove language that permits 6 a licensed authorized organization to receive a refund 7 or credit of a license fee when it does not hold the 8 temporary occasion. 9 Do you have any questions about this 10 proposed rule? 11 CHAIRMAN WILLIAMSON: Commissioner? 12 COMMISSIONER KRAUSE: No, ma'am. 13 CHAIRMAN WILLIAMSON: I make a motion 14 that we adopt this rule. 15 COMMISSIONER KRAUSE: Second. 16 CHAIRMAN WILLIAMSON: All in favor? 17 COMMISSIONER KRAUSE: Aye. 18 CHAIRMAN WILLIAMSON: Aye. 19 The rule is passed. 20 AGENDA ITEM NO. VII 21 MS. JOSEPH: Item VII concerns 16 TAC 22 §402.402 relating to the Registry of Bingo Workers. 23 It's recommended that the rule be adopted with one 24 change to the proposed text. That change concerns the 25 definition of "bookkeeper." And language has been 19 1 added to clarify that the bookkeeper is an individual 2 ultimately responsible for preparation and maintenance 3 of certain bingo records. 4 This definition and other changes to 5 this rule are also being made to make the rule 6 consistent with the recent legislation, HB 1474. 7 If you have any questions, I would be 8 happy to address them. 9 CHAIRMAN WILLIAMSON: Commissioner? 10 COMMISSIONER KRAUSE: No questions. 11 CHAIRMAN WILLIAMSON: I make a motion to 12 adopt this rule. 13 COMMISSIONER KRAUSE: Second. 14 CHAIRMAN WILLIAMSON: All in favor? 15 COMMISSIONER KRAUSE: Aye. 16 CHAIRMAN WILLIAMSON: Aye. 17 Motion passes. 18 AGENDA ITEM NO. VIII 19 MS. JOSEPH: Item VIII is consideration 20 of adoption of amendments to 16 TAC §402.405 relating 21 to temporary authorization. It's recommended that 22 this rule be adopted without changes to the text, as 23 it was proposed in the Texas Register. 24 The purpose of the amendments is to 25 clarify specific items that must be in compliance with 20 1 the Bingo Enabling Act and the bingo rules for each 2 license type before a temporary authorization will be 3 issued. 4 Do you have any questions concerning 5 this rule? 6 COMMISSIONER KRAUSE: No, ma'am. 7 CHAIRMAN WILLIAMSON: I make a motion we 8 approve this rule, adopt this rule. 9 COMMISSIONER KRAUSE: Second. 10 CHAIRMAN WILLIAMSON: All in favor? 11 Aye. 12 COMMISSIONER KRAUSE: Aye. 13 CHAIRMAN WILLIAMSON: Motion is passed. 14 AGENDA ITEM NO. IX 15 MS. JOSEPH: Item IX is consideration of 16 adoption of amendments to 16 TAC §402.101, advisory 17 opinions. It's recommended that this rule be adopted 18 without changes to the proposed text. 19 This rule was presented to you at the 20 last Commission meeting and passed at that time. 21 Since that time, we have clarified, I hope for the 22 Commissioners, that concern that was raised by 23 Commissioner Schenck will be appropriately addressed 24 in a subsequent rulemaking proceeding. Commissioner 25 Schenck was concerned about language in Subsection (e) 21 1 which provides that a bingo advisory opinion will 2 apply to the requester as well as any other person who 3 is under similar facts and situation. Commissioner 4 Schenck had concern about it applying to any other 5 person. 6 That portion of the rule was not 7 proposed. It was not new language. In fact, it 8 exists right now and could not be addressed in this 9 rulemaking. However, staff will bring a new 10 rulemaking to address that concern and that language 11 at a future meeting. 12 So, therefore, we recommend that the 13 rule be adopted as it was proposed. 14 CHAIRMAN WILLIAMSON: Commissioner, do 15 you have any questions? 16 COMMISSIONER KRAUSE: I guess what my 17 question is, is that what we're going to do, we're 18 going to come back and change it later so that the 19 advisory opinion is for the requester only? 20 MS. JOSEPH: At the direction of the 21 Commission, we'll bring that as a proposal for you. 22 COMMISSIONER KRAUSE: All right, because 23 that's the only party that we have information on, and 24 we don't get to decide if they're similarly situated 25 or not. 22 1 MS. JOSEPH: We will bring it back for 2 your consideration. 3 COMMISSIONER KRAUSE: On that basis, 4 then I'll second that motion. 5 CHAIRMAN WILLIAMSON: Okay. I'll make a 6 motion to adopt. 7 COMMISSIONER KRAUSE: Second. 8 CHAIRMAN WILLIAMSON: All in favor? 9 COMMISSIONER KRAUSE: Aye. 10 CHAIRMAN WILLIAMSON: Aye. 11 Motion passes. 12 MS. KIPLIN: Commissioners, that 13 concludes all the items that had to do with adoptions 14 of rulemaking on bingo. And with your permission, I 15 will give you the orders now for your signature. 16 CHAIRMAN WILLIAMSON: All right. 17 AGENDA ITEM NO. II 18 CHAIRMAN WILLIAMSON: Well, before we 19 start with our Item No. II, we are very honored to 20 have with us today Rep. Chente Quintanilla sitting up 21 here next to Ms. Melvin, and we are so happy to have 22 you here to join us today. He had expressed a concern 23 in our Item No. II, and he's graciously come over. 24 And I have encouraged him to participate in any manner 25 that he wishes to do so. And we're very honored that 23 1 you're here and appreciate that you came. 2 REP. QUINTANILLA: Thank you, 3 Ms. Chairman. 4 CHAIRMAN WILLIAMSON: And with him, he 5 brought Robert. Robert, you can introduce yourself, 6 if you would. 7 MR. GRIJALVA: Robert Grijalva. 8 CHAIRMAN WILLIAMSON: And we also have 9 other members -- staff members from members of the 10 Licensing Committee. 11 And, Nelda, I'm going to let you 12 introduce everyone, if you would, please, because I 13 think you would know who is here and their names 14 better than I. And we're happy to have them here as 15 well. 16 MS. TREVINO: Chairman Williamson and 17 Commissioner Krause, along with Rep. Quintanilla and 18 Robert Grijalva from his office, we have Nina Serno 19 also from Rep. Quintanilla's office. We have Brittney 20 Grigg in attendance also from Chairman Edmund 21 Kuempel's office and Michael Schofield from the 22 Governor's office. And I'm not sure if Margaret 23 Wallace is here, but she was looking to be in 24 attendance from Rep. Roland Gutierrez's office as 25 well. 24 1 CHAIRMAN WILLIAMSON: Great. Now, all 2 of these, I understand, these are members of the House 3 Licensing and Regulation and Administrative Procedures 4 Committee? 5 MS. TREVINO: That's correct. 6 CHAIRMAN WILLIAMSON: And they are our 7 oversight committee? 8 MS. TREVINO: Correct. 9 CHAIRMAN WILLIAMSON: We are glad to 10 have all of you here in attendance today. And while I 11 would like to wait for Commissioner Schenck, I'm 12 sensitive to the fact that the weather is lousy and 13 I'm sure there's a bunch of y'all that want to get 14 back on the road or catch your flight. 15 So we will go to Item No. II. This is 16 report, possible discussion and/or action on the 17 lottery operations and services procurement, including 18 but not limited to the Gartner contract(s). 19 As you know, we do have special guests 20 today in our audience as well in regard to this 21 matter. Commissioner, I know you have been provided a 22 copy of a recent letter that I was copied on from 23 Rep. Quintanilla to Chairman Kuempel regarding the 24 Gartner/GTECH matter. 25 MS. KIPLIN: Commissioners, I'm sorry to 25 1 interrupt you. 2 CHAIRMAN WILLIAMSON: Sure. 3 MS. KIPLIN: I've got several witness 4 affirmation forms. 5 CHAIRMAN WILLIAMSON: Okay. 6 MS. KIPLIN: And I would like to go 7 ahead and call those names. And I know you're going 8 to request people to come up -- 9 CHAIRMAN WILLIAMSON: Sure. 10 MS. KIPLIN: -- in order, and I think 11 first what we've asked for is the staff to be there. 12 So if we could allow just the staff to be there and 13 then go to who you want to call. And what I would 14 like to do now is go ahead and put these names on the 15 record. 16 CHAIRMAN WILLIAMSON: Okay. 17 MS. KIPLIN: Charles Chun -- and I'm 18 sorry if I'm mispronouncing anybody's name. I'll just 19 apologize in advance. Charles Chun with Gartner, 20 Inc.; William Kumagai with Gartner, Inc.; Brett 21 Rugroden, Gartner, Inc.; Alan Eland with GTECH; 22 Patrick Kamm with GTECH, Jaymin Patel with GTECH 23 Corporation; David Carron with GTECH; Robert Vincent 24 with GTECH; Michael Prescott with GTECH; and 25 Rep. Quintanilla. Thank you. 26 1 CHAIRMAN WILLIAMSON: All right. Thank 2 you. 3 Commissioner, we have each received a 4 report issued by the agency's Legal Services Division, 5 to the Deputy Executive Director. Bob Biard, the 6 Assistant General Counsel, will present that report. 7 And after his presentation, I would like to request 8 GTECH and Gartner representatives to come to the table 9 and offer testimony and respond to any questions that 10 we may have. 11 And after we've concluded our business 12 with Gartner and GTECH and after any comments that we 13 may have, then I would like Rep. Quintanilla to have 14 any additional comments. And I'm inviting you as 15 well, any questions you want to ask while we have all 16 these representatives here, just please feel free to 17 jump in and ask whatever you would like. 18 REP. QUINTANILLA: Thank you. And I'll 19 just listen here and try to see if I have a few 20 questions that I could possibly have. Thank you. 21 CHAIRMAN WILLIAMSON: All right. Great. 22 Thank you. 23 And then after that, we'll hear from our 24 Deputy Executive Director regarding his impressions 25 from the Legal Services and his intentions. 27 1 And so with that, Mr. Biard, we'll start 2 with you. 3 MR. BIARD: Thank you. Good morning, 4 Commissioners. I am Bob Biard, Assistant General 5 Counsel in the Legal Services Division. And with me 6 today is Andy Marker, the Deputy General Counsel. 7 At the Commission's January meeting, 8 Mr. Fernandez, the Director of Administration, 9 informed you of the termination of the agency's 10 contract with Gartner, Inc., following a disclosure by 11 Gartner that it had a consulting contract with GTECH, 12 the current lottery operator. Gartner had breached 13 its contract with the lottery by entering into a 14 contract with a primary vendor of the lottery. 15 Since that time, the Legal Services 16 Division has issued several requests for information 17 to Gartner and GTECH to determine whether there was 18 any information-sharing between Gartner and GTECH 19 about the lottery operator procurement. Gartner and 20 GTECH have both provided responses and documents to 21 our requests. The report we had provided to the 22 Deputy Executive Director is a summary of our 23 fact-finding and review of the information provided. 24 In summary, we identified three 25 contracts between Gartner and GTECH that were in place 28 1 during the term of the lottery's contract with 2 Gartner. The first is a master consulting services 3 agreement. The master consulting services agreement 4 between Gartner and GTECH, with an effective date of 5 September 28, 2009, was a document designed to cover 6 multiple statements of work for different services. 7 The only statement of work issued under 8 the master agreement was for an assessment of GTECH's 9 project management office which GTECH authorized on 10 November 16, 2009. Gartner and GTECH have executed a 11 document canceling the master consulting services 12 agreement and another document canceling the project 13 management office statement of work, both effective 14 January 6, 2010. 15 The second contract was a consulting 16 contract between Gartner, GTECH and the Finland 17 lottery. On December 29, 2008, Gartner, GTECH and 18 Veikkaus Oy, the Finland lottery, executed a contract 19 for Gartner to measure the productivity of 20 applications development work GTECH provided for the 21 Finland lottery in 2008. On May 19, 2009, Gartner 22 provided GTECH and the Finland lottery a final report 23 under this contract. 24 The third contract is a subscription 25 agreement of which Gartner and GTECH both acknowledge 29 1 that they were parties to. Under this agreement, 2 Gartner provides reports of generic research 3 information that it makes available to any person who 4 subscribes to the service. Gartner had previously 5 disclosed this relationship to the Texas Lottery at 6 the time of the agreement with the lottery and Gartner 7 was executed. This agreement does not involve 8 specific consulting services. 9 The only violations or potentially 10 improper actions we have identified are, one, that 11 Gartner breached the supplemental agreement it had 12 with the Texas Lottery by entering into a contract 13 with a primary vendor of the Texas lottery. And, two, 14 GTECH failed to disclose its contractual relationship 15 with Gartner. According to the documents we received, 16 Gartner did not have procedures in place to ensure 17 compliance with the prohibition against contracting 18 with primary vendors of the lottery, and GTECH 19 acknowledged that it did not perform a conflict check 20 before entering into the master consulting services 21 agreement. 22 We have seen no evidence that the 23 Gartner representatives who contracted with GTECH were 24 aware of the preexisting Gartner contract with the 25 Texas Lottery. We also have seen no evidence that 30 1 either any information developed or obtained by 2 Gartner through its contract with the Texas Lottery 3 was ever made available to or accessible by Gartner 4 employees outside the small circle of employees that 5 were assigned to the Texas Lottery contract or any 6 Gartner employees assigned to the lottery contract 7 were also assigned to or worked on the Gartner/GTECH 8 contract. And we also have no reason to believe that 9 the work performed for the Texas Lottery by Gartner 10 consultants was influenced in any way by other work 11 Gartner may have been doing for GTECH. 12 Therefore, based on the documents and 13 information that we received in response to our 14 requests, we have found no evidence of any actual 15 conflict of interest in the Gartner/GTECH contractual 16 relationship that demonstrates influence or bias in 17 the current lottery operator RFP. However, we 18 acknowledge that our review is limited to the 19 responses to our requests for information, and we may 20 not have received or requested all of the relevant 21 information that exists on the issues reviewed. And 22 we cannot conclude with certainty that there was no 23 sharing of information between Gartner and GTECH that 24 influenced the development of the RFP. 25 In our report, we have identified for 31 1 the Deputy Executive Director several options to 2 consider with respect to the current procurement. 3 Among these options are, first, to cancel the RFP; 4 second, to suspend the procurement temporarily or 5 extend the RFP schedule and perhaps request a 6 disinterested third party to conduct a review of the 7 procurement process and/or our fact-finding and review 8 or, third, to consider the matter closed based on 9 these findings and this review and continue the 10 procurement under the current schedule without taking 11 further direct action. 12 In addition, we have also recommended 13 soliciting sworn testimony from representatives of 14 Gartner and GTECH. We believe if the agency could 15 obtain sworn testimony or other reliable evidence from 16 knowledgable persons within Gartner and GTECH that 17 there was no sharing of information regarding the 18 procurement, that the agency would have a stronger 19 record to support a conclusion that there was no 20 improper influence on the RFP. 21 And I understand that there are 22 representatives from Gartner and GTECH present today. 23 They may wish to address the Commission. I'll be 24 happy to answer any questions. 25 CHAIRMAN WILLIAMSON: Commissioner? 32 1 COMMISSIONER KRAUSE: The Gartner 2 employees that worked on our RFP project, how many 3 were there? 4 MR. BIARD: Mr. Marker better knows. 5 MR. MARKER: I believe there were two 6 primary directors who worked on that engagement. 7 Mr. Fernandez and Ms. Erickson, I believe, worked 8 closely with them. I believe there were two -- and 9 there may have been a lead or two co-leads who headed 10 the Gartner team that worked with the Texas Lottery. 11 COMMISSIONER KRAUSE: Okay. Well, my 12 interest is in finding out about, you know, who these 13 people were, what they were doing and if they were 14 full-time, part time, you know, what kind of 15 procedures were in place that were designed to keep 16 the information that they were developing or receiving 17 from the Lottery Commission confidential. And so 18 those are -- the witnesses that can talk about that 19 are the people that I'm going to want to hear from, 20 from Gartner. 21 MR. BIARD: I understand that there are 22 persons with personal knowledge of that present today. 23 COMMISSIONER KRAUSE: Wonderful! 24 CHAIRMAN WILLIAMSON: Do you want to ask 25 Mr. Fernandez or any of them about that aspect of 33 1 Gartner work in-house? 2 COMMISSIONER KRAUSE: Well, actually, I 3 think I would like to hear that from a Gartner 4 representative with personal knowledge. 5 CHAIRMAN WILLIAMSON: All right. 6 COMMISSIONER KRAUSE: And I'm ready to 7 start asking questions, if we can get that person to 8 the podium -- 9 CHAIRMAN WILLIAMSON: Okay. 10 COMMISSIONER KRAUSE: -- or to the 11 witness box. 12 CHAIRMAN WILLIAMSON: I think at this 13 time I would ask if there are -- the representatives 14 from Gartner and GTECH, if anybody has any opening 15 comments or statements they would like to make, I 16 would invite you to come up and do those now, and then 17 we will proceed with the specific questions. So 18 whomever would like to go first and present their 19 statement. 20 MS. KIPLIN: Madam Chairman, I just want 21 to point out for the record, on the witness 22 affirmation form it does indicate -- this goes to the 23 point that Mr. Biard was making in terms of sworn 24 testimony, that the individuals solemnly swear the 25 testimony that they are about to give will be the 34 1 truth, the whole truth and nothing but the truth, so 2 put that on the record. 3 CHAIRMAN WILLIAMSON: All right. Thank 4 you. 5 MR. KUMAGAI: For the record, my name is 6 Bill Kumagai. I thank you for the opportunity to 7 speak this morning. I'm a Group Vice President at 8 Gartner. I have responsibility for Gartner Consulting 9 in North America. And I would like to introduce two 10 members of my team that are here today: Brett 11 Rugroden who is our lead for the state and local 12 government, consulting in North America, as well as 13 Charles Chun, who has responsibility for high tech and 14 telecommunications providers, that part of the market. 15 And so they have specific detailed knowledge regarding 16 both our engagement with the lottery as well as the 17 terminated agreement with GTECH. 18 So if I could, I would just like to say 19 a few words as sort of a preface here. One is that we 20 did make a mistake, and we apologize. We regret 21 making that mistake. And as soon as we had discovered 22 the mistake, we did notify the Lottery Commission. We 23 discovered the mistake in late December and reported 24 it to the lottery on December 30th. 25 The work that we did for GTECH in Rhode 35 1 Island had nothing to do with the work that we did for 2 the lottery. We had different Gartner consultants 3 working on that engagement. They were out of 4 different business groups, the groups that are 5 represented here by Mr. Rugroden and Mr. Chun, and 6 they worked out of different geographies as well. 7 So the Gartner employees that were 8 working on the Rhode Island project had no access to 9 the Texas information, and vice versa. So no 10 information was shared at all between those two 11 project teams. In fact, those two project teams did 12 not know of the other's activities. And no Lottery 13 Commission information was shared with GTECH, just to 14 emphasize that. 15 So we did self-report on December 30th. 16 And subsequently the Lottery Commission issued the RFP 17 on January 2nd of this year. We take this very 18 seriously. And again, we apologize for that mistake. 19 It was an administrative mistake. We do not think 20 there was a conflict of interest here. We do not 21 think there was an exchange of information that was 22 harmful at all to the lottery. 23 We have cooperated with the Lottery 24 Commission in this inquiry and will continue to do so. 25 So we want to thank you for giving us this opportunity 36 1 to answer questions, and we'll be happy to provide any 2 information we can. Thank you. 3 CHAIRMAN WILLIAMSON: Thank you. And I 4 believe GTECH has the opening statement or comments 5 they would like to make before we start. Thank you. 6 MR. PATEL: Thank you, Madam Chairman 7 and Commission Krause, for the opportunity to address 8 you today. For the record, my name is Jaymin Patel. 9 I and the President and CEO of GTECH Corporation. And 10 by way of introduction, I have brought with me some 11 people from GTECH today. We have GTECH's General 12 Counsel, Michael Prescott back there. We have Alan 13 Eland, GTECH's Senior Vice President For Business 14 Operations in the Americas. We have Robert Vincent, 15 our Senior Vice President for Corporate Affairs. And 16 we have Ramon Rivera, our local General Manager whom 17 you know. 18 Let me also begin by telling you how 19 much we regret having to deal with this unfortunate 20 issue. I fully understand first and foremost our 21 obligation to you as a prime lottery vendor is to 22 protect the public trust and the integrity of the 23 Texas Lottery, both real and perceived. 24 As you have just heard from the lottery 25 staff, an issue has arisen that could be perceived as 37 1 a conflict of interest with regard to the Gartner 2 Group's contract to advise the Texas Lottery and a 3 relatively small contract they had to support GTECH's 4 Project Management office to support GTECH's endeavors 5 in this areas. That organization, the Project 6 Management office, is part of our corporate group of 7 technologists who are based in Providence, Rhode 8 Island. 9 When we first learned of this matter, I 10 met with Michael Prescott and Alan Eland internally at 11 GTECH and I ordered an immediate and thorough review 12 of the matter. Since then, a comprehensive internal 13 investigation has been completed. I am confident that 14 the GTECH Texas operations were not aware of the 15 Gartner Group's involvement with our corporate 16 technology group, nor were the staff in the Project 17 Management office aware of Gartner's involvement with 18 the Texas Lottery. 19 Furthermore, as part of the internal 20 review, all of the individuals with whom Gartner had 21 contacted GTECH have provided written assurances that 22 they were unaware of Gartner's role with the Texas 23 lottery. Similarly, members of the Texas team 24 provided written assurances that they were unaware of 25 the GTECH/Gartner internal assessment of the Project 38 1 Management office. And, most importantly, there were 2 never any discussions about the Texas Lottery 3 procurement between the GTECH staff and the Gartner 4 representatives with whom they interacted, and we have 5 written assurances on this point as well. 6 I want to be clear about our findings. 7 Very simply, there was no conflict of interest and 8 there was no influence by GTECH staff through the 9 Gartner Group on the Texas Lottery RFP process. On 10 this point I am certain. 11 While there are clearly no conflicts, we 12 recognize that some perceive the appearance of one. 13 One part of the GTECH field organization did not know 14 what another part of the corporate group was doing. 15 That's certainly troubling. I understand that. And I 16 intend to strengthen our procedures to ensure that 17 such situations do not recur. 18 We understand and appreciate the 19 lottery's issue with the situation, and we apologize 20 for the trouble this has caused the Commission, the 21 lottery staff and the State of Texas. 22 If it would please the Commission, 23 Michael Prescott, our General Counsel, would be happy 24 during the question and answers to explain that we 25 have put in place certain procedures to guard against 39 1 such occurrences in the future and make sure that we 2 do a better job in meeting obligations to Texas. And 3 you have my personal assurance that we have taken some 4 steps already and will be much stricter enhancing our 5 policies and procedures to prevent such a situation 6 from happening again. 7 I have also directed Michael Prescott to 8 have his office be the center for the disclosure 9 process going forward so that we will know with 10 certainty, whether it's a large contract or a small 11 contract, that all of these matters are reviewed in 12 the light of our obligations to you. 13 We will propose to work closely with the 14 Texas lottery staff to make certain key vendor 15 relationships are known and to review for potential 16 conflicts on a regular basis. 17 I should also point out that we have 18 responded to the Texas Lottery's review with complete 19 cooperation and full transparency. We recognize the 20 critical importance of resolving this matter to the 21 satisfaction of the lottery and those that have the 22 responsibility for overseeing the lottery. We have 23 responded promptly, completely and transparently to 24 all requests for information. And again, you have my 25 personal assurance that we will continue in that 40 1 manner. 2 To that end, we have brought with us 3 today two individuals that are again prepared to 4 answer your questions: Patrick Kamm who is the 5 individual who is responsible for the Project 6 Management office and had the Gartner relationship in 7 this regard. And Patrick is over here (indicating). 8 And we also have brought with us today 9 David Carron, our Senior Director of Technology 10 Operations for the Americas, who was interviewed by 11 Gartner as part of their work for us. And David is 12 here as well. 13 As I mentioned earlier, they have 14 provided written statements attesting to the fact that 15 there was no interaction with Gartner regarding the 16 Texas RFP, but they are willing to provide you with 17 these assurances in person if you so desire. 18 I believe that you are aware of this, 19 but I wanted to point out that we have ended our 20 relationship with the Gartner Group and certainly let 21 them know of our disappointment in their mishandling 22 of this disclosure obligation to the Texas Lottery and 23 to us. 24 Let me conclude and offer to take your 25 questions with this thought in mind: GTECH takes 41 1 great pride in the partnership we have with the Texas 2 Lottery. You are a most valued customer. It is 3 unimaginable to us that we would knowingly do 4 something to undermine your confidence in us. 5 I can assure you that we did not have a 6 conflict of interest in this matter. We could have 7 done a better job of communicating internally, and I'm 8 certain that we will do so in the future. And I will 9 take the responsibility to make sure that we implement 10 processes accordingly. 11 Hopefully you will judge this matter not 12 by the incident but how we responded to it. I have 13 given this the utmost urgency within GTECH. It's top 14 priority for us. And hopefully my presence with my 15 colleagues here today underscores that. It is my firm 16 belief that our cooperation and the detail with which 17 we conducted our internal review should give you a 18 sense of confidence that, while unfortunate, this 19 matter was an isolated one and has been resolved. 20 Again, I am sorry we are having this 21 discussion and the difficulty that it has caused the 22 Texas lottery. I can only resolve to make certain it 23 will never happen again. 24 Thank you again for the opportunity to 25 address your opening remarks. Now my colleagues and I 42 1 will be glad to answer your questions. Thank you. 2 CHAIRMAN WILLIAMSON: Thank you. 3 Do we need to do the sworn testimony 4 with every person that comes up or did your statement 5 at the first take care of everybody that will be 6 coming up? 7 MS. KIPLIN: I received witness 8 affirmation forms from those that I understand will be 9 available to testify, and I think that's sufficient. 10 If there are others that have not completed a witness 11 affirmation form with that oath on there, then I would 12 ask for that form. 13 CHAIRMAN WILLIAMSON: Okay. So I guess 14 as people come up and talk, you'll make sure that -- 15 MS. KIPLIN: I'll make sure that -- 16 CHAIRMAN WILLIAMSON: -- you have what 17 you need for that? 18 MS. KIPLIN: Yes, I will. I'll make 19 sure of that. 20 CHAIRMAN WILLIAMSON: All right. Thank 21 you, gentlemen, for your comments. Probably we'll 22 just -- whoever needs to come up and speak can either 23 go over there or come sit down there, so y'all don't 24 necessarily have to sit there. Like I said, we'll 25 just kind of see how it flows as we have questions. 43 1 Okay. Commissioner? 2 COMMISSIONER KRAUSE: Mr. Patel, I 3 appreciate you coming down here. And I can certainly 4 appreciate, you know, the challenges of a large 5 organization, you know, such as yours has with trying 6 to monitor all the contacts it has with the outside 7 world. And I can also appreciate the fact that in 8 your business, there are not a large number of 9 organizations that you contract with, because it's a 10 specialized industry. 11 And so anyway, with that said, our staff 12 report indicates that the place in your organization 13 where, you know, the information about these two 14 different kinds of contracts would finally converge 15 into, you know, one person or one office is at the 16 very highest office in your organization, so I guess 17 that's you. And so my question to you is, tell me how 18 this did come to your attention. 19 MR. PATEL: Yes, sir. Let me answer 20 that question for you. Within our organization, we 21 have what we call an approval authority matrix which 22 is a method that allows me to give the Senior Vice 23 Presidents who report to me authority to conduct 24 business on a day-to-day basis. And that matrix 25 requires material contracts to be approved by certain 44 1 offices of the company as they become more and more 2 material to our organization itself. 3 In this case, the fairly small contract 4 that we had with Gartner did not rise to the point 5 where it required the approval of myself or my chief 6 financial officer. The contract I believe was for a 7 value of $150,000, and that value of contract would 8 not normally arise to me, so I was not made aware of 9 it until early January when the matter became known. 10 In terms of -- to give you more 11 assurances of how our business works, the selection of 12 Gartner as a consulting engagement for GTECH would 13 never have arisen within the Business Operations 14 organization of GTECH. And the Business Operations 15 organization for the Americans is run by Alan Eland. 16 And Ramon Rivera reports directly to Alan Eland. And 17 those two gentlemen were certainly aware that there 18 was a Gartner relationship with the Texas Lottery. 19 And so if the opportunity arose to hire Gartner from 20 within the organization, it would have been stopped 21 immediately, because they knew, of course, being in 22 Texas, that that conflict may have arisen. 23 What happened in our company, sir, was 24 that the Corporate Technology group and the PMO -- 25 specifically the Project Management office, which is a 45 1 different part of the organization to Business 2 Operations -- was the group that independently sought 3 to bring on board Gartner as our adviser. So that's 4 how the matter arose. And there was no knowledge of 5 Alan Eland or Ramon Rivera in what the PMO office was 6 doing, and it wasn't raised to my attention because of 7 the low level of materiality of the matter involved 8 COMMISSIONER KRAUSE: Well, it sounds 9 like the low level of materiality is one aspect of it. 10 But because they were in completely different lines of 11 businesses, that that's why y'all didn't catch it. 12 But I guess what my question was, how did you find out 13 about it, given those organizational challenges? 14 MR. PATEL: Around the 5th of January, 15 sir, Alan Eland walked into my office and advised me 16 that -- he was advised that same day -- that an issue 17 has arisen with the Gartner Group where our Project 18 Management office had engaged them in a piece of work 19 and this has been brought to the attention of the 20 Texas Lottery by the Gartner Group. 21 COMMISSIONER KRAUSE: How did he come to 22 find that out, then? Is he here? 23 MR. PATEL: Alan is here. So if you 24 would -- if it would please you, I would ask him to 25 join -- 46 1 COMMISSIONER KRAUSE: Sure. Absolutely. 2 MR. PATEL: -- me here and answer 3 questions. 4 MR. ELAND: Madam Chairman, Commissioner 5 Krause, for the record, my name is Alan Eland, Senior 6 Vice President for the Americas for GTECH. 7 And to answer your question 8 specifically, I received a phone call from Ramon 9 Rivera letting me know that Gartner had disclosed to 10 the Texas Lottery this conflict, and that's how I 11 found out on or about the 5th of January. 12 CHAIRMAN WILLIAMSON: Well, actually, 13 y'all heard about this through the lottery rather than 14 from Gartner originally? 15 MR. ELAND: I believe that's correct. 16 COMMISSIONER KRAUSE: You know, that 17 helps me out, because it makes me feel like that your 18 organization was completely unaware that there was, 19 you know, any kind of a conflict, a potential conflict 20 of interest. 21 MR. PATEL: That's true, sir. The 22 senior leadership team were unaware, including my 23 General Counsel, Michael Prescott, who was unaware of 24 this matter until the 5th of January. 25 COMMISSIONER KRAUSE: Has this kind of 47 1 circumstance ever occurred before in your 2 organization, because we're not the only lottery out 3 there and we're not your only customer? 4 MR. PATEL: Certainly -- Alan should 5 certainly answer the question as well. But in my 16 6 years in the company, I haven't come across this 7 situation before. And, as I mentioned in my opening 8 remarks, we have been thinking about procedures that 9 we will implement with the Texas Lottery personnel to 10 strengthen our processes to ensure that we have a list 11 of primary contracts with the Texas Lottery that we 12 both agree. And then Michael Prescott, our General 13 Counsel, his office with ensure that there are regular 14 conflict checks conducted against that list. 15 Alan? 16 MR. ELAND: I'm not aware of any similar 17 situation. 18 COMMISSIONER KRAUSE: Given that, you 19 know, the contracting with government entities is 20 subject to, you know, a request for proposal and, you 21 know, the opportunity for unsuccessful bidders to, you 22 know, contest the contracts awarded and, indeed, even 23 the contract contests, the letting of RFPs, what kind 24 of procedures does GTECH have in place to prevent, you 25 know, the receiving of possible improper information 48 1 around its RFP process? 2 MR. PATEL: Well, sir, we have a very 3 strict ethical and compliance organizational network 4 within our company which reports up to two committees, 5 and one committee reports to our board directly. We 6 have the Global Compliance Committee, which is a 7 committee of our board, which is comprised of our 8 Chief Financial Officer. 9 And three independent non-GTECH or 10 Lottomatica staff sit on that committee -- they're 11 external members -- and their job is to review all of 12 our engagements with consultants and with outside 13 advisers in support of our business, which is largely, 14 of course, you know, bidding for contracts around the 15 world. 16 In addition to that, we have the 17 Government Affairs Committee of our organization that 18 reviews and approves all relationships with external 19 consultants that are working on bids. And we have 20 very strict policies internally where our employees 21 are required to certify every year that they have not 22 been unduly influenced or have unduly influenced any 23 aspect of our business. We take this matter very 24 seriously, and we require that every one of our 25 employees certifies to these points every year. 49 1 Again, Michael Prescott is here, and 2 Michael Prescott will be pleased to provide further 3 review of our procedures in this regard. 4 COMMISSIONER KRAUSE: Well, given that 5 the award of a contract to GTECH for, you know, a good 6 sized lottery is a very valuable piece of business. 7 You told me about procedures in place to protect those 8 awards, you know, both in the process of responding to 9 RFPs and that kind of thing. 10 And, you know, one of the things that I 11 can't help thinking about is -- and I don't know that 12 there is any real organizational way to deal with 13 this -- but employees that, you know, have the direct 14 relationship with the customer that they're responding 15 to the RFP on, it's obviously important to them that 16 your bid, you know, be accepted. 17 And so while they are affirming that 18 they haven't done anything wrong, there is a huge 19 financial incentive, I'm sure, you know, for them to 20 make sure that they're successful in having an award 21 made to GTECH. And so is there any way that you know 22 that your organization tries to address that beyond 23 just a written attestation that, you know, the people 24 involved did nothing wrong? 25 MR. PATEL: Well, sir, I believe that 50 1 that starts totally at the top. And it is important 2 for the leadership of the organization, starting from 3 me to all of my senior management team to run the 4 business in a way that does not tolerate any kind of 5 illicit behavior or any undue influence in the way 6 that our business in run. 7 And I can assure you, sir, that I do not 8 tolerate that kind of behavior, and I can assure you 9 that my senior offices and the people that work with 10 them every day behave in that regard as well. I am 11 very confident that there was no conflict here. 12 I believe that GTECH conducts its 13 business ethically and appropriately around the world. 14 We do have procedures in place, and I have said that 15 we're going to strengthen those procedures, 16 particularly with Michael Prescott's office taking 17 responsibility to ensure that there are conflict 18 checks that will take place in the future. But 19 ultimately, sir, I believe it's about making sure that 20 you set the right tone at the top and having a policy 21 of non-tolerance for any kind of illicit behavior in 22 the company. 23 COMMISSIONER KRAUSE: That helps me out 24 quite a bit, and I appreciate that. 25 MR. PATEL: Thank you, sir. 51 1 CHAIRMAN WILLIAMSON: Do you have anyone 2 here that could give us a little bit of explanation on 3 the Gartner contract, the one that was canceled, the 4 $150,000? Is there anyone here that can really 5 explain to me: This is what it was, this is what it's 6 for, this is kind of the scope of the engagement. Is 7 there anyone here that can do that? 8 MR. PATEL: I think the best person to 9 address that is the person who dealt directly with 10 Gartner, and that's Patrick Kamm. 11 CHAIRMAN WILLIAMSON: Okay. Then if you 12 would. 13 MR. KAMM: Good morning, Commissioners. 14 My name is Patrick Kamm, for the record. 15 I'll give you the background on how we 16 entered into the agreement with Gartner. As the 17 leader of our Program Management office, I sent out 18 inquiry to a number of different consulting houses -- 19 Accenture, The Revere Group, and Gartner -- in early 20 July of 2009, general inquiry to convey to them my 21 wishes to assess my Program Management office against 22 industry standards. 23 It's very easy at GTECH, when you're in 24 a specialized business as we are, to consider 25 yourselves very good at what you do. And what I 52 1 wanted to do was, I wanted to bring in an independent 2 consultant organization to assess us against industry 3 standards, outside of what we do every day. 4 I spoke with members from Accenture, The 5 Revere Group and Gartner, and I found that Gartner's 6 presentation was the most attractive financially, it 7 was the most aligned to my wishes for a very impartial 8 assessment of our organization. And to that end, we 9 entered into agreement with them in -- I want to say 10 in November. We signed the statement of work on 11 November 16th. 12 COMMISSIONER KRAUSE: Mr. Hamm or Kamm? 13 MR. KAMM: Kamm. 14 COMMISSIONER KRAUSE: Kamm. Give us a 15 brief synopsis of the line of business that you run 16 and how it's distinguished from, you know, the line of 17 business that includes the part of GTECH that was 18 doing business with the lottery, the Texas Lottery. 19 MR. KAMM: Certainly; certainly. At a 20 very high level at GTECH, the organization is split 21 into two areas, very clearly. There is the Global 22 Operations and Account side of the business and there 23 is the Technology Services side of the business. We 24 consider ourselves a fulfillment arm to the Account 25 organization that has the direct relationship with our 53 1 customers. 2 My day-to-day business, running the 3 Program Management office, and many of the people in 4 the Technology organization, do not have a daily 5 interface with those on the Account side of the 6 business. Our work with the Account side more comes 7 during actual projects, you know, a conversion or a 8 large services batch, those types of things. But in 9 the day-to-day operation of the business, we are 10 completely separate. And they reach out to us, in 11 fact, when they need our assistance. 12 COMMISSIONER KRAUSE: So your 13 organization provides services to the actual operating 14 units? 15 MR. KAMM: More times than not, yes. 16 COMMISSIONER KRAUSE: Okay. And that's 17 a support type of service, and they call you and say, 18 "We need some help on technology issues" and things 19 like that? 20 MR. KAMM: That's correct. 21 CHAIRMAN WILLIAMSON: I'm going to put 22 you on the hot seat here. But can you tell me with 23 absolute certainty that no information came to your 24 group or came out of your group in interaction with 25 the activity that was going on with Gartner here at 54 1 the lottery? 2 MR. KAMM: I'm absolutely certain, as 3 far as the assessment that I had from my organization 4 with Gartner, that there was no information that came 5 into my organization that would influence any of the 6 answers that we provided. And the information that we 7 provided to Gartner in no way was provided to anybody 8 in the other relationship that Gartner had with the 9 Texas Lottery Commission. 10 CHAIRMAN WILLIAMSON: On your 11 information systems, or systems -- and I don't know if 12 you're the proper person to answer this -- are there, 13 for lack of a better word, fire walls or securities so 14 certain business groups -- I'm probably not using the 15 right words -- cannot access information in other 16 business groups in your company? There again, I don't 17 know who is the proper person to answer that. But do 18 you understand what I'm trying to ask? 19 MR. PATEL: I think I understand the 20 question, Madam Chairman. 21 CHAIRMAN WILLIAMSON: Okay. 22 MR. PATEL: We have very complex 23 security architecture, architecture built into our SAP 24 system, which is our internal accounting and 25 management system, to ensure that people in different 55 1 parts of the organization do not have access to 2 records or contracts they should not have. 3 All of the contracts in our company are 4 housed in the Legal Department. And, of course, the 5 Legal Department is a secure department. And the 6 lawyers, under the direction of Michael Prescott, 7 would not give out information to anybody unless it 8 was, you know, for a valid business reason. 9 So through the combination of physical 10 access controls through our systems, combined with the 11 controls where we have information stored in our Legal 12 Department, I'm confident that unauthorized access to 13 contractual information could not happen without a 14 breach being known, and no breach was ever reported or 15 known in the company. 16 CHAIRMAN WILLIAMSON: So once again I 17 guess I'll put you on the hot seat. And so with 18 absolute certainly, you can assure us and me that no 19 information has been shared regards the procurement, 20 the RFP, Gartner's work here with the other 21 department, that it was totally compartmentalized? 22 MR. PATEL: I can provide you with that 23 assurance with absolute certainly, that I am very 24 confident that no information-sharing exchange took 25 place and that the people that were working on the 56 1 GTECH Texas team did not have a communication with the 2 Gartner Project Management office engagement, nor was 3 there any discussion that took place between the GTECH 4 Texas team and the group that Patrick Kamm manages. 5 CHAIRMAN WILLIAMSON: Thank you. 6 COMMISSIONER KRAUSE: Mr. Kamm, any 7 information about the Texas Lottery's RFP would have 8 no remote relevance to what you do and to what the 9 contract with Gartner was all about. Is that true? 10 MR. KAMM: Let me see if I understand 11 your question correctly. The RFP, as it's been 12 released, I do participate in the response to the RFP 13 in the sense that my organization will be the one that 14 will manage the conversion project. So as a member of 15 the Technology Leadership group, I'm involved in 16 working with our proposals organization. My 17 organization then constructs the conversion plan. 18 COMMISSIONER KRAUSE: Well, but that's 19 not what my question was. My question was, you know, 20 in connection with the Gartner contract that you've 21 not terminated. 22 MR. KAMM: Yes. 23 COMMISSIONER KRAUSE: And the services 24 that you were asking for from Gartner were not 25 remotely related to anything Gartner was doing with 57 1 our RFP? 2 MR. KAMM: Nothing at all. It was 3 completely independent. My intent was simply to bring 4 in a third party with no knowledge whatsoever of any 5 relationship Gartner currently had with the Texas 6 Lottery. My decision to contract with Gartner was 7 again solely based on the presentations presented by 8 Gartner and others and my personal feeling that they 9 are the best aligned to what I was looking for in 10 terms of an unbiased, very detailed assessment of my 11 organization such that I could institute their 12 findings in a long-term improvement road map for the 13 team. 14 COMMISSIONER KRAUSE: So the services 15 you were looking for were a critique of what your 16 business is doing and nothing else? 17 MR. KAMM: That's correct. 18 COMMISSIONER KRAUSE: Okay. And so it 19 wasn't anything having to do with getting new business 20 anywhere from any other customer or anything, because 21 that's not what you do. 22 MR. KAMM: That's correct. We are 23 simply in the business of managing the conversion 24 projects. 25 COMMISSIONER KRAUSE: Okay. 58 1 MR. PATEL: If I may just add to that, 2 to be more specific, within our organization, the 3 Business Operations side of our organization is 4 responsible for customer relationships and for bidding 5 contracts. We do not have the technology side of our 6 business responsible for that because we believe that 7 a separation is the proper way to run our business, 8 there is no influence between those two parts of our 9 business. 10 And by way of background, I think it 11 would be helpful for the Commission to know that a 12 little over a year ago, I had asked Matthew Whalen, 13 who Patrick reports to -- Matthew Whalen is the Senior 14 Vice President of Technology Implementations in our 15 company -- I had asked him to make sure that we were 16 always looking for ways to improve the way that we 17 deliver technologies around the globe. 18 And so, you know, it's important that, 19 you know, we're always looking for ways to make sure 20 we have best practices in our organizations. That's 21 the general background for you to help to understand 22 that there's complete separation between the business 23 operations side of our business that deals with 24 customers and the rest of our business. 25 CHAIRMAN WILLIAMSON: All right. Any 59 1 other questions? 2 Representative, do you have anything you 3 would like to -- I'm not trying to put you on the 4 spot. But if you have anything you would like to ask 5 or interject at this point, please feel free to do so. 6 REP. QUINTANILLA: Thank you; thank you 7 for giving the opportunity. But, you know, I think 8 I'm here to listen also and just try to learn a little 9 bit more about what the system works like. You know, 10 obviously, you-all are very well-informed as to what 11 is occurring and you are very interested in looking 12 into the process. 13 I kind of wanted to refrain myself from 14 asking questions in case Chairman Kuempel does form a 15 subcommittee to further ask questions and review what 16 is going on. So basically I guess, even though I have 17 many, many questions, you know, that have arisen as 18 this Commission has asked here, I kind of want to 19 refrain myself. 20 But I do -- it's just a burning question 21 that I have here. Did you mention that you had three 22 contracts with Gartner, Mr. Patel? 23 MR. PATEL: I think my colleague here 24 from Gartner mentioned the three contracts. 25 REP. QUINTANILLA: Yes. Somebody 60 1 mentioned that there were -- 2 MR. PATEL: Yes. 3 CHAIRMAN WILLIAMSON: Yes, our Legal 4 Services did. 5 REP. QUINTANILLA: So we do have 6 previous contracts -- I mean, "we." I mean, the 7 Commission has had previous contracts with Gartner or 8 with the GTECH. Does GTECH have any -- 9 CHAIRMAN WILLIAMSON: There were three 10 contracts that Gartner and GTECH have that we're aware 11 of, in light of this. The one was a subscription 12 contract. And just as a aside, the lottery also has 13 the same subscription contract. It's a -- and I'm 14 sure you guys can correct me if I'm wrong. But it 15 provides just information that's gathered daily on a 16 subscription basis. I'm sure there are other 17 lotteries. And who knows? They're going to let y'all 18 kind of fill in the blank on that. But that's -- 19 REP. QUINTANILLA: Was one of the 20 contracts for consultation? I'm just, you know, 21 trying to -- 22 CHAIRMAN WILLIAMSON: Right. And then 23 the other one was with the Finland Lottery. 24 And I'll let you -- y'all can detail 25 that better than I. 61 1 MR. PRESCOTT: My name is Michael 2 Prescott. 3 There were three contracts during the 4 period from July 2008 when the Texas Lottery 5 Commission engaged Gartner. One was the subscription 6 service agreement. One is the PMO agreement that 7 Patrick described. And the third is the Tripartite 8 agreement among GTECH, our Finland customer, and 9 Gartner for the benchmark services that the Legal 10 Department of the Texas Lottery Commission described 11 earlier. 12 REP. QUINTANILLA: Okay. Let me ask the 13 question again. The contracts that we're talking 14 about were between what individuals, what companies? 15 MR. PRESCOTT: Okay. The first 16 contract, the PMO contract, was GTECH Corporation and 17 Gartner. 18 REP. QUINTANILLA: Okay. 19 CHAIRMAN WILLIAMSON: Could you explain 20 what a PMO contract is? 21 MR. PRESCOTT: Sorry. That's the 22 Project Management office that Patrick had described, 23 the agreement that Patrick Kamm's group had entered 24 into in order to assess the internal GTECH Project 25 Management office. 62 1 The second is the subscription services, 2 and that's A generic offering that Gartner -- many IT 3 industry folks and perhaps several people in our 4 industry subscribe to as well. 5 And then the third contract -- and 6 that's a GTECH corporation, Gartner, Inc. 7 The third contract was an agreement 8 among a subsidiary of GTECH that has a contract with 9 the Finnish lottery. The Finnish Lottery, an entity 10 called Veikkaus, and a subsidiary of -- well, I'm not 11 sure of the relationship but a Gartner entity out of 12 Europe -- to provide benchmark services which took 13 into account some of the -- reviewed the delivery, the 14 GTECH deliveries in connection with our contract with 15 the Finnish Lottery. 16 REP. QUINTANILLA: So my question is 17 that there were previous contracts that were entered 18 into with Gartner, between GTECH and Gartner prior to 19 this last contract? 20 MR. PRESCOTT: All the contracts -- 21 we've had -- actually, there are a host of other 22 contracts, too, going back in time. The three that I 23 just described are the contracts that were entered 24 into after July 2008. And so that Veikkaus agreement 25 was entered into in December 2008 and terminated with 63 1 its deliverable in May of 2009. 2 REP. QUINTANILLA: So there has been 3 previous relationships, many relationships between 4 Gartner and GTECH? 5 MR. PRESCOTT: Over the course of years, 6 GTECH and Gartner have had other contracts. 7 REP. QUINTANILLA: Madam Chairman, does 8 it -- and, you know, I'm just asking a question -- 9 does the Commission know that we did have other 10 contracts with Gartner or the Gartner -- had other 11 contracts with GTECH? And I'm not questioning it. 12 Just for my information, did we know that they had 13 entered into other contracts, themselves had entered 14 into other contracts? 15 CHAIRMAN WILLIAMSON: The answer is 16 "Yes" on two of them, I believe is correct. And we 17 can certainly address that further. 18 MR. BIARD: Hi. This is Bob Biard again 19 with Legal Services. Gartner did disclose the 20 subscription agreement that was just described to the 21 Commission at the time that Gartner and the Commission 22 entered into their consulting agreement in 2008 and 23 later disclosed that they have a similar subscription 24 agreement with Scientific Games, which is another 25 primary vendor of the lottery. 64 1 REP. QUINTANILLA: So you knew about the 2 other contracts? 3 MR. BIARD: The Commission knew about 4 the one, the data reporting subscription agreement. 5 REP. QUINTANILLA: So what made it such 6 a big deal to terminate the last contract? Why, if 7 you had had previous -- or if they had had previous 8 relationships? 9 MR. BIARD: Well, the data reporting 10 subscription agreement is not a consulting contract. 11 It was just a -- 12 REP. QUINTANILLA: But there was a 13 relationship between Gartner and GTECH previously? 14 MR. BIARD: It had been disclosed. The 15 subscription agreement had been disclosed to the 16 Commission, and the other agreements were not 17 disclosed. 18 REP. QUINTANILLA: That's my question. 19 I mean, what I understood is that the last 20 relationship that was there or the first relationship 21 with the last contract that you-all had entered or 22 that GTECH had entered into with Gartner, and that's 23 why they terminated that contract. But, obviously, 24 there was a previous relationship between the two 25 companies. 65 1 MR. BIARD: At the time that -- my 2 understanding is that at the time that the lottery and 3 Gartner entered into their agreement, Gartner 4 disclosed that GTECH was a customer for a subscription 5 service, which was not consulting. The contract that 6 the lottery and Gartner entered into subsequently had 7 a provision in it that prohibited Gartner from 8 entering into a contract with any primary vendor of 9 the lottery, but we already knew about that 10 subscription agreement. 11 And it was after the agreement was 12 signed with the lottery that prohibited any contracts 13 with the lottery primary vendor. It was after that 14 point that this agreement with the Finnish Lottery and 15 the agreement with GTECH occurred without, and we were 16 not aware of that until December 30th of last year. 17 MS. KIPLIN: It -- 18 REP. QUINTANILLA: I'm also very 19 curious -- I'm sorry. Go ahead. 20 MS. KIPLIN: Well, I just wanted to try 21 to add a little bit to what Mr. Biard had said in 22 response to your question. The contract that the 23 Lottery Commission entered into with Gartner had a 24 provision that said that during the life of that 25 contract and for a year thereafter, Gartner could not 66 1 enter into a contract with one of our primary vendors. 2 So based on that provision and the 3 disclosure of the contract that Gartner had entered 4 into with GTECH in November of 2009, the Lottery 5 Commission terminated the contract with Gartner. 6 Through the vetting of Gartner, the disclosure of the 7 subscription agreement was made to the lottery. The 8 lottery did not conclude that that was a conflict of 9 interest, because it was a generic type of service 10 that was offered to many companies. It was not an 11 individual consulting relationship between Gartner and 12 GTECH. I hope that helps. 13 REP. QUINTANILLA: It helps, but it's 14 still -- you know, I mean to me, I mean, it's still -- 15 the relationship has been an ongoing relationship that 16 we knew about or that the Commission knew about that 17 was going on between the two companies. My question 18 to -- I'm sorry. "Kamalie"? 19 MR. KUMAGAI: Kumagai. 20 REP. QUINTANILLA: Kumagai. Kumagai, 21 yes. 22 How big a company are you? 23 MR. KUMAGAI: Gartner is over a billion- 24 dollar company. We are considered the world's leading 25 information technology, research and advisory services 67 1 company. So we're a global company, and we do 2 business with the better part of the Fortune 500. 3 REP. QUINTANILLA: How many contracts do 4 you have in the United States, approximately, with 5 other commissions? 6 MR. KUMAGAI: I think one of the numbers 7 I heard was like 60,000 clients. So can I make a 8 comment I think to some of the points here? 9 We're talking about two different kinds 10 of contracts here. Our research contracts -- so we do 11 syndicated research, which is write once, publish and 12 our subscribers read that research. You might compare 13 it to Consumer Reports, sort of the Consumer Reports 14 of information technology. 15 So when we disclosed the fact that GTECH 16 was a customer of our subscription research, that was 17 at the time that we were entering into a contract to 18 do consulting work for the Lottery Commission. The 19 Lottery Commission acknowledged that and said that was 20 okay. 21 So the event that led to the termination 22 by convenience of our consulting contract was actually 23 this consulting agreement that we entered by mistake 24 into with GTECH regarding their Project Management 25 organization. 68 1 REP. QUINTANILLA: Did you know -- did 2 you divulge information to GTECH that you had a 3 contract with the Commission already when you entered 4 into their last contract? Did anyone in your company 5 say to GTECH, "Look, we're doing this big contract 6 with the Commission to do the RFP. I mean, we want to 7 let you know that with the Finnish company that, you 8 know, there might be some possible conflict"? Did 9 anybody think about that? 10 MR. KUMAGAI: We did not. Our situation 11 at Gartner was, these contracts were entered into by 12 separate consulting groups within Gartner -- that's 13 not an excuse, just a statement -- and that 14 communication did not occur. So the same separation 15 that makes us absolutely certain that no information 16 was passed back and forth between those two 17 engagements, that separation was part of our 18 administrative mistake in terms of not being able to 19 communicate. 20 Now, on the Finnish Lottery agreement, 21 this is a benchmark that a Gartner affiliate, Gartner 22 Ireland, was performing for the Finnish Lottery as 23 well as a GTECH affiliate. So I just want to make a 24 couple of points, I guess. One is that by our read of 25 the contract, strict read of the contract, that wasn't 69 1 a violation of the contract, because of the affiliates 2 and those kinds of things. But we disclosed 3 voluntarily, because we wanted to be fully transparent 4 about this. 5 Second is, is that we had done this same 6 benchmark for the Finnish Lottery for two prior years. 7 It was an annual thing. They try to assess how their 8 progress is going. In the first two years, we did it 9 directly for the Finnish Lottery. 10 In the third year, the Finnish Lottery 11 said, could we make this a three- part contract and 12 include this GTECH affiliate, because they wanted to 13 share the cost. But they in no way affected the study 14 itself, the benchmark itself. It was strictly a 15 cost-sharing kind of thing. 16 REP. QUINTANILLA: But was this 17 disclosed to the Commission? 18 MR. KUMAGAI: It was disclosed, I 19 believe, in our December letter. I don't know the 20 exact date of that, but we did disclose it. 21 REP. QUINTANILLA: But disclosed it 22 after the contract had been -- 23 MR. KUMAGAI: We disclosed it 24 afterwards. When we did our further diligence, when 25 we realized, when we discovered the GTECH Rhode Island 70 1 consulting engagement and realized that we had made a 2 mistake, we did a full sweep and said, "Is there 3 anything else here?" And in that further diligence, 4 we discovered this Finnish Lottery deal, which we 5 immediately disclosed. 6 But again, we failed. No information 7 was exchanged. And, obviously, we didn't even know 8 about it, so we wouldn't have known who to disclose 9 information to in the first place. But we disclosed 10 that voluntarily as soon as possible. And we have put 11 in strong administrative controls to make sure that 12 this doesn't recur. 13 REP. QUINTANILLA: Mr. Patel, how long 14 have you done business with the Commission, the 15 lottery? 16 MR. PATEL: GTECH has provided services 17 to the Texas Lottery since 1992, sir. 18 Is that correct? 19 MR. PRESCOTT: (Nods head) 20 MR. PATEL: Yes, that's correct. 21 REP. QUINTANILLA: And here is my last 22 one. I better quit, but I've got one more question. 23 How long has -- obviously, your relationship with 24 Gartner has been a long-lasting relationship, because 25 it is very, very -- what is the word that I'm trying 71 1 to use? -- it's a very closed business. I mean, very 2 small, I mean, very few of you out there in the 3 business world that deal with lotteries. So how long 4 has your relationship been with Gartner? 5 MR. PATEL: I don't have the exact facts 6 for how long we've been in business. 7 But, Michael, perhaps you can answer 8 that. 9 MR. PRESCOTT: I don't know the answer 10 either. I mean, we from time to time enter into 11 discrete projects with Gartner as well as -- 12 REP. QUINTANILLA: Say 10 years, 15 13 years, or the same number of years that you have 14 worked with the Commission? 15 MR. PRESCOTT: I don't know. 16 MR. PATEL: We'll go back and check 17 those facts, but I don't believe it's been that long. 18 As I think you've heard, in terms of data services, 19 many companies, including vendors in the industry, use 20 Gartner for that service, so it's not unusual at all, 21 so these are contracts that you enter into from time 22 to time to gather information, which is information 23 that Gartner researches for IT companies. 24 And also I want to provide one more 25 clarification, if I may. With respect to the Finland 72 1 contract, it was the Finnish customer that originally 2 contracted with Gartner. GTECH was simply asked this 3 year to share in the cost. There was no instigation 4 on GTECH's part to work with Gartner. The Finnish 5 customer and Gartner have been working together for 6 several years. 7 REP. QUINTANILLA: Thank you, Madam 8 Chair. I mean, it's just a lingering number of 9 questions that could come up, but I will defer to 10 you-all to make your decisions based on -- 11 CHAIRMAN WILLIAMSON: We're happy for 12 you to ask questions at any point that you so choose. 13 REP. QUINTANILLA: Thank you. 14 CHAIRMAN WILLIAMSON: So we appreciate 15 that. 16 COMMISSIONER KRAUSE: Well, I'm 17 interested in hearing in more detail from Gartner and 18 Gartner representatives at this point. 19 CHAIRMAN WILLIAMSON: But before we do 20 that, let's take a -- it's 10:25. Let's take about a 21 10-minute break, and we'll be back in 10 minutes. 22 (Recess: 10:25 a.m. to 10:40 a.m.) 23 CHAIRMAN WILLIAMSON: We're back in 24 session. It's 10:40. 25 And why don't we go ahead and everybody 73 1 introduce themselves again for the record so we can 2 have that, please. 3 MR. CHUN: Good morning. Charles Chun. 4 I'm a Vice President with Gartner, Inc., responsible 5 for the high tech and telecom industry consulting 6 practice in North America. 7 MR. RUGRODEN: Good morning. I'm Brett 8 Rugroden. I'm a Vice President with Gartner and 9 responsible for state and local government business in 10 North America. 11 MR. KUMAGAI: I'm Bill Kumagai. I'm a 12 Group Vice President with responsibility for 13 consulting in North America. 14 CHAIRMAN WILLIAMSON: All right. And 15 I'm always derelict in doing this. But if everyone 16 would please speak very clearly in the microphones so 17 we can get a good, clear record. And I'm very bad at 18 reminding everyone of that. So thank you. 19 Commissioner? 20 COMMISSIONER KRAUSE: Yes. Mr. Kumagai, 21 you had visited with us a little while ago about the 22 size of Gartner, and you said that there were 60,000 23 customers here in the United States or at least in 24 North America. Can you just give us a little bit of a 25 synopsis about the kind of business that you have here 74 1 in the United States, like how many Fortune 500 2 companies? And, you know, it sounds like your 3 business is limited to consulting, you know, 4 primarily, technology consulting and that kind of 5 thing. If you could just give us a one-minute 6 description of -- 7 MR. KUMAGAI: Sure. 8 COMMISSIONER KRAUSE: -- Gartner's 9 business in North America. 10 MR. KUMAGAI: And, actually, the 60,000 11 reference is the number of clients we have worldwide. 12 That's over 10,000 distinct organizations, because we 13 have multiple -- sometimes multiple contracts with the 14 same organizations -- 15 THE REPORTER: Could you speak up a 16 little. 17 MR. KUMAGAI: Sure. There we go. 18 Sorry. 19 Our clientele includes 65 percent of the 20 Fortune 1000 and 80 percent of the Global 500. We 21 have about -- is it 4,000 associates globally. And 22 our annual revenues are somewhere over a billion 23 dollars. 24 Now I think to your other point, 25 Commissioner. Gartner's primary business, the largest 75 1 business is its research business. So this is the 2 subscription research that we sell to companies that 3 are looking to improve information technology, and we 4 sell that to companies all over the world. Our 5 consulting business is a smaller segment of the 6 overall company. 7 CHAIRMAN WILLIAMSON: Can you, without, 8 if you can, quote a list or tell us some of the 9 people, particularly in the gaming lottery industry 10 that you have had contracts with, business with, 11 either now or in the past? I mean, are you free to 12 divulge that sort of information? 13 And I'm not going to worry about what 14 they are. But I guess my point being that this is 15 somewhat of a small industry in itself and who you 16 would touch within this industry. 17 MR. CHUN: Hello. Some of the ones that 18 I'm aware of, because a lot of the technology 19 providers or gaming technology providers would fit 20 under my group. EA Games, Electronic Arts would be a 21 client of ours we do work with. Activision, a gaming 22 company but more for on-line gaming as opposed to 23 gambling -- right? -- would be one of our clients. 24 And IGT would be one of our clients. 25 COMMISSIONER KRAUSE: Any other 76 1 lotteries? 2 MR. KUMAGAI: Those are the ones we've 3 disclosed, the lottery clients. So it's not a huge 4 number. 5 MR. CHUN: Yes, very specialized 6 industry, as you said. 7 COMMISSIONER KRAUSE: Well, given that 8 you do work with 65 percent of the Fortune 1000 9 companies in North America or the United States -- 10 MR. KUMAGAI: It is worldwide. 11 COMMISSIONER KRAUSE: Worldwide. Okay. 12 Surely those companies are always concerned about the 13 confidentiality of the information they give you and 14 about your procedures for maintaining the 15 confidentiality of the information that you receive 16 from them. Can you tell me about your procedures that 17 satisfy your clients' needs and concerns along that 18 line? 19 MR. KUMAGAI: We have very strict 20 polices and procedures regarding non-disclosures of 21 information between our clients, and we have those 22 protection and firewalls, if you will, between 23 research and consulting, as well as between any 24 consulting engagements that we do. So in our 25 information databases, these are all protected and the 77 1 access to those -- to any particular information is 2 very carefully controlled. 3 Oh, in addition to that, we take this so 4 seriously, because we are an information provider 5 ourselves, that we have an ombudsman office that 6 features prominently in whenever there is a question 7 of any potential conflict of interest or any client of 8 Gartner has a question about things like, "How is my 9 information protected? And who has access to this? 10 And how do you prevent conflicts of interest?" that 11 they represent Gartner, they perform internal 12 investigations and those kinds of things where need 13 be, to make sure that everything is, as we say, 14 carefully protected. 15 COMMISSIONER KRAUSE: Well, it sounds 16 like you wouldn't be very successful in your business 17 if customers did not perceive Gartner as being 18 successful in being able to, you know, keep 19 confidential the information that they're providing to 20 your organization. 21 MR. KUMAGAI: Exactly. 22 CHAIRMAN WILLIAMSON: Interject here. 23 Please note for the record that Commissioner Schenck 24 is here at 10:45. Thank you. 25 COMMISSIONER KRAUSE: As far as your 78 1 relationship with Gartner, how would you characterize 2 it? Is it an ongoing relationship or is it just a 3 series of independent contracts that you make with 4 them from time to time? 5 MR. KUMAGAI: With -- 6 COMMISSIONER KRAUSE: I'm sorry. With 7 GTECH. 8 MR. KUMAGAI: With GTECH. Well, we do 9 have the research subscription relationship. 10 COMMISSIONER KRAUSE: Well, let's 11 discount that -- 12 MR. KUMAGAI: Okay. 13 COMMISSIONER KRAUSE: -- because that's 14 not anything where you're receiving any confidential 15 information from them? 16 MR. KUMAGAI: Exactly. It is 17 intermittent. 18 MR. CHUN: Yes, I think Bill is correct. 19 Our relationship with GTECH on the consulting side is 20 very intermittent. 21 COMMISSIONER KRAUSE: How many Gartner 22 employees were working on the Texas Lottery Commission 23 contract in helping prepare its RFP? 24 MR. RUGRODEN: We had two core personnel 25 from Gartner that were the core project team working 79 1 for Texas Lottery. There were, during the course of 2 that engagement, several subject matter experts or 3 people that were brought in to do specific parts of 4 the analysis. But the core team included Scott 5 Klopfleisch and Kris Doerring. 6 COMMISSIONER KRAUSE: Well, how many, I 7 guess, specialized people were there that actually 8 were -- that you-all billed the Lottery Commission 9 for? So you've got two full-time and then others that 10 just came in and out? 11 MR. RUGRODEN: Correct. For example, 12 during the data discovery and initial stages of the 13 engagement, we had a junior consultant who was helping 14 provide arms and legs to that engagement. Towards the 15 later stages of the preparation of the RFP, we had a 16 sourcing expert, Hilda Tourians, who assisted in some 17 of that RFP work. 18 COMMISSIONER KRAUSE: So it sounds like 19 there were really only four Gartner employees that 20 were involved in the work that Gartner was doing for 21 the Texas Lottery Commission on this contract? 22 MR. RUGRODEN: In total, four -- yes, 23 four to five that may have been engaged, yes. 24 COMMISSIONER KRAUSE: Two full-time and 25 two that just were on an as-need basis? 80 1 MR. RUGRODEN: Yes. 2 CHAIRMAN WILLIAMSON: How long were 3 y'all involved in this contract until the termination 4 date? 5 MR. RUGRODEN: Well, from July -- I 6 believe actually this engagement was signed in August 7 2008 and commenced in August 2008. And so up until 8 termination on -- what was it? -- January 4th. 9 COMMISSIONER KRAUSE: What kind of 10 controls would you have around those four people in 11 connection with the information that they learned from 12 the Texas Lottery Commission about the RFP? 13 MR. RUGRODEN: Sure. And let me state 14 for the record that I am certain that there was no 15 compromise of these RFP deliverables, and there was no 16 communication between the TLC team and the Gartner/ 17 GTECH team. I know that for a couple of reasons. 18 One, in terms of the security of that information, the 19 Gartner/TLC team kept RFPs, statement or work, service 20 level type of information on their local encrypted 21 hard drives only and in the TLC offices. So there was 22 no possible access to that information, that most 23 sensitive information. 24 Furthermore, on our internal storage and 25 networks, any sensitive non-public information related 81 1 to the TLC was kept in a restricted password access- 2 only file, and we have audited those files in terms of 3 access, and so we know that to be true as well. 4 Let me further state that the GTECH/ 5 Gartner personnel, in terms of our investigation of 6 how they treated their information, that information 7 was kept only on local encrypted hard drives. 8 And then finally, I would like to state 9 for the record that the Gartner/TLC team did not even 10 learn of the GTECH engagement until after December 11 22nd or thereabouts, which was after the time that 12 they had completed the preparation of the RFP. 13 COMMISSIONER KRAUSE: Well, that's going 14 to lead me to my next question. And let's talk a 15 little bit about how that discovery was made, who made 16 it, how it occurred and what happened after that. 17 MR. RUGRODEN: So I received a call from 18 the engagement manager for the GTECH/Gartner 19 engagement. 20 MR. CHUN: Project manager. 21 MR. RUGRODEN: Project manager, who had 22 learned just that day of our TLC contract and wanted 23 to ensure, understanding the sensitivity around 24 government procurement, that I understood that there 25 was a contract that had been entered into. So he was 82 1 concerned, wanted to let me know. 2 I believe he had called Charles Chun 3 first. Charles Chun had advised him to call me. I 4 had that conversation. And it was at that time that I 5 asked him to set up a meeting with the various parties 6 so that we could discover the facts and make sure that 7 we addressed the issues, and that's how that discovery 8 took place. That meeting then took place on December 9 30th. After that meeting, once we had, you know, 10 reviewed the facts, considered the contract issues, we 11 made then the decision to immediately disclose that 12 relationship. 13 COMMISSIONER KRAUSE: Well, I think that 14 was the right thing to do. So your employee working 15 on the GTECH contract is the one who learned about 16 your organization's relationship with the Texas 17 Lottery Commission. Did he ever say anything to you 18 about how he learned that you were wrapping up a 19 contract with us? 20 MR. RUGRODEN: He had had a conversation 21 in his office with someone who was not engaged with 22 TLC but who does public sector work as the principal 23 nature of his work, was aware we were doing work at 24 TLC. And when he learned that Mr. MacDorman was doing 25 work for GTECH, he asked that -- he advised him that 83 1 he should call me. 2 COMMISSIONER KRAUSE: I appreciate 3 finding out about that. You have discussed the 4 technology aspects of, you know, encrypted data and, 5 you know, data access and things like that. Testify, 6 if you would, a little bit about, you know, the human 7 aspect of the four Gartner employees and what they 8 knew, you know, about the RFP and what controls 9 Gartner would have in place with respect to their 10 communications, proper or improper, and about the RFP 11 with somebody else in Gartner that was connected with 12 GTECH. 13 MR. KUMAGAI: Can I start on this, 14 Brett? Let me sort of take this from the top down. 15 From a Gartner perspective, we have 16 ethical codes of conduct and policies that we not only 17 have everybody sign off on at the time of employment, 18 they're reminded of actually every time they log on to 19 any Gartner intranet type of systems or anything like 20 that because, as you recognized, Commissioner, our 21 position in the industry as an adviser and authority 22 and really to be an independent and objective adviser 23 about technology, because we don't do implementations, 24 we don't sell hardware, we don't sell software. We 25 are purely advisers in this industry. 84 1 So the use of information and the 2 protection of information is a constant priority for 3 us that we remind our associates all the time. So 4 that's sort of the general situation for all of us who 5 work at Gartner. 6 MR. RUGRODEN: And then let me say 7 specifically that the core team, Kris Doerring and 8 Scott Klopfleisch, are long-time employees. They 9 understand our culture; they understand our rules of 10 engagement. And I can tell you from my interaction 11 with them, that they were hyper-cautious about the TLC 12 engagement, so much so that they would not have 13 discussions even internally with people within Gartner 14 about this project. 15 COMMISSIONER SCHENCK: Winston, I don't 16 want to interrupt your line of questioning, and I 17 apologize for my flight being delayed two hours this 18 morning to get here. And I know that some of this may 19 be redundant, and I appreciate your coming here and 20 sharing this information with us. 21 But what I just heard you relate is what 22 I would call hearsay. You have a couple of -- I think 23 is it four employees that are here in Texas that have 24 been working on this matter most directly with us? 25 MR. RUGRODEN: Two that were dedicated, 85 1 four or five that if you include some of the people 2 that worked part time. 3 COMMISSIONER SCHENCK: Okay. And your 4 understanding is that you would be very surprised if 5 they were communicating with anyone else or sharing 6 any details, even internally, with respect to any 7 efforts they were taking on behalf of the TLC in 8 connection with this? 9 MR. RUGRODEN: Certainly for key aspects 10 of the work that were being completed, yes. 11 COMMISSIONER SCHENCK: Do we know that 12 for a fact or are we going on the reputation? 13 MR. RUGRODEN: I could give you a 14 factual example of that if you would like. 15 COMMISSIONER SCHENCK: No, I don't want 16 an example. The problem I have is that unless I'm 17 mistaken, my understanding from the communications 18 you've had in writing with the Commission are that you 19 signed the contract with us that had a provision which 20 you regarded as unusual that required you not to 21 accept an engagement with any vendors of ours. 22 I don't believe that -- correct me if 23 I'm wrong -- that you have, after signing the 24 contract, put any specific measure in place to assure 25 that Gartner did not engage in another contractual 86 1 engagement that would violate that provision? 2 MR. KUMAGAI: We are looking at that 3 now. It is unusual for us. Typically we work with 4 our Contracts group and our Operations group on that. 5 It was my responsibility, because this is where the 6 organizations come together, to make sure those 7 special provisions were made. We have not had any 8 conflict-of-interest issues arise as long as I've been 9 at Gartner. 10 COMMISSIONER SCHENCK: My question, 11 though, is a little more narrow. 12 MR. KUMAGAI: Yes. 13 COMMISSIONER SCHENCK: It's what 14 specific steps did you take to create an alarm that 15 would go companywide or something else that would 16 prevent the engagement with anybody that might be 17 doing work with the lottery? Was there anything? 18 MR. KUMAGAI: I do not know on that. 19 COMMISSIONER SCHENCK: Does anybody on 20 the panel know? 21 MR. CHUN: No. 22 COMMISSIONER SCHENCK: Okay. Then we 23 have these two or four people who, as a matter of 24 culture, are generally in the habit of being very 25 secure with the information they were doing with 87 1 respect to all the engagements that they have. We 2 didn't ask them to do anything specific or different 3 with respect to the Texas Lottery contract? 4 MR. RUGRODEN: No, not to my knowledge. 5 COMMISSIONER SCHENCK: Okay. Does 6 anyone know that they had a conversation with any 7 employee that was working on the Texas Lottery 8 contract to tell them not to share information and 9 particularly not to share information that might get 10 back to a vendor with the Texas Lottery Commission? 11 MR. KUMAGAI: We did have that 12 Commission. 13 COMMISSIONER SCHENCK: With whom? 14 MR. KUMAGAI: With Scott Klopfleisch. 15 COMMISSIONER SCHENCK: Okay. And who 16 else. 17 MR. KUMAGAI: Well, Scott Klopfleisch is 18 the engagement manager on this, so he has 19 responsibility for the overall success of the 20 engagement. 21 COMMISSIONER SCHENCK: And do we know 22 whether he had that conversation with everyone else 23 who worked on the contract? 24 MR. KUMAGAI: I do not. 25 COMMISSIONER SCHENCK: Gartner has how 88 1 many employees -- quite a few? 2 MR. KUMAGAI: Yes. I think about 4,000. 3 COMMISSIONER SCHENCK: About 4,000. And 4 how many in North America? 5 MR. KUMAGAI: I don't know. Over half 6 of that number. 7 COMMISSIONER SCHENCK: Okay. Do you 8 have retreats? Do you have events where the companies 9 get together, where you put people together on purpose 10 so that they get to know each other and know what the 11 company is doing, what the company's objectives are, 12 give presentations on, for instance, activities and 13 how productive people are being generally? 14 MR. KUMAGAI: We do. 15 COMMISSIONER SCHENCK: How often? 16 MR. KUMAGAI: Actually, we have not had 17 any on a national basis for the past year and a half, 18 because of cost management reasons during the economic 19 recession. 20 COMMISSIONER SCHENCK: So would it be 21 true, then, that during the course of the engagement 22 from the time that we've entered into the contract 23 with you until we discovered this issue with the GTECH 24 contract, that you have not had the employees that 25 were working on our contract in the same building with 89 1 the employees who were working with GTECH? 2 MR. RUGRODEN: I'm sorry. In the same 3 what? 4 COMMISSIONER SCHENCK: Building, in the 5 same location. 6 MR. KUMAGAI: Not for any company 7 function like you're talking about. I can't say that 8 they didn't run into one another in passing. 9 COMMISSIONER SCHENCK: So we can't rule 10 that out, then? 11 MR. KUMAGAI: Can't rule that out. 12 MR. RUGRODEN: We can tell you that, for 13 example, Kris Doerring and Scott Klopfleisch work out 14 of our Dallas office. There were no personnel from 15 the GTECH that worked out of that office. 16 Is that correct? 17 MR. CHUN: Yes, that's correct. 18 COMMISSIONER SCHENCK: But do we know 19 that all the personnel that were working on the 20 GTECH -- I'm sorry -- the Texas Lottery Commission 21 contract were not in an office with any other employee 22 who was in turn working on the GTECH contract? 23 MR. CHUN: The only overlap is between 24 Hilda Tourians and Rahul Handa on the GTECH side. 25 They're both based out of the Los Angeles office. 90 1 COMMISSIONER SCHENCK: I'm assuming, 2 just from past experience, that you gentlemen have met 3 before you came to testify here today, presumably with 4 counsel, in preparation for your presentation to us 5 here today? 6 MR. KUMAGAI: Yes. 7 COMMISSIONER SCHENCK: Do you know 8 whether or not -- and I'm not asking you to tell me 9 what you told your lawyers -- but do you know whether 10 or not your lawyers have talked with lawyers for 11 GTECH? 12 MR. KUMAGAI: I believe so. 13 COMMISSIONER SCHENCK: Okay. Do you 14 know whether there were any controls on the passing of 15 information that you were giving to your lawyers that 16 would keep it from being given to lawyers for GTECH, 17 and vice versa? 18 MR. CHUN: I think what we do know is 19 that there is still a nondisclosure in place between 20 Gartner and GTECH, and so we've been very cautious in 21 terms of what information has been shared specific to 22 the engagement. 23 COMMISSIONER SCHENCK: And I believe -- 24 my understanding again from the communications we've 25 had is that initially the first thought at Gartner was 91 1 to put up what we call a Chinese wall, some sort of 2 barrier between communications between the staff who 3 might have been involved with our engagement and the 4 GTECH engagement. Was that ever formalized or did you 5 just shift gears and say, "We're just going to have a 6 disclosure" and move forward? 7 MR. RUGRODEN: I'm sorry. Could you 8 repeat that? 9 COMMISSIONER SCHENCK: Do you understand 10 what I mean when I say a "Chinese wall"? 11 MR. RUGRODEN: Yes, I understand that. 12 COMMISSIONER SCHENCK: A barrier to make 13 clear to the people who are working on both of these 14 engagements that they were to make sure that they 15 don't communicate with each other in any way. 16 MR. CHUN: I think one of the reasons -- 17 well, it's standard practice that we do keep our 18 client work fairly confidential because it's -- 19 COMMISSIONER SCHENCK: I know, but I'm 20 not asking about standard practice or what's fairly 21 done. I want to know exactly what was done here. 22 MR. CHUN: In the GTECH case, we were 23 unaware of the Texas Lottery Commission project. It 24 was completely unknown to both sides that the other 25 side was working here and another team in Rhode 92 1 Island. So in some ways, that lack of really 2 understanding that both sides existed in itself served 3 as a wall. 4 COMMISSIONER SCHENCK: But when 5 ignorance fails as a wall and you now learn that you 6 have these contract provisions that create a serious 7 problem, somebody inside your company has said, as I 8 understood it, "We have to put up a wall to protect 9 against the possibility that something beyond blissful 10 ignorance has protected against a breach here." Now, 11 did you happen or did it not? 12 MR. RUGRODEN: The first time that the 13 parties from the various -- the two -- the GTECH/ 14 Gartner contract and the Gartner/TLC contract, the 15 first time that they came together as part of a 16 discussion was on December 30th. We reviewed the 17 facts, we reviewed the contractual, you know, 18 components and issues that were at stake. And then 19 after that conversation, I then, as well as our 20 contracts manager, worked with Scott Klopfleisch to 21 prepare a disclosure, and that disclosure happened 22 within hours of that conversation. 23 COMMISSIONER SCHENCK: Okay. So then 24 there was never an email or memo that went around 25 Gartner saying that nobody who has been -- you have 93 1 three kinds of people at your company after that 2 moment. You have people that have been working on the 3 TLC contract and you have people who have been working 4 for GTECH. Right? Those are two fairly small subsets 5 of the 4,000 people you have. 6 Then you have probably 3,900 odd people 7 all sort of bouncing around like electrons around a 8 nucleus. What did you do to prevent information from 9 moving from one of these employees on the GTECH 10 contract to somebody else who then might overhear and 11 communicate information on our contract, or the other 12 way around? Has there ever been any formalized 13 communication generally to the staff or particularly 14 to these two groups of people to make sure that the 15 information that they both had did not get 16 communicated by osmosis or otherwise or directly among 17 those groups? 18 MR. RUGRODEN: In the one or two 19 business days that transpired between disclosure on 20 the 30th and there was a holiday and a weekend 21 termination on Monday, and then I believe the 22 conversation and mutual agreement to cancel the 23 GTECH/Gartner contract occurred on that Tuesday or 24 thereabouts. So in those two business days, we did -- 25 COMMISSIONER SCHENCK: I understand 94 1 that. 2 MR. RUGRODEN: -- we did not. 3 COMMISSIONER SCHENCK: But as we sit 4 here today, for all you know, the lawyers have been 5 talking with each other about everything that each 6 side knows. What has been done today to prevent 7 Gartner employees from sharing information with other 8 Gartner employees that might be of use to GTECH? 9 MR. RUGRODEN: From intentionally 10 hearing or from -- is that your question? 11 COMMISSIONER SCHENCK: Either 12 intentional -- well, intentionally you're telling me 13 it's against policy, so no one at your company would 14 violate policy. I'm talking about inadvertently. 15 What affirmative acts have you taken to make sure that 16 when one of your guys is a lunch wiping his brow and 17 saying, "Oh, we've got this mess over this contract," 18 he's not sharing information with someone who is 19 dating somebody in another office who is working on 20 the GTECH contract? 21 MR. RUGRODEN: I can tell you one action 22 that we took, and that is that we completely locked 23 down anything related to the Gartner/TLC contract. So 24 while the sensitive item was already secured, we 25 secured that item. 95 1 COMMISSIONER SCHENCK: You mean the 2 data, the software and the information and the files, 3 those things? 4 MR. RUGRODEN: Correct. 5 COMMISSIONER SCHENCK: But not 6 necessarily human information. Right? 7 MR. RUGRODEN: Well, it would be hard to 8 lock that down, yes. 9 COMMISSIONER SCHENCK: Other than 10 getting people to sign acknowledgments, Chinese walls 11 and things of that nature. Okay. 12 MR. KUMAGAI: But I think we consider 13 the signing of nondisclosure agreements with our 14 clients to be that wall. We take those agreements 15 extremely seriously. We review those agreements when 16 they're signed. And it is a -- 17 COMMISSIONER SCHENCK: Did you remind 18 the employees that had been working on these contracts 19 that they had that non-disclosure commitment? 20 MR. KUMAGAI: We did -- yes. Scott 21 Klopfleisch. 22 COMMISSIONER SCHENCK: When? 23 MR. KUMAGAI: When we initially talked 24 about this engagement and we talked about the high 25 need for sensitivity and for confidentiality on this 96 1 engagement, and we talked about non-disclosures and 2 the need for absolute confidentiality on this. 3 COMMISSIONER SCHENCK: How about when we 4 discovered -- and I'm using the "we" in the royal 5 sense here -- that we had a problem with GTECH and the 6 simultaneous engagements, were people reminded that 7 both the size of the engagement, that they had these 8 disclosure obligations to make sure that in 9 coordinating the response, there wasn't a violation of 10 the intent of this prohibition? 11 MR. RUGRODEN: I was on that call, and I 12 don't believe that, you know, reinforcement took place 13 during that call. But I can tell you that there were 14 no sensitive facts about the work that we were doing 15 with TLC discussed on that call where the Gartner/ 16 GTECH consultants were working or were on that call. 17 There was no sensitive information discussed. In 18 fact, we did not even discuss the release date for the 19 TLC RFP at that call. 20 COMMISSIONER SCHENCK: And I keep coming 21 back to this question. You didn't on that call also 22 come to the conclusion that these four or five 23 employees you have that do have knowledge, personal 24 knowledge, of the TLC bid structuring shouldn't be 25 sent to your Nome office or Antarctica for some period 97 1 of time to prevent some unintended consequence and you 2 haven't since that call formalized some structure to 3 prevent the inadvertent sharing of information among 4 what I'm going to call the intermediary mass of your 5 employees, the bulk of your staff? 6 MR. RUGRODEN: No, we have not. But I 7 would also like to point out that all that information 8 that would be in their head regarding the TLC RFP is 9 now a matter of public record, because it's been 10 released to the vendor community. 11 So I don't think there is anything more, 12 you know, beyond what's in that RFP that would need to 13 be segregated within Gartner, because that was the 14 work of the consultant to express what the Lottery 15 Commission's needs were. 16 COMMISSIONER SCHENCK: Assuming perfect 17 structuring of the RFP. I understand your position on 18 that, and I do. And I'll tell you, I am sympathetic. 19 I know you have a large organization; I know you have 20 a lot of moving pieces. I work at a large law firm. 21 We have procedures in place, putting alarms in place. 22 And we don't -- I can't -- I couldn't -- if you wanted 23 to hire me today to represent you in some sort of a 24 matter, much as I might like to, I cannot just agree 25 to do it. We don't allow that to happen for exactly 98 1 these kinds of reasons. 2 And I really -- it's unfortunate that -- 3 I understand that this provision was unusual in this 4 contract, but that seems to me all the more reason to 5 take it seriously. And I think -- I don't know where 6 we go from here. But, as I say, I'm sympathetic, but 7 it's a difficult situation. 8 COMMISSIONER KRAUSE: Do either of the 9 three of you, any of the three of you, have any 10 knowledge about the RFP for the Texas Lottery 11 Commission? 12 Okay. Well, I'm going to ask this 13 question. And then if you need to bring somebody else 14 up to answer it, then please do so. 15 If a prospective vendor wants to 16 complain about the RFP because of this situation, what 17 would the Lottery Commission do to change its RFP, if 18 anything, in order to respond to a complaint about, 19 you know, these relationships? 20 MR. RUGRODEN: I don't believe there is 21 anything that you would need to do to change the RFP 22 in its current state. 23 COMMISSIONER KRAUSE: Why? 24 MR. RUGRODEN: Because there was no 25 conflict, there was no compromise of this RFP. There 99 1 was no insinuation into that RFP document of any 2 interest, other than the Texas Lottery Commission's 3 interest. That is it. 4 CHAIRMAN WILLIAMSON: And you can say 5 that with certainty? 6 MR. RUGRODEN: I can say that with 7 certainty. 8 COMMISSIONER KRAUSE: Well, and the 9 obvious reason why we're interested in that is that 10 if -- you know, I mean, this thing is being aired as 11 publicly as possible, because we want to know, you 12 know, what happened and what the consequences are, and 13 we want to be able to know what the right thing to do 14 is here. And so we have -- another prospective vendor 15 comes up and says, you know, "RFP is unfair," RFP 16 this, RFP that. Then, you know, that's why I'm 17 interested in knowing, "Well, what could we do? What 18 should we do? 19 One of the presentations of our staff, 20 when this topic came up initially, they gave us the 21 different options: Pull back the RFP, change the RFP, 22 start all over again, you know. And, frankly, that's 23 a huge burden, because this RFP was not months in the 24 making but years in the making and maybe not more than 25 a year and a half or so. 100 1 But it's been a big, you know, 2 consumption of resources on our side. And then, of 3 course, you know, that includes the monetary side 4 where we're hiring, you know, outside vendors to help 5 us make the RFP. And so that's why my question is 6 what it is. And I hear you say that there isn't 7 anything to change, and that makes me feel good about 8 that. 9 So just reassure me that if -- put 10 yourself in the shoes of a vendor that wants to, you 11 know, respond to this RFP, that they wouldn't have any 12 complaint or what would you expect them to complain 13 about the RFP because of the relationships? 14 MR. RUGRODEN: My advice, if you are 15 seeking it, Commissioner, would be to stay the course. 16 This RFP has not been compromised. Any complaint from 17 the vendor community about this RFP has nothing to do 18 with actual conflict of this RFP. And if they choose 19 to make a business decision not to bid on this RFP, 20 then that's their business decision to make. 21 COMMISSIONER SCHENCK: Can I jump in for 22 a second? 23 COMMISSIONER KRAUSE: Go in. 24 COMMISSIONER SCHENCK: I would love to 25 have the question and answer read back, but I don't 101 1 think we can do that in this forum. 2 A minute ago, you said you were certain 3 that this bid hadn't been compromised? 4 MR. RUGRODEN: Yes, sir. 5 COMMISSIONER SCHENCK: And I appreciate 6 that. That's the kind of attitude I really like in a 7 leader. And if I were at Garter, that's the guy I 8 would want up in front. But you're certain of that, 9 because of the policies that you have in place in 10 Gartner? 11 MR. RUGRODEN: I'm certain of it because 12 of the policies, because of the culture and because of 13 those individuals that were the core team members of 14 this project. 15 COMMISSIONER SCHENCK: You have 4,000 16 employees. Do you have policies against sexual 17 harassment at Gartner? 18 MR. RUGRODEN: Yes, we do. 19 COMMISSIONER SCHENCK: Are there people 20 that violate them from time to time? 21 MR. RUGRODEN: I'm sure there are. 22 COMMISSIONER SCHENCK: I guarantee you 23 there are. 24 MR. RUGRODEN: I can't pick a specific 25 instance, but I'm sure there are. 102 1 COMMISSIONER SCHENCK: Thank you. 2 COMMISSIONER KRAUSE: Well, let me bore 3 down on one other thing, and that is that, you know -- 4 and this is going back to, you know, our decision 5 about whether to pull the RFP or not, and we don't 6 really want to. But you said that the reason why the 7 RFP is not compromised is because of the policies in 8 place, there hasn't been any sharing of information. 9 What I would like for you to do is focus 10 for a second on the actual content of the RFP, you 11 know, and what it is that Gartner was advising the 12 Lottery Commission on, you know. And with respect to 13 that, you know, what could have been different, what 14 could another vendor complain about with respect to 15 the actual advice that Gartner was giving to the 16 Lottery Commission and the result of the content 17 within the RFP. Okay? 18 So this goes to the substance, you know, 19 of the information systems that we were asking you 20 about. What possibly could be different in the RFP, 21 you know, now that we know about all this? 22 I know that was a long question. But it 23 doesn't have anything to do with, you know, the actual 24 sharing of information. This goes to, you know, 25 another -- anybody that wants to complain about the 103 1 RFP, what about the content would they focus on if 2 they were to complain about the RFP? 3 MR. RUGRODEN: Commissioner, I can't 4 testify to the content. I don't know if there are 5 members of the TLC who could respond to that question. 6 I don't have that information. Sorry. 7 COMMISSIONER KRAUSE: So your manager 8 that managed this relationship is not here? 9 MR. RUGRODEN: He is not, Commissioner. 10 COMMISSIONER KRAUSE: Okay. Nor any of 11 the other four or five employees? 12 MR. RUGRODEN: Correct. 13 COMMISSIONER KRAUSE: Okay. Describe 14 for me succinctly what the goal was with this contract 15 between Gartner and the Lottery Commission. 16 MR. RUGRODEN: Succinctly, it was to 17 re-bid the lottery operation services currently 18 provided by GTECH. 19 COMMISSIONER KRAUSE: And what did y'all 20 focus on? Because, obviously, we know a lot about 21 that already. But we were buying specific expertise 22 from Gardner for that. What was that? 23 MR. RUGRODEN: Some of those things 24 included developing a business case. Some of those 25 things included defining the specifications and the 104 1 requirements which are the expression of the Lottery 2 Commission's needs. Those things were not 3 requirements that we handed down to the Texas Lottery 4 Commission. Those were requirements that were 5 developed in partnership with the Texas Lottery 6 Commission, based around their specific use and need 7 for the system. And that expression of need was then, 8 you know, built into those RFP documents. 9 COMMISSIONER KRAUSE: Well, you can 10 imagine that, you know, if there is another vendor 11 that wants to bid on this and they look at it -- and 12 I've been told that any vendor that wants to seriously 13 bid on this RFP is going to spent a million dollars to 14 do so, and that is just to respond to an RFP, whether 15 or not there is an award made. 16 And so, you know, what I can imagine, 17 you know, would be the complaint would be that, you 18 know, because of the relationship, this RFP was 19 structured in a way to favor GTECH, and so that's what 20 I'm trying to get at. 21 And what I'm hearing you say is that 22 this is totally about the Lottery Commission's needs 23 and what it wants out of all that. And so if you 24 wouldn't mind focusing on the possible complaint -- 25 you know, I know this is a little bit of a 105 1 hypothetical -- but, you know, if someone else wants 2 to complain about the RFP and say, "Oh, well, this is 3 structured to favor GTECH," what would you respond to 4 that? 5 MR. RUGRODEN: Certainly that any such 6 bias would not have come from Gartner due to these 7 other issues that we have discussed here, absolutely 8 not. To the question of are there or potentially 9 could there be requirements in an RFP -- and I'm 10 speaking conceptually here and theoretically. 11 Okay? -- that might, you know, favor one vendor or 12 another, I assume that there is a process -- and let 13 me ask this, because I have not been involved in the 14 details, you know, project planning here -- but there 15 is a process typically and procurements by which 16 vendors can request changes to RFP or challenge 17 certain requirements and ask for their changing. 18 If so, then that would be the correct 19 forum to do that, let those vendors come forward and 20 note what specific complaints they have on the 21 business requirements that TLC has and make them known 22 and then you make a decision as to whether or not 23 you're going to change any of those requirements. 24 MR. KUMAGAI: Part of why our clients 25 are looking for consulting services in the first place 106 1 from companies like ours that are independent and 2 objective, that we do not benefit from any particular 3 bidder winning your business in the end is because we 4 can help focus that process on real business 5 requirements, functional requirements: What do you 6 need to do? What do you need a system to do and not 7 get into necessarily extraneous details about how to 8 do it and those kinds of things which can bias a 9 selection process so it's one vendor and another. 10 So part of that whole rationale is to 11 make this agnostic in that sense and as objective and 12 as focused on the Lottery Commission's requirements 13 and real needs as possible. 14 COMMISSIONER KRAUSE: Well, I'm assuming 15 that the Lottery Commission's needs in that regard is 16 that unique to the services that you provide. And so 17 do you work for the United States federal government? 18 MR. KUMAGAI: Yes, we do. 19 COMMISSIONER KRAUSE: Okay. And like 20 defense contracting or other kinds of things? 21 MR. KUMAGAI: Yes. 22 COMMISSIONER KRAUSE: Okay. And so our 23 RFP requirements are not significantly different from 24 those? 25 MR. KUMAGAI: That's right. 107 1 COMMISSIONER KRAUSE: Okay. And so your 2 organization is conscious of the need to, you know, 3 make sure that when they're advising a government 4 entity and putting together an RFP, that, you know, 5 it's done in the appropriate antiseptic method so 6 that, you know, all vendors should feel like that they 7 can compete, you know, on a level playing field when 8 they're responding to the RFP? 9 MR. KUMAGAI: That is exactly right. 10 MR. RUGRODEN: Oftentimes our clients 11 bring us in to do just that, to demonstrate to the 12 vendor community that there is going to be a fair and 13 open process and to help increase competition. 14 COMMISSIONER SCHENCK: But if you were 15 helping the Defense Department, say, to purchase a new 16 airborne tanker, do you think Airbus might find it 17 offensive if you were at the same time engaged in a 18 fairly potentially lucrative contract with Boeing? 19 MR. RUGRODEN: As I think we've all 20 stated here, we absolutely made a mistake. We're all 21 sorry for it. This is my, you know, industry. This 22 is where I make my livelihood. I take this very 23 seriously. 24 COMMISSIONER SCHENCK: Well, I know 25 you're sincere when you say that, and I appreciate 108 1 that. 2 CHAIRMAN WILLIAMSON: Representative, do 3 you have any questions? 4 REP. QUINTANILLA: Yes. Excuse me. 5 This has led me to, you know, one more question that I 6 would like to ask. Specifically how many possible 7 vendors are out there that could bid on this contract? 8 Do you have any idea? 9 MR. KUMAGAI: I do not know. 10 REP. QUINTANILLA: I mean, how many 11 companies out there would have the capability of 12 paying one million dollars or spending one million 13 dollars to bid on this contract? Do you have any 14 idea? 15 MR. KUMAGAI: By "this contract," are 16 you talking about the consulting agreement? 17 REP. QUINTANILLA: No, the RFP for the 18 lottery. 19 MR. KUMAGAI: The RFP for the lottery? 20 I don't have that specific knowledge. I'm sorry. 21 REP. QUINTANILLA: Do you have any 22 consulting contracts with other companies that could 23 be possible bidders? I think you mentioned Accenture 24 a while ago. 25 MR. RUGRODEN: I don't believe Accenture 109 1 would be bidding on this, but I don't know that for 2 sure. 3 REP. QUINTANILLA: You don't have -- I 4 mean, you know -- 5 MR. RUGRODEN: My understanding is, 6 there's probably a handful of vendor teams that will 7 likely be interested in doing this work. There would 8 be, you now, a number of vendors that might come 9 together for the purpose of meeting the needs that 10 have been expressed in the TLC's RFP. 11 REP. QUINTANILLA: I think we're 12 focusing right now on your relationship with GTECH. 13 What relationships do you have with other possible 14 bidders, consulting contracts with other possible 15 bidders? 16 MR. RUGRODEN: Yes, sir. Impossible for 17 me to answer that question because we were terminated 18 the morning prior to the bid being released and have 19 not been part of the process since then. So I do not 20 know or have any certain knowledge at all of who has 21 expressed interest, who is planning to submit a 22 proposal. 23 REP. QUINTANILLA: You're a big company. 24 I mean, obviously you are very well-known around the 25 world. You cannot tell me two or three other 110 1 companies that would possibly be interested in 2 bidding? You have no idea? 3 MR. RUGRODEN: Some of those vendors 4 might include Interlott, I believe is -- 5 REP. QUINTANILLA: Okay. Interlott. 6 MR. RUGRODEN: Scientific Games. 7 REP. QUINTANILLA: Yes. Okay. 8 Basically that's sort of the -- 9 MR. RUGRODEN: I mean, there's a number. 10 I apologize. I am not -- 11 REP. QUINTANILLA: Do you have any 12 relationships -- now, that directs me directly to that 13 question. Do you have any relationships in the past 14 with Interlott or Scientific Games? 15 MR. RUGRODEN: Interlott, I do not know. 16 I know that -- 17 REP. QUINTANILLA: You do not know at 18 all whether you have any contracts with them? 19 MR. RUGRODEN: I do not know. 20 REP. QUINTANILLA: Either of the three 21 of you? 22 MR. RUGRODEN: I know as part of our -- 23 MR. KUMAGAI: Our disclosure. 24 MR. RUGRODEN: -- disclosure and our 25 inquiries that we do have a research subscription with 111 1 Scientific Games. I do know that. 2 REP. QUINTANILLA: But no consulting 3 contracts with either one of the other two that you 4 mentioned? 5 MR. KUMAGAI: No. 6 REP. QUINTANILLA: That is a fact? 7 MR. KUMAGAI: I believe that's true. I 8 cannot say that with absolute certainty. 9 COMMISSIONER SCHENCK: Can you confirm 10 that after you've had a chance today -- 11 MR. KUMAGAI: Absolutely. 12 COMMISSIONER SCHENCK: When you go back, 13 if that's not correct, can we ask you please to 14 confirm in writing that the answer is otherwise? 15 MR. KUMAGAI: Yes. 16 MR. RUGRODEN: May I request that you 17 send us a list of bidders that you would like us to 18 look at or would you like us to just -- 19 COMMISSIONER SCHENCK: Well, I think the 20 question you were asked was these are others, 21 Interlott and Scientific Games, can you assure us that 22 you have -- 23 MR. RUGRODEN: There may be many others 24 that are potentially bidding on this engagement. 25 COMMISSIONER SCHENCK: That's fine. 112 1 REP. QUINTANILLA: Well, my question 2 basically deals back with the question the 3 Commissioner was asking a while ago, you know, what 4 are you using out there to make sure that you -- the 5 integrity of what you did is not divulged? And as the 6 Commissioner asked a while ago, you have 4,000 7 employees, that somebody is not out there working with 8 one of the other companies, because they know about 9 the contract. 10 Now, I know that right now we're 11 focusing on GTECH. But is it a possibility that you 12 also have relationships with Accenture or Scientific 13 Games? And you're saying, "No, at this moment." But 14 could you discover -- and this is -- I think the 15 Commissioner is asking -- could you discover at some 16 point that somebody else might have more of an 17 advantage rather than GTECH? 18 MR. RUGRODEN: Well, the fact would 19 still remain, sir, that the information regarding the 20 TLC work that we did is restricted -- 21 REP. QUINTANILLA: I understand that. 22 MR. RUGRODEN: -- to the prior team 23 members, and that information is now a matter of 24 public record because it's been released to the vendor 25 community. 113 1 REP. QUINTANILLA: Well, I understand 2 that, but I also, you know, want to know -- or maybe 3 the Commission would like to know -- is what 4 relationships do you have with other companies that 5 would be possible bidders? 6 CHAIRMAN WILLIAMSON: Representative, 7 we'll follow up on that -- 8 REP. QUINTANILLA: Okay. 9 CHAIRMAN WILLIAMSON: -- and see if we 10 can't get that information. 11 COMMISSIONER SCHENCK: And if I can 12 clarify the question I was trying to join with, my 13 understanding of your testimony here today is, to your 14 knowledge, you don't know that you have any -- you 15 believe that you do not have any consulting 16 arrangement with Scientific Games or Interlott? 17 MR. CHUN: Yes. 18 COMMISSIONER SCHENCK: I would 19 appreciate greatly if you could, when you leave here 20 today, within the next let's say week, confirm that 21 that is true. And if it's not true, please inform us 22 that you need to correct your testimony. 23 MR. KUMAGAI: We will do so. 24 COMMISSIONER SCHENCK: And if we do not 25 receive that correction, we will assume that you are 114 1 standing by your testimony here today. 2 MR. KUMAGAI: Agreed. 3 MR. CHUN: Agreed. 4 CHAIRMAN WILLIAMSON: All right. Any 5 other questions, Commissioners? 6 COMMISSIONER SCHENCK: Yes. I 7 appreciate that we've brought these men here today. 8 I'm convinced of their sincerity of their opinions. 9 Unfortunately, I think we're talking to generals, and 10 we have privates who have been pulling triggers, and 11 we don't have the answers that we need to have. 12 If you want me to be as confident as you 13 are in the conclusions you draw about what happened at 14 the company, I would appreciate your getting to us 15 affidavits executed by the people who actually were 16 working on these matters, closing down the complete 17 circle of people with whom they've had conversations 18 about the Texas Lottery Commission contract and, on 19 the other side, the GTECH contract -- 20 MR. RUGRODEN: Yes. 21 COMMISSIONER SCHENCK: -- and getting a 22 complete list of who it is they've talked to. And, 23 frankly, it will be fine with me if they talked with 24 someone they weren't supposed to have talked to. I 25 frankly -- I suspect that's happened. So long as we 115 1 then go to the next person and close down the loop -- 2 MR. RUGRODEN: Yes. 3 MR. KUMAGAI: Understood. 4 COMMISSIONER SCHENCK: -- and make sure 5 that we have the universe now of people that have had 6 information or accessed information about both of 7 these contracts, because absent that, then I think 8 we're sort of working with less than complete 9 information. 10 But we do have a degree of confidence 11 which you gentlemen have about your company, based on 12 your experience in it, that we do not, though I 13 appreciate your confidence and your enthusiasm for the 14 company you work for. 15 MR. KUMAGAI: I understand. We will 16 provide that. 17 CHAIRMAN WILLIAMSON: Commissioner, any 18 other comments? 19 COMMISSIONER KRAUSE: I have exhausted 20 all of my questions. 21 COMMISSIONER SCHENCK: Thank you very 22 much for coming. 23 MR. KUMAGAI: Thank you. 24 CHAIRMAN WILLIAMSON: Kim, is there 25 anything you wanted to -- 116 1 MS. KIPLIN: Yes. I would like to probe 2 the issue of waiver of confidentiality by Gartner. We 3 have tried to have this process be as open and 4 transparent as we possibly can, to be in a position of 5 being able to release the report that the Legal 6 Services Division rendered to the Deputy Executive 7 Director with the attachments. 8 One concern that I have that I need to 9 have addressed is the fact that Gartner has asserted 10 confidentiality on its last response. And I think 11 that came from Mr. Cummings, Phillip Cummings. So 12 it's tagged as a footer on the last response. 13 But in an email exchange with 14 Mr. Cummings of your company, he is asserting 15 confidentiality, possibly not to the entirety of 16 Gartner's response but to certain aspects of it. And 17 I am requesting that Gartner waive any claims of 18 confidentiality you have over any of the materials 19 that you have provided the Lottery Commission in 20 connection with this matter. 21 It goes to the heart of being as open 22 and transparent as we can. I understand in 23 conversations with your counsel, Mr. McConnico, that 24 there is a matter of confidentiality that the Finnish 25 Lottery will not waive. But I can tell you that with 117 1 regard to GTECH, we have had a waiver of any claims of 2 confidentiality that GTECH has over any of the 3 materials that GTECH has provided in response to our 4 request for information, save I think interview notes. 5 And we have reviewed those, and I don't think we've 6 had a concern as a result of that. 7 But I would like to have on the record 8 what your company's position is on the waiver of any 9 claims of confidentiality you have to any of the 10 materials you presented. 11 MR. McCONNICO: Commissioners, on behalf 12 of Gartner, I'm Steve McConnico. I'm the attorney for 13 Gartner. 14 We will waive the confidentiality claim. 15 All the documents we have provided to the Commission 16 except for the Finnish documents, because we have 17 requested our partner in the Finnish arrangement to 18 allow us to waive that confidentiality. We have not 19 received that waiver from them. But to everything 20 else, we waive the confidentiality. 21 MS. KIPLIN: Thank you. 22 Now, as a follow-up, I made some 23 statements regarding GTECH and its waiver of any 24 claims of confidentiality it has. And I want to make 25 sure that the statements that I've made are accurate 118 1 and would ask somebody with GTECH to confirm the 2 accuracy of my comments. 3 MR. PRESCOTT: Mike Prescott from GTECH. 4 I confirm the statements. 5 CHAIRMAN WILLIAMSON: Okay. Thank you. 6 Commissioner Schenck, you had another -- 7 COMMISSIONER SCHENCK: I have one last 8 question for you gentlemen. Just assume with me 9 hypothetically that the Lottery Commission were 10 interested in, on a crash basis, retaining someone 11 independent to do exactly the work that you did for 12 us, to help us arrive at an independent and new work 13 product. Who do you think could do that, other than 14 your company? In other words, who is your most 15 effective competition? 16 (Laughter) 17 MR. RUGRODEN: Well, Commissioner, we 18 would be happy to come back and finish the engagement. 19 (Laughter) 20 COMMISSIONER SCHENCK: My question still 21 is, who else might be able to do this? 22 MR. RUGRODEN: We can take that under 23 advisement and provide any recommendations that we 24 might have to you, and we would be more than willing 25 to provide any knowledge transfer to that other 119 1 consulting organization to ensure that they come up to 2 speed not on your dime but on our time. 3 COMMISSIONER SCHENCK: That's fine. But 4 no one, as you sit here today, comes to mind as an 5 obvious candidate to do this sort of work. That's 6 fine. And, frankly, at this point I don't want you 7 talking to them. 8 MR. RUGRODEN: Okay. Great. 9 CHAIRMAN WILLIAMSON: Thank you. We'll 10 kind of wrap this up. 11 Rep. Quintanilla, do you have any other 12 comments you would like to share or anything else? 13 REP. QUINTANILLA: No. I just want to 14 thank you for allowing me the opportunity to, you 15 know, ask a couple of questions. Like I told you 16 before, you know, it's interesting to me what the 17 transparency issue is here, that, you know, the 18 integrity of the RFP be accepted by the Texans that 19 buy the lotteries that are, you know, in the areas of 20 purchasing, that they feel also that everything is 21 aboveboard, that everything is okay, even though we 22 ourselves believe that it is a process, it's a long 23 and arduous process, because as I hear it here, you 24 know, you have been in it for two years, it's over a 25 $2 million contract. 120 1 And I appreciate your question about who 2 else could do this business. Why we chose the Gartner 3 Group, I have no idea. But maybe I could be 4 enlightened at one time. Then we go out for RFPs or 5 consulting firms also. 6 And my only interest in this is, as my 7 constituents, you know, made me aware of the article 8 that had come out in the paper, and I've always had an 9 interest in, you know, how we go about awarding 10 contracts. 11 And I think one of my questions 12 previously was how long have we had a relationship 13 with GTECH? And, as I understand, that's the only 14 company that has done business with the Lottery 15 Commission to this point. 16 And my sole interest is in not trying to 17 nix anything that's going on here that the Commission 18 is doing but to make sure that I can go back to our 19 public and our committee and say, "It is very 20 transparent. Everything is aboveboard and people -- 21 and we believe that we're heading in the right 22 direction," if that's the direction that the 23 Commission decides to take 24 CHAIRMAN WILLIAMSON: Thank you. 25 REP. QUINTANILLA: So I want to thank 121 1 you for giving me the opportunity, Madam Chairman, to 2 sit here and listen to this very interesting 3 testimony. 4 CHAIRMAN WILLIAMSON: Thank you. And we 5 certainly invite you to come back whenever you would 6 like to do so. 7 And I guess you guys are off the hot 8 seat right now, but we would still -- at this point I 9 like comments from our Deputy Executive Director on 10 this whole matter, if you're ready. 11 MR. GRIEF: I am. Thank you, Madam 12 Chair. And I want to express appreciation to our 13 Legal Services Division for the excellent work that 14 they've done in putting together the report to me on 15 this matter. I think they did a thorough and complete 16 job and did a very excellent job of analyzing the 17 documents that came in and following up on each and 18 every matter as it was brought to their attention. 19 I also want to thank Gartner and GTECH 20 for appearing today. We appreciate you being 21 forthcoming with your documentation that you provided 22 us and with your attendance here. 23 And I want to thank you, 24 Rep. Quintanilla, for your interest in this matter. 25 You've served on the Licensing Committee for sometime 122 1 and have had a keen interest in the lottery business 2 over the years. And I appreciate you taking time out 3 of your busy schedule to come and be a part of our 4 Commission meeting. And thank you for your questions 5 today. 6 I would like to offer my views, Madam 7 Chair, on this, along with a possible plan of how we 8 proceed from here. As I told you at the last 9 Commission meeting, which occurred very shortly after 10 the RFP was issued, we believe that we have issued an 11 RFP that the agency can be very proud of. The 12 preparation of that RFP began with a thorough analysis 13 of all of our current operations and practices. And 14 in many instances in that RFP that's been issued, we 15 have made our choice as to the best solution to 16 certain specific business needs. And when that was 17 the case, we made it clear and we put it in detail in 18 the RFP. 19 At the same time, we saw some areas 20 where there might be some room for improvement in the 21 way we do business with our lottery operator, and 22 we've invited those who are willing to propose to 23 share their creativity and their ingenuity in the 24 proposal that they might put forward. The result of 25 all of that is a highly detailed RFP that has put all 123 1 of the potential proposers on notice of exactly what 2 we are looking for in an apparent successful proposal. 3 Two very important points that I would 4 like to make about the RFP that the Texas Lottery 5 Commission has issued. First, our RFP effectively 6 levels the playing field for all potential vendors by 7 requiring all new equipment and infrastructure and by 8 providing enough detail so as to minimize any 9 misunderstanding that there might be of any of the 10 exact goods or services required in each 11 specification. This approach hopefully mitigates any 12 perceived advantage that an incumbent vendor might 13 have, and that was one of our most important goals in 14 this RFP development process. 15 Secondly, we've made the scoring 16 methodology for the RFP transparent for all potential 17 vendors to see and for the public to see. Every 18 proposal that we receive will be evaluated using that 19 clearly identified scoring methodology that's detailed 20 in the RFP. 21 Now, during the development and the 22 review of the RFP, the senior management team had the 23 assistance of our in-house counsel, our outside 24 counsel, the Financial Litigation Division of the 25 Attorney General's office, the Controller of Public 124 1 Accounts, all of these in addition to the assistance 2 that Gartner provided. 3 But I would like to be clear that the 4 senior management team made all final decisions 5 regarding the content and the specifications contained 6 within the RFP. In addition, I was present in all 7 meetings where each major decision was made in the 8 RFP. Those include what goods and services we've 9 required, whether to bundle or unbundle those goods 10 and services and whether or not to pursue one vendor 11 or multiple vendors, what the contractual terms and 12 conditions would be, including the initial term and 13 any renewals, what type of scoring methodology would 14 be used, and what weight would be given to both the 15 technical and the cost components contained within the 16 RFP. 17 And I'm here today to tell the 18 Commission, Rep. Quintanilla, that I observed no 19 evidence whatsoever of any bias or influence on the 20 part of Gartner. To the contrary, Commissioners, you 21 have a very experienced management team here at this 22 agency. They all have strong knowledge and opinions 23 based on their particular areas of expertise, either 24 with lottery-specific or in Texas state government. 25 And those members of the senior management team drove 125 1 the decisionmaking within the RFP. 2 All that said, I am extremely 3 disappointed in the actions of both Gartner and GTECH 4 in failing to have the necessary checks and balances 5 within their organizations to prevent these types of 6 contracts that we've talked today from occurring. 7 In failing to do so, they didn't meet 8 their obligations to the State of Texas, and they have 9 created a terrible perception problem for this agency 10 that we're now left to address. It's been made clear 11 from the documentation that we've received and from 12 the testimony, the sworn testimony -- and I'll 13 emphasis that -- that we've heard today from both 14 GTECH and Gartner that neither one had adequate 15 systems or procedures in place to avoid these 16 contractual relationships that in Gartner's case 17 clearly violated the terms of their contract and 18 caused us to cancel that contract and, in the case of 19 GTECH, have caused us to examine potential contract 20 sanctions under that contract. 21 And I'm not satisfied with either 22 Gartner's or GTECH's explanation of how this occurred. 23 This agency adheres to the very highest standards of 24 integrity and security. Our success absolutely 25 depends -- I think, Rep. Quintanilla made that 126 1 clear -- on preserving the public trust. And 2 Gartner's and GTECH's actions have damaged the 3 perception of the integrity and fairness of this 4 process. 5 As we the agency have been from the 6 outset, we've tried to be open and transparent in this 7 entire process. We've tried to make it a process that 8 meets those high standard of integrity that I 9 mentioned just a moment ago. That's why I believe 10 that the extensive fact-finding work and review that 11 our General Counsel and her staff undertook was both 12 proper and necessary in this situation. 13 And as their report states, we've 14 conducted a comprehensive review of all the 15 information provided, and we found no evidence that 16 Gartner and GTECH shared information about the 17 development of the RFP and no influence of bias or 18 influence on the process. 19 In addition, we've heard from both 20 Gartner and GTECH today in sworn testimony as to that 21 very same fact. And with that, I think we do now have 22 a stronger, more viable record to support a conclusion 23 that there was no improper influence on the RFP. 24 In light of all that, I intend to take 25 the following action: First, I plan on exploring all 127 1 avenues available to the agency to recoup the monies 2 that have been paid to Gartner, based on the impact 3 that the lack of proper controls within that 4 organization have had upon our lottery operator 5 procurement process. 6 Secondly, I would like an opportunity to 7 review the report that Legal Services has provided me, 8 once again, in addition to reading the transcript 9 carefully from this Commission meeting. And I also 10 want to ensure that I haven't overlooked anything and 11 make sure that the affidavits that Commissioner 12 Schenck mentioned that he would like Gartner to 13 provide are given to us in a timely manner and are 14 appropriate. 15 Third, I would like to consider any 16 additional information or guidance that might come 17 from any legislative hearing that might be called by 18 Chairman Kuempel. I would look forward to that and 19 seek some guidance there as well. 20 And, finally, I am going to ask the 21 staff to amend the RFP today, to change the schedule 22 of events to allow any interested proposers an 23 additional 30 days to submit their proposal. I 24 believe that's important to allow them ample time, due 25 to the delay and discussion that we've had to have, 128 1 we've had to have regarding this GTECH/Gartner matter. 2 At this point in the process, we are 3 very encouraged by the level of participation we're 4 seeing in this RFP, as all the major lottery vendors 5 have participated in the process up to this point. 6 And I've said it before and I'll say it again. 7 Encouraging participation and competition are one of 8 our top priorities in this lottery operator 9 procurement process. 10 Going forward, once I have completed all 11 those actions that I listed, once we have received all 12 the documentation from Gartner that Commissioner 13 Schenck has asked for, I will ask the Chairman to 14 notice this item up again for the March meeting, at 15 which time I would hope to bring closure to the 16 matter. 17 That concludes my remarks, Madam Chair. 18 I would be happy to answer any questions or receive 19 any guidance that the Commission might have for me 20 CHAIRMAN WILLIAMSON: Commissioners? 21 COMMISSIONER SCHENCK: Gary, I have a 22 couple of things. I'm going to lay some cards on the 23 table I don't think it affects. Let me start by 24 saying, our role with respect to this contract is, we 25 don't award it; it's all up to you. We will come 129 1 after the fact if there is a challenge. So we're here 2 to make sure that to the extent we can within that 3 limited role, we're facilitating a healthy process 4 that reduces the possibility of controversy. 5 And I see Mike Fernandez in the back. I 6 remember this Gartner contract. It was publicly 7 posted twice at least, and we could not get an 8 alternative bidder; hence, my question to the Gartner 9 people here today. I don't think there's another 10 group around that was able to give us advice. 11 Now, Gary, as I understand what you've 12 said, Gartner was functioning here without its hand on 13 the steering wheel or the accelerator, the clutch or 14 the brake. You had your hands on all of this. They 15 were giving advice; it was not the other way around. 16 MR. GRIEF: I'll agree with that, yes, 17 sir. 18 COMMISSIONER SCHENCK: All right. And 19 to the extent I would love to see somebody else able 20 to come in and cover, using a legal term, for Garner 21 and redo their work starting from fresh, I don't think 22 I'm going to be able to find that as an alternative. 23 Do you disagree? 24 MR. GRIEF: No, I do not. 25 COMMISSIONER SCHENCK: All right. And I 130 1 have said since the beginning of my term on this 2 Commission that I would really like to see 3 competition. We've had GTECH performing this 4 contract. I have been hard on GTECH from time to 5 time. I think they've been actually doing pretty good 6 work and commendable work, and I know that they have. 7 That said, I really want more 8 competition. And the one thought that I have raised a 9 few times at this Commission is, I would like to have 10 considered the unbundling of the contract, whatever 11 way we can to have multiple vendors providing us 12 services, potentially in different geographic regions 13 or doing different aspects of the contract. 14 Now right now, we really do have that in 15 that SciGames is printing our scratch-off tickets us. 16 GTECH is running the on-line side. 17 But that's not my call. And I think 18 it's a very complicated analysis. We have major 19 systems that are running across an enormous geographic 20 area. I'm not the expert in this. 21 And so my question for you is: Are you 22 confident that the RFP process has gotten to the point 23 that it's gotten to on the bundling question is your 24 determination and the determination you would make 25 regardless of who was advising you? 131 1 MR. GRIEF: I would answer that question 2 "Yes," Commissioner. But I can assure you that an 3 incredible amount of time and thought and discussion 4 has gone into that, among other -- 5 COMMISSIONER SCHENCK: I don't doubt it, 6 and I couldn't ask for more than that. And I have 7 asked for more than that in the past, and I know that 8 you've taken that into consideration in arriving at 9 where you are, knowing my view on the subject, and 10 it's your call and you know it better than I do. So 11 it's my job not to try to step on you for it. And I 12 appreciate your hard work in answering my questions. 13 Thanks, Gary. 14 MR. GRIEF: Yes, sir. 15 CHAIRMAN WILLIAMSON: Commissioner, do 16 you have other -- 17 COMMISSIONER KRAUSE: No further 18 comments. 19 CHAIRMAN WILLIAMSON: I'll make mine 20 brief. Like Gary, this disappoints me when I have to 21 sit at a table with 10 of the Lottery Commission 22 employees and spend a half a day of their time dealing 23 with this when they could have been better served 24 doing things to promote the continued sales of lottery 25 to fund a school. It makes me very unhappy. 132 1 Having said that, I hope this doesn't 2 delay us for a long time, because that will really 3 make me unhappy. At the end of the day, we will be 4 selling lottery tickets regardless of what happens 5 here. 6 Just so you know, Representative, we 7 will continue selling lottery tickets. 8 And having said that, we will take about 9 a two-minute break, because I know a lot of you want 10 to go ahead and leave, so we won't have that 11 disruption. And I want to thank everyone that came. 12 I know this was an effort; I know this was not 13 comfortable. It was not comfortable for us either. 14 But we appreciate your honesty and willingness to come 15 and participate in this. So thank you. 16 COMMISSIONER SCHENCK: Thank you very 17 much. 18 (Recess: 11:51 a.m. to 11:58 a.m.) 19 AGENDA ITEM NO. X 20 CHAIRMAN WILLIAMSON: We are now on to 21 Item No. X. The next item is consideration of and 22 possible discussion and/or action, including adoption 23 or withdrawal, of new rule 402.104 relating to 24 "gambling promoter" and "professional gambler" and/or 25 amendments to 16 TAC 401.153 relating to 133 1 qualifications for license. 2 Commissioners, this item was on the 3 agenda for the January 6, 2010 meeting. At that 4 meeting, we discussed the opportunity for me to meet 5 with Rep. Kuempel, who is the Chairman of the House 6 Licensing and Administrative Procedures Committee, our 7 oversight committee. 8 As you will recall, he submitted a 9 comment on this rulemaking. And at that January 2010 10 meeting, I suggested to you I would meet with Chairman 11 Kuempel regarding his comment. I have met with 12 Chairman Kuempel, and he had requested that we wait 13 and defer to the Legislature and let them define these 14 terms in the 2011 session. 15 I believe from a policy standpoint, that 16 we are best served allowing the Legislature to provide 17 those definitions. I also expressed to him that we 18 would provide a resource for him as they consider this 19 matter. And specifically, Commissioner Schenck, I 20 referred the job. I'm sure you would be a very 21 outstanding resource for this. 22 COMMISSIONER SCHENCK: I would be more 23 than happy to. 24 CHAIRMAN WILLIAMSON: And so do y'all 25 have any questions or discussions on this? 134 1 COMMISSIONER SCHENCK: I do. 2 Unfortunately, I regret that I can't -- as I mentioned 3 at the meeting when we talked about going to talk to 4 the Chairman, I very much value his input and I would 5 greatly encourage the Legislature to pass a bill in 6 the next session. 7 The problem I find myself in, given my 8 training and background especially, is that we are an 9 independent agency. The Legislature has passed a 10 bill, and it's been on the books since 1983. It does 11 contain a prohibition on our licensing of anyone who, 12 in addition to being convicted of a felony or a crime, 13 is or has been a professional gambler or gambling 14 promoter. 15 So we have a law already in place, and I 16 don't think that we are in a position where we can 17 just defer to the Legislature for a year and a half to 18 let them give us additional guidance on the rule. 19 Right now we have cases or will have cases that are 20 pending before us that we have to apply some standard 21 to. So whether that's the standards that we put into 22 this rule now or an ad hoc standard that we'll have to 23 come up with in an individual case, we have that 24 statute already on the books. 25 So my preference would be to vote on the 135 1 rule or adopt the rule. But again, that's just my 2 point of view, based on my -- as I say, my background 3 and training, that as an independent agency, we have 4 the obligation to proceed under the statute that's 5 already been passed, until there is another one. 6 CHAIRMAN WILLIAMSON: Commissioner, do 7 you have any . . . 8 COMMISSIONER KRAUSE: Well, I may sound 9 a little bit like a broken record on this, and I don't 10 know that my interest diverges with that of 11 Commissioner Schenck. But it distresses me that we've 12 got people out there who are running 8-liner casinos 13 and they are, in addition, either through affiliates 14 or directly, they are lottery licensees or they're 15 involved in charitable bingo. 16 And so what my interest is, is 17 attempting to put our enforcement personnel in a 18 position that we can take away these licenses or we 19 can bar people from participating in charitable bingo, 20 because that is the power that we've got ultimately. 21 The, you know, illegal gambling that's 22 going on competes with the legal games that we offer, 23 both in charitable bingo and in lottery. 24 Unfortunately, because of the criminal statutes, local 25 prosecutors are not interested in helping us out, do 136 1 our job. 2 And so to the extent that we can deny, 3 you know, anybody the economic benefits of having our 4 licenses or our permission to be in business, then I 5 want to empower our agency to be able to, you know, 6 deny those licenses or deny those people the ability 7 to benefit from the industries that we regulate. 8 CHAIRMAN WILLIAMSON: Thank you, 9 Commissioners. 10 Pete, can you lay out our options for us 11 on this matter, please. 12 MR. WASSDORF: Chairman, Commissioners, 13 the options at this point, since this is not -- while 14 this is ripe for adoption timewise, the Commission has 15 not been provided with responses to the comments that 16 were received; and, therefore, it probably would not 17 be appropriate to adopt anything at this time. 18 You could hold it over for adoption at 19 the next Commission meeting. You could vote to 20 withdraw these rules at this time. You could -- these 21 rules -- or the proposal does not expire until 22 April 15th, and so you could leave the proposed rules 23 standing until that time, at which they would expire 24 by operation of law. You could give the staff 25 direction on a different approach to the rules or any 137 1 amendments that you wanted. And that's pretty much 2 it. 3 CHAIRMAN WILLIAMSON: Okay. Any further 4 questions or comments, gentlemen? 5 COMMISSIONER SCHENCK: Well, I would 6 like, as I've said, maybe for the next meeting have 7 this rule come before us for adoption, with the 8 staff's recommendations and with any public comments. 9 But it seems that there is at least some sense -- and 10 to be clear, I completely concur with my fellow 11 Commissioners, that we need to take action here. 12 And we have people who are gambling 13 promoters that are running 8-liners and slot machines 14 in this state, and the Legislature has said they 15 cannot have licenses from this Commission, and I want 16 to move forward and make sure we're doing something 17 about it. And I would like that rule to come up at 18 the next Commission meeting, if it can. 19 CHAIRMAN WILLIAMSON: So what I'm 20 hearing from you then is, you don't want to have a 21 motion and put it up to a vote right now, any motion? 22 COMMISSIONER KRAUSE: Let's take it up 23 in executive session and act on it next time. 24 COMMISSIONER SCHENCK: I don't think 25 we're allowed to. 138 1 CHAIRMAN WILLIAMSON: I don't think we 2 can do that. 3 MS. KIPLIN: I'm sorry. You cannot take 4 this matter up in executive session. 5 COMMISSIONER SCHENCK: No, I'm sorry. I 6 meant I don't think we're allowed to vote on the rule 7 today, are we? 8 MS. KIPLIN: No. And what I said is, 9 you can't deliberate this topic is executive session. 10 This is for the open. You can receive legal advice, 11 but you can't deliberate this topic. 12 And in terms of adopting the rule today, 13 I don't think that you're able to do that because you 14 have not reviewed the entire rule in its entirety, 15 including the agency responses, as part of the 16 preamble. 17 CHAIRMAN WILLIAMSON: So at this point, 18 then, we will take no action on this. 19 Do I need to make a motion for that? 20 MS. KIPLIN: No, I don't think you do. 21 But just to be clear, I'm understanding that the 22 direction to staff is to prepare the rule for adoption 23 with the entire preamble, which would include the 24 summary of the comments and the draft agency responses 25 to those comments. 139 1 COMMISSIONER SCHENCK: That's what I 2 would like. And I would like it -- and let the -- 3 we'll give notice before the next meeting, and those 4 who are sympathetic to the cause of professional 5 gamblers and gambling promoters will have an 6 opportunity to be heard again. 7 MS. KIPLIN: What I would say to that is 8 that the comment period has expired. 9 COMMISSIONER SCHENCK: Oh, fair point; 10 fair point. 11 MS. KIPLIN: And, you know, if we open 12 this up for additional comment, then it would require 13 us to summarize -- 14 COMMISSIONER SCHENCK: I don't want to 15 do that necessarily, no. When I say they will have 16 the opportunity to be heard, you will provide us with 17 their comments and the staff responses for us to 18 consider when we go about the adoption? 19 MS. KIPLIN: That's right. And the 20 staff will do its dead level best to draft responses 21 consistent with the direction that we've been given. 22 But to be clear, when you-all vote to adopt this rule, 23 if that's what you do, those are really the 24 Commission's responses, because it's your policy that 25 you're making. 140 1 CHAIRMAN WILLIAMSON: Basically we're 2 just letting this go on -- stay in play for another 3 month. Correct? 4 All right. 5 MR. WASSDORF: I would like to bring one 6 thing to the Commission's attention, in light of your 7 comments with respect to this, that the prohibition 8 only applies to manufacturers -- 9 COMMISSIONER SCHENCK: And distributors. 10 MR. WASSDORF: -- and distributors. And 11 so with respect to those people who are not 12 manufacturers or distributors who are running 13 8-liners, this would not have any effect on them. And 14 I just wanted to be sure that -- 15 COMMISSIONER SCHENCK: Well, that's 16 true. But we've got a history of some of those people 17 being involved in this activity that we are -- 18 MR. WASSDORF: Right. 19 COMMISSIONER KRAUSE: -- not happy with. 20 COMMISSIONER SCHENCK: And again, I 21 think all of us here are welcoming and grateful for 22 any assistance we can get from the Legislature on 23 these issues, now and in the future. 24 CHAIRMAN WILLIAMSON: All right. So we 25 won't take any action on this. 141 1 MR. WASSDORF: Thank you. 2 CHAIRMAN WILLIAMSON: Thank you. 3 AGENDA ITEM NO. XXV 4 CHAIRMAN WILLIAMSON: At this time I 5 move the Texas Lottery Commission go into executive 6 session to deliberate the appointment, employment and 7 duties of the Executive Director, the duties and 8 evaluation of the Deputy Executive Director, Internal 9 Audit Director and Charitable Bingo Operations 10 Director and to deliberate the duties of the General 11 Counsel and Human Resources Director pursuant to 12 Section 551.074 of the Texas Government Code and to 13 receive any legal advice regarding pending or 14 contemplated litigation, pursuant to Section 551.071, 15 and/or to receive legal advice regarding settlement 16 offers pursuant to Section 551.071, including but not 17 limited to those items posted on the open meeting 18 notice for purposes of receiving legal advice. 19 Is there a second? 20 COMMISSIONER SCHENCK: I second the 21 motion. 22 CHAIRMAN WILLIAMSON: All in favor? 23 COMMISSIONER SCHENCK: Aye. 24 CHAIRMAN WILLIAMSON: Aye. 25 COMMISSIONER KRAUSE: Aye. 142 1 CHAIRMAN WILLIAMSON: We go into 2 executive session at 12:10. Today is February 11, 3 2010, and it's a unanimous vote. 4 (Recessed for executive session: 5 12:10 p.m. to 1:05 p.m.) 6 AGENDA ITEM NO. XXVI 7 CHAIRMAN WILLIAMSON: We are out of the 8 executive session, and it is 1:05. 9 AGENDA ITEM NO. XI 10 CHAIRMAN WILLIAMSON: Let's continue on 11 with Agenda Item No. XI, Charitable Bingo report from 12 Phil, Charitable Bingo Operations, and action on their 13 activities, including updates on House Bill 1474, 14 implementation and any other items. 15 Phil. 16 MR. SANDERSON: Good afternoon, 17 Commissioners. I'm used to saying "Good morning," so 18 it is kind of hard now. 19 In your notebook is the memo outlining 20 the activities of the Charitable Bingo Operations 21 Division for the month of January. There are two 22 items I would like to just kind of point your 23 attention to. 24 The first is the Bingo Advisory 25 Committee. They held their meeting yesterday. But 143 1 along with that, the terms of three individuals are up 2 at the end of August. And so beginning March the 1st 3 through April the 30th is the nomination process, to 4 receive individual nominations to be and serve on the 5 Bingo Advisory Committee. 6 Think did form a nominations committee 7 to review those, to provide you with their input. The 8 three positions are those held by Pat Gifford -- she 9 is a member of the general public -- Earl Silver who 10 is representing commercial lessors, as well as Markey 11 Weaver, who is representing commercial lessors. 12 COMMISSIONER SCHENCK: Are you sure 13 about that, Phil? Isn't Markey Weaver 2011. I was 14 looking at that on the handout yesterday. 15 MR. SANDERSON: I can check real quick 16 here. 17 COMMISSIONER SCHENCK: If you wouldn't 18 mind. My recollection is that we have two commercial 19 lessor members. 20 MR. SANDERSON: I'm sorry. It is; it's 21 Kimberly Rogers. You're correct. Kimberly Rogers is 22 up, and Earl Silver and Pat Gifford. And that's why 23 Kimberly was not put on the Nomination Committee, or 24 Earl, because they're both up for potentially 25 re-nominations. 144 1 COMMISSIONER SCHENCK: I think we did a 2 great job last time, Phil, of getting -- I'm sorry. 3 Am I interrupting? 4 MR. SANDERSON: No. Go ahead. 5 COMMISSIONER SCHENCK: I think you did a 6 great job last time of, towards the end of the 7 process, getting additional interest and nominations. 8 And I think we had some very good people who applied 9 at the time we didn't have room for. 10 MR. SANDERSON: Yes, sir. 11 COMMISSIONER SCHENCK: And I hope that 12 you will go out and -- 13 MR. SANDERSON: We will solicit their 14 application and -- 15 COMMISSIONER SCHENCK: Interest. 16 MR. SANDERSON: -- interest, yes. 17 COMMISSIONER SCHENCK: That will be 18 great. Thanks, Phil. 19 MR. SANDERSON: One other item I would 20 like to point out is on the second page of the report 21 where it indicates the applications and licenses that 22 we've processed. And just to kind of give you an 23 impact of what House Bill 1474 has had. Last year for 24 January, we received 560 applications; this year we 25 received 879. And that's primary from doubling the 145 1 temps from 12 to 24. 2 We saw similar increases but not quite 3 as much in November and December as well, but we're 4 starting to receive more applications for temporaries, 5 so it's increasing the activity in that department. 6 And that's all I have. 7 CHAIRMAN WILLIAMSON: Thank you. 8 Any questions, Commissioners? 9 COMMISSIONER SCHENCK: No. 10 CHAIRMAN WILLIAMSON: Thank you. 11 AGENDA ITEM NO. XII 12 CHAIRMAN WILLIAMSON: Let's see. Let's 13 start with Item XII, report, possible discussion 14 and/or action on lottery sales and revenue, game 15 performance, new game opportunities, advertising, 16 market research, et cetera. 17 Kathy and Robert, this is your item. 18 MS. PYKA: Thank you, Commissioners. 19 For the record, my name is Kathy Pyka, Controller for 20 the Commission. With me to my right is Robert 21 Tirloni, our agency's Product Manager. 22 Our first chart that we have for you 23 this morning reflects comparative sales for the week 24 ending February 6, 2010. Total Fiscal Year 2010 sales 25 through this 23-week period are $1.62 billion, an 146 1 increase of $40.4 million over the same period last 2 fiscal year. 3 Fiscal Year 2010 instant ticket sales 4 reflected on the blue bar are $1.2 billion, slightly 5 below the figure for Fiscal Year 2009. And our Fiscal 6 Year 2010 on-line sales reflected on the second red 7 bar are $415.7 million, a 44.1 million-dollar gain 8 over the last fiscal year. 9 Our next slide reflects cumulative 10 average daily sales for Fiscal Years 2008, 2009 and 11 2010, through the 23rd week of the fiscal year. Our 12 daily average sales for Fiscal Year 2010 are 13 $10.6 million, reflecting an increase of 5.4 percent 14 over Fiscal Year 2008 sales and a 7.8 percent increase 15 over Fiscal Year 2009 sales. 16 The jackpot games on this chart are 17 reflected in the white font, and they note an average 18 daily sale of $1.9 million, almost $2 million. All of 19 the jackpot games are leading their prior years, with 20 the exception of Two Step, which we had a number of 21 larger jackpots on those prior years than compared to 22 this fiscal year. 23 And this is the first week that we are 24 actually showing Powerball and Powerplay sales. The 25 average up there reflects the very first week of 147 1 sales, and so we came in at 378,000 is the average 2 sale for Powerball and 76.7 thousand for Powerplay, 3 which represented $3.1 million in total sales for 4 those two games together for the first week. 5 Our daily games are reflected in the 6 green font, just a little bit under $1.1 million 7 average for the Fiscal Year 2009. And then our 8 instant ticket sales are reflected in yellow font, at 9 $7.6 million as an average just between Fiscal Years 10 2008 and 2009. 11 Commissioners, if you don't have any 12 questions, I know that Gary wanted to provide an 13 update for you this morning on the implementation of 14 Powerball. 15 MR. GRIEF: Thank you, Kathy. Just a 16 couple of comments, Commissioners. We are very 17 excited to be offering the Powerball game. And I just 18 want to refresh your memory a little bit. Those of us 19 in the industry, we started talking seriously about 20 this cross-sell initiative right after NASPL in 2008, 21 but it wasn't until after the NASPL conference that 22 occurred in October of 2009 that the real push to make 23 this happen occurred. 24 It's required a huge effort on the part 25 of all the parties involved. It's caused us to have 148 1 to build a consensus with our colleagues on the 2 Powerball side, work out all the countless details 3 involved in putting this all together. 4 Now it's all come together, and we 5 launched Powerball on January 31st, along with most of 6 our other Mega Millions colleagues. Now, I want to 7 point out -- you see the raw data up there for our 8 first week of Powerball sales with 378,000 for the 9 base game, 76,000 for Powerplay. 10 And what I want to highlight for you is 11 something that occurred that first week of Powerball. 12 Our $144 million Mega Millions jackpot got hit on 13 Friday, January 29th. And, as usual, our sales for 14 Mega Millions right after we have a high jackpot hit 15 decrease down to base level sales at the lower 16 jackpots. 17 However, since we were able to introduce 18 Powerball on the 31st, we got the benefit of sales 19 from a $115 million Powerball jackpot on Wednesday, 20 February 3rd, and then $140 million Powerball jackpot 21 for Saturday, February 6th, all without seeing any 22 cannibalization of our existing games. And Kathy and 23 I have talked about this now. One week certainly is 24 no measure of the long-term success of these games 25 over time, but that type of possibility is exactly 149 1 what we were hoping for. It gives us great optimism 2 for the future. 3 So with that, I'll turn it back over to 4 Robert, unless you've got any questions. 5 COMMISSIONER SCHENCK: That was genius, 6 whoever it was that thought we could do both of these 7 things at the same time, Gary, wasn't it? 8 MR. GRIEF: Pure genius. 9 COMMISSIONER SCHENCK: I agree; I agree. 10 Well done. 11 MR. TIRLONI: Good afternoon, 12 Commissioners. For the record, my name is Robert 13 Tirloni. I'm the Products Manager for the Commission. 14 This next slide is fiscal year to date 15 sales through the week ending last Saturday, 16 February 6th. So these are totals broken down by 17 game. And it's very similar to the slide you just 18 looked at. All the jackpot games are at the top in 19 white. 20 You'll see Lotto is experiencing a 21 healthy increase this fiscal year over last year. And 22 overall, our jackpot games are up almost $50 million 23 in Fiscal '10 compared to Fiscal '09. Our daily games 24 in green in the middle are experiencing a decline of 25 just under $6 million. But overall the online 150 1 category as a whole is up over $44 million. 2 And then for instants, we've been 3 struggling a little bit with instants for the past few 4 weeks. They're down only $500,000 year-over-year. We 5 had a very, very strong instant ticket sales week last 6 week. We were having a very good week this week. I 7 suspect the weather is going to hurt us between 8 yesterday and today, especially with the weather in 9 the northern part of the state. But we hope to be 10 able to make up that deficit on the instant side this 11 week. 12 Commissioners, I do have an update for 13 you. Back in August of 2009, I talked to you-all 14 about a retailer sales incentive program that we were 15 going to start running for our lottery retailers. And 16 it was a two-phase program, and it was the first time 17 we had ever run a program like this. 18 And when we were investigating the best 19 way to run this type of program, we looked to a lot of 20 other lotteries to see what they had done. And at 21 that time, I told you-all that the program that we 22 were building was very comprehensive and very detailed 23 and we had not seen anything like the program that we 24 were creating in the industry. 25 Most other states run cashing bonuses 151 1 where they reward or incentivize retailers based on 2 the number of prizes or the dollar volume of prizes 3 that they cash, and we were going in a completely 4 different direction. 5 Our first program, our first 13-week 6 program has been completed and I have some results to 7 share with you. But I wanted to give you a real quick 8 recap of the program. Again, the first phase was a 9 sales increase program, and retailers were given very 10 specific sales goals for their locations. And they 11 were assigned a sales increase, and if they met that 12 increase, they were going to receive an incentive 13 payment. 14 And then the second phase was, for those 15 retailers who met the sales goal and received an 16 incentive payment, they were entered into a drawing, 17 and that drawing had prizes ranging from $500 up to 18 $50,000, with the total prizes in the drawing totaling 19 $500,000. And so I wanted to show you the results and 20 let you know how pleased and how happy we are with the 21 first program that we ran. 22 The 13-week program which started in 23 September and ended in December generated an 24 additional $3 million in net revenue to the Foundation 25 School Fund. And that's based on an additional 152 1 $16.3 million in sales that we realized during that 2 time. 3 COMMISSIONER SCHENCK: Well, Robert, how 4 can you determine those are additional sales? Have 5 you normatized this to sort of take out the increased 6 sales that you had over the period from everyone else? 7 Is this assuming a like increased rate would have 8 applied to the people that were participating? 9 MS. PYKA: That's correct. We went back 10 and looked at their base sales for the same time 11 period in which their goals were set. 12 COMMISSIONER SCHENCK: What, same base 13 time -- base period last year? 14 MS. PYKA: Right, against the 15 incentivized program period and then measured how well 16 they did against that sales goal. And any new sales 17 dollars for that particular retailer we considered to 18 be new sales growth. 19 COMMISSIONER SCHENCK: Okay. But you 20 didn't do what I'm suggesting, because we had an 21 increase of sales for everybody, even people who 22 weren't participating in this program last year, 23 didn't we? So how can we tell how much of this 24 increased sale was due to the fact that they were 25 participating in the program as opposed to the 153 1 generalized increase we saw in sales at every retail 2 location across the course of the year? 3 MS. PYKA: The interesting part about 4 the game -- or the program is that when you look at 5 the on-line side, the jackpot games, the larger 6 jackpot games have been removed from their sales base 7 as part of the program standard. And so any of the 8 new sales growth that we may be seeing on these larger 9 on-line jackpots has been removed out of the mix. So 10 it's true pure comparative sales data from one period 11 to another. 12 MR. TIRLONI: So the retailers that were 13 eligible to participate in this first program were 14 9,200. And we had 1,009 retailers who met their 15 instant ticket or scratch-off sales goals, and then we 16 had 1,031 that met their on-line sales goals. And as 17 Kathy mentioned, that did not include Mega Millions, 18 Megaplier or Lotto Texas. 19 Now, we would have liked to have seen 20 higher participation rates. So fewer retailers did 21 participate and met their goals than we had hoped for. 22 But I think the results show that for those retailers 23 that did participate and were successful, they 24 certainly led us to successful results for the first 25 time out of the gate. 154 1 COMMISSIONER KRAUSE: Question. 2 MR. TIRLONI: Yes, sir. 3 COMMISSIONER KRAUSE: What kind of 4 behavior are we trying to incentivize? I mean, I'm 5 trying to visualize myself walking into a convenience 6 store. What kind of message -- is the store clerk or 7 the store -- I mean, beyond I guess the point of sale, 8 advertising, items that, you know, we provide or, you 9 know, our vendor provides, what do they do? I mean, 10 how do they do what they're doing to try and achieve 11 the goals? 12 MR. TIRLONI: We're trying to encourage 13 retailers to, you know, suggest the sale of lottery 14 products, ask players to purchase a lottery ticket. 15 And, you know, honestly, the games that were included, 16 because it's the daily games like Pick 3 and Cash 5 17 and Daily 4 that don't have huge jackpots associated 18 with it, it is harder for retailers to, you know, get 19 people to buy those games. But that's what we're 20 trying to get them to do, to suggestively promote the 21 games and ask their customers in their locations for 22 the sale. 23 COMMISSIONER KRAUSE: Okay. 24 MR. GRIEF: If I could add, 25 Commissioner, just thinking back to when we requested 155 1 this authority through the appropriations process to 2 use these funds for this program, we couldn't just put 3 a program out there that rewarded retailers for 4 something they probably might already be doing and 5 just by luck of a draw, for example, or a high 6 jackpot, they would get compensated with a sales 7 incentive. 8 So what we designed was a program that 9 eliminates all the high jackpot games, so it doesn't 10 matter where Mega Millions, Powerball, Lotto Texas is. 11 Those aren't even included in this. It's the daily 12 games on the on-line side and the scratch-offs. 13 And we had to design a program where 14 they had to increase their sales. That was the only 15 way they could qualify to get an incentive payment or 16 get into this drawing. And yes, I heard Robert say 17 that we had less than the participation that we 18 wanted, and I'll agree with that. 19 But it's a new program. We think that 20 the drawings that we held at the end of this first 21 quarter where the retailers won these bigger cash 22 prizes, that word is going to get out through our 23 publications and word of mouth, and the participation 24 we hope will grow over time. 25 This is not a permanent appropriation 156 1 that we were given. We're going to have to come back 2 with results like this when we go before the 3 legislative budget bodies and ask for money. And I 4 think what we're trying to do is build a good record 5 and a solid business case, if you will, to justify 6 them continuing to give us that additional 7 appropriation. 8 COMMISSIONER KRAUSE: I think that's 9 great. 10 MR. TIRLONI: So, Commissioners, we 11 actually awarded payments to 1,845 retailers, and they 12 combined received a total of just over $495,000. 13 You'll look at that number and say the 1,009 and 1,031 14 don't add up to the 1,845. There are some retailers 15 who met their goals in both categories and so they got 16 one payment from us, which was a combined incentive 17 payment for meeting their goals in both categories. 18 And then, as we mentioned, the drawing 19 had a total of $500,000 in prizes, and so we awarded 20 307 drawing prizes to retailers as a result of that. 21 MR. GRIEF: Just so there is no 22 misunderstanding, Robert, on that particular slide, 23 that 3 million at the top of the page, that's net of 24 all those prizes that we pay, the 495 in incentive 25 payments, the 500,000 in drawings, et cetera. 157 1 MR. TIRLONI: So just to kind of give 2 you an idea of the time line, the incentive payments 3 for the sales increase portion of the program were 4 mailed in early January. We held our drawing in the 5 middle of the month, on the 13th, and we mailed our 6 payments the following week. 7 And as Gary mentioned, we're working 8 with our Graphics Department on a results brochure. 9 We believe and the sales organization believes as word 10 spreads about this program and about the winners in 11 the drawing, that more retailers will become involved 12 and will actually participate and hopefully meet the 13 sales goals that we've set out for them. 14 So we've got another program running 15 right now, and that started January 17th. It goes 16 till the end of April, April 24th. That program 17 that's in existence right now mirrors the criteria 18 that we had in place for the first program. And what 19 we're currently doing now is building a new program 20 that will start in May and run almost through the end 21 of our fiscal year. It will run into August. 22 And we're looking for that last program 23 to take the learnings we've had from the first one, 24 see where we could simplify, make it a little bit 25 simpler for retailers to track and understand, with 158 1 the hopes that we're going to get even higher levels 2 of participation in that last program and see even 3 higher sales and revenue generation as a result of 4 that program. 5 So all in all, we're very excited that 6 after all these years, that we have the funds 7 available to us and we have the ability to create 8 these types of incentive programs that hopefully 9 encourage the retailer base to promote our products 10 and ask for the sale and, like I said, drive sales and 11 hopefully drive revenue for the School Fund. 12 And that's our presentation for today. 13 We're happy to answer any further questions. 14 CHAIRMAN WILLIAMSON: Questions? 15 Thank you, Robert. 16 MR. TIRLONI: Thank you. 17 AGENDA ITEM NO. XIII 18 CHAIRMAN WILLIAMSON: Next item, Kathy, 19 transfers to the state. 20 MS. PYKA: Yes. Again for the record, 21 my name is Kathy Pyka, Controller for the Commission. 22 The first report in your notebook 23 reflects transfers and allocations to the Foundation 24 School Fund, the Texas Veterans Commission and the 25 allocation of unclaimed prizes for the period ending 159 1 December 31, 2009. Total cash transfers to the state 2 amounted to $363.5 million for the first four months 3 of Fiscal Year 2010. 4 The second page in your notebook 5 reflects the detailed information for the monthly 6 transfers. Of the $363.5 million transfer to the 7 state, $320.5 million went to the Foundation School 8 Fund. $2 million was transferred to the Texas 9 Veterans Commission, with a balance of $41 million 10 transferred to the state's general revenue fund. This 11 represents a 2.9 percent increase, or $9 million over 12 the amount transferred to the Foundation School Fund 13 in December of 2008. 14 Commissioners, the cumulative transfers 15 from 1992 to date are at this point $11.99 million, 16 but I wanted to note that we did finish up the January 17 transfer yesterday. And following the January 18 transfer, our cumulative transfers have now exceeded 19 $12 billion mark, so we're at $12,054,000,000 as of 20 yesterday. 21 And the final item under this tab is the 22 agency's Fiscal Year 2010 method of finance summary 23 for the first quarter ending November 30th of 2009. 24 Our lottery account budget for Fiscal Year 2010 is 25 $205 million. Of this amount, 73.2 percent was 160 1 expended and encumbered through the first quarter. 2 The bingo operations budget funded by general revenue 3 is $15.5 million, with 35.5 percent expended and 4 encumbered through the first quarter. 5 This concludes my remarks. I would be 6 happy to answer any questions that you might have. 7 CHAIRMAN WILLIAMSON: Commissioners? 8 COMMISSIONER SCHENCK: Thank you. 9 MS. PYKA: Thank you. 10 AGENDA ITEM NO. XIV 11 CHAIRMAN WILLIAMSON: All right. Item 12 XIV, the 5 percent budget reduction. Any action and 13 discussion for 2010-2011? 14 MS. PYKA: Yes. Again for the record, 15 Kathy Pyka, Controller for the Commission. 16 Commissioners, on January 10th of this 17 year, the Commission was notified by state leadership 18 of a requirement that all state agencies submit plans 19 to identify saving equivalent to 5 percent of general 20 revenue and general revenue dedicated appropriations 21 for Fiscal Years 2010 and '11. 22 Further guidance was provided by the 23 Legislative Budget Board and the Governor's Office of 24 Budget and Planning on January 22nd that provided 25 specific methodology for the reduction. And the first 161 1 item that I would like to note that was included in 2 this methodology was that appropriations from the 3 general revenues dedicated lottery account are to be 4 exempt from the 5 percent budget reduction. 5 So that left us with a requirement to 6 make the 5 percent reduction for our general revenue 7 program that funds, obviously, the bingo area. The 8 general revenue bingo program is required to submit a 9 reduction of $1,553,348, which is the 5 percent of 10 their $31.1 million biennial appropriation. Of the 11 reduction, $1,263,550 is attributed to the bingo prize 12 fee allocation pass-through appropriation, leaving 13 just over $289,000 from their administrative funds. 14 I've included an item in your notebook 15 that outlines our staff recommendation for the bingo 16 reduction. The reduction for the bingo prize fee 17 allocation program includes the specific statutory 18 references that will require modification, should the 19 program not receive an exemption. So we're basically 20 saying we're looking for an exemption because of this 21 statutory requirement. 22 And then the administrative portion of 23 the bingo reduction reflects salary lapse generated to 24 date from bingo positions as well as holding specific 25 positions open through the remainder of the biennium. 162 1 In closing, we need to wrap up the 2 proposals and submit those into the LBB's automated 3 budget system by the 15th of this month. 4 And I would be happy to answer any 5 questions that you might have about our proposal. 6 CHAIRMAN WILLIAMSON: Gentlemen? 7 COMMISSIONER KRAUSE: No questions. 8 COMMISSIONER SCHENCK: I don't have any 9 questions about this proposal. 10 Have we given any thought to whether 11 there are additional savings that we could find beyond 12 this 5 percent, assuming that there is another request 13 that could come or whether we could just volunteer it? 14 MS. PYKA: We'll certainly look at it. 15 I mean, we've analyzed every single one of the bingo 16 positions. And should we end up having additional 17 salary lapse funds, I would think that's how we would 18 look at it. 19 The way that we have scheduled it out in 20 looking at the six vacant positions in bingo right 21 now, one is currently posted and I know that they are 22 pretty close to a selection, are moving forward with 23 that. He has five positions in which he has got the 24 postings ready to go, and we've scheduled those out to 25 either be hired in March or April of this fiscal year, 163 1 with one position needing to be vacated or vacant 2 through the end of -- almost to the end of next 3 biennium. So if there's extra dollars from those 4 positions. If not, we would need to look towards more 5 staffing areas. 6 CHAIRMAN WILLIAMSON: Thank you. 7 Any other questions? 8 COMMISSIONER KRAUSE: No. 9 MS. PYKA: And I'm looking for an 10 approval on that particular item, Madam Chair. 11 CHAIRMAN WILLIAMSON: An action item. 12 Is there a motion to approve the budget reduction? 13 COMMISSIONER SCHENCK: I'll so move. 14 CHAIRMAN WILLIAMSON: Second? 15 COMMISSIONER KRAUSE: Second. 16 CHAIRMAN WILLIAMSON: All in favor? 17 COMMISSIONER SCHENCK: Aye. 18 CHAIRMAN WILLIAMSON: Aye. 19 COMMISSIONER KRAUSE: Aye. 20 CHAIRMAN WILLIAMSON: Motion passes. 21 Thank you. 22 Let's see, then. I guess, Kathy, you're 23 still on the Item XV. 24 MS. PYKA: Yes. 25 AGENDA ITEM NO. XV 164 1 MS. PYKA: Again for the record, Kathy 2 Pyka, Controller for the Commission. 3 Commissioners, this afternoon I wanted 4 to provide you an update on Amendment 8 of the lottery 5 operations and services contract and the amount due to 6 the Commission for the first quarter of Fiscal Year 7 2010. 8 Section 10.3.3 of the amendment provides 9 an annual credit to the Commission equal to 12 percent 10 of GTECH's annual incremental revenue from sales over 11 the previous fiscal year for every tenth of a percent 12 of an increase in prize payout. As a result of this 13 requirement, we have received a credit of $791,884 for 14 the first quarter of Fiscal Year 2010, because we did 15 have an increase in, obviously, prize payout -- or 16 excuse me -- with sales as well as prize payout. 17 Section 10.3.4 is a section of the 18 amendment that provides an annual credit of 19 4.5 percent of the year-over-year decline in dollar 20 returns as sales remain flat and there is an increase 21 in prize payout. 22 Commissioners, I've included a copy of 23 the credit calculation in your notebook, and I would 24 be happy to answer any questions. 25 CHAIRMAN WILLIAMSON: Commissioners? 165 1 Thank you. 2 MS. PYKA: Thank you, Commissioners. 3 AGENDA ITEM NO. XVI 4 CHAIRMAN WILLIAMSON: Item XVI, possible 5 discussion and/or action on the 81st Legislature. 6 Nelda, this is your item, please. 7 MS. TREVINO: Madam Chair and 8 Commissioners, for the record, I'm Nelda Trevino, the 9 Director of Governmental Affairs. 10 I do not have a report to provide today, 11 but I'll be glad to answer any questions that you 12 might have. 13 CHAIRMAN WILLIAMSON: Commissioners? 14 Thank you. 15 MR. TREVINO: You're welcome. 16 AGENDA ITEM NO. XXI 17 CHAIRMAN WILLIAMSON: All right. Now 18 we're on down to Item XXI, report, possible discussion 19 and/or action on current GTECH Corporation. 20 Gary, this is your item, please. 21 MR. GRIEF: Thank you, Madam Chair. 22 Other than the information that's already in your 23 notebook today, I have nothing further to report. 24 CHAIRMAN WILLIAMSON: Questions or 25 discussion? 166 1 AGENDA ITEM NO. XXII 2 CHAIRMAN WILLIAMSON: Item XXII, 3 Executive Director report and any other discussion or 4 action on agency's operational status, procedures and 5 FTE status. 6 Gary, continue, please. 7 MR. GRIEF: Again, Commissioners, other 8 than the information that's in your notebooks, I have 9 nothing further. 10 AGENDA ITEM NO. XXIII 11 CHAIRMAN WILLIAMSON: Item XXIII, 12 consideration of the status and possible entry of 13 orders in cases posted on the meeting agenda. 14 Kim, I believe this is your item. 15 MS. KIPLIN: Yes. Commissioners, before 16 you today are cases that are letted A through J. I 17 would like to take A separately. That is the Mirror 18 Lake Texaco Star 21 case. This is a claim prize by 19 fraud. It was the principal in the entity who 20 defrauded a claimant who came in, mistakenly thought 21 that the ticket was worth $100 when, in fact, it was 22 worth $1,000. 23 The claimant filed a complaint. We 24 followed up. And we moved forward to revoke this 25 entity's license over at the State Office of 167 1 Administrative Hearings, before an Administrative Law 2 Judge. After an evidentiary proceeding, the 3 Administrative Law Judge has recommended revocation of 4 this license, and the staff recommends that you 5 approve that. 6 COMMISSIONER SCHENCK: Have we referred 7 this matter for criminal prosecution to the local DA? 8 MS. KIPLIN: I don't have that in front 9 of me, but I would think that we would, based on our 10 practices and policies -- Michael Anger is here. 11 MR. ANGER: For the record, my name is 12 Michael Anger. And yes we have. 13 COMMISSIONER SCHENCK: Okay. Michael, 14 have you had a chance, since the last time we spoke 15 about this, to get the data on how often we have 16 turned in clerks who cheat, for criminal prosecution? 17 MR. ANGER: Yes. I don't have it with 18 me today. I did send out a copy in your packets a 19 couple of weeks ago, and I'll be happy to get you 20 another one. 21 COMMISSIONER SCHENCK: Okay. Please 22 re-send it. I didn't see it. 23 MR. ANGER: Yes, I will. 24 COMMISSIONER SCHENCK: Thanks. I 25 appreciate it. 168 1 MR. ANGER: Sure. Certainly. 2 CHAIRMAN WILLIAMSON: Any other 3 comments, Commissioner? 4 COMMISSIONER SCHENCK: And what form of 5 punishment is coming out of SOAH for this person? 6 MS. KIPLIN: The highest form, 7 revocation. 8 COMMISSIONER SCHENCK: Okay. Well, the 9 highest we're allowed anyway. 10 MS. KIPLIN: Under the State Lottery 11 Act. 12 COMMISSIONER SCHENCK: Okay. 13 MS. KIPLIN: Staff is recommending that 14 you approve the Administrative Law Judge's 15 recommendation, the proposed findings and conclusions, 16 and revoke the license. 17 CHAIRMAN WILLIAMSON: Is there a motion? 18 COMMISSIONER SCHENCK: I move that we 19 adopt staff's recommendation and impose the highest 20 penalty of revocation. 21 CHAIRMAN WILLIAMSON: Is there a second? 22 COMMISSIONER KRAUSE: Second. 23 CHAIRMAN WILLIAMSON: All in favor? 24 COMMISSIONER SCHENCK: Aye. 25 CHAIRMAN WILLIAMSON: Aye. 169 1 COMMISSIONER KRAUSE: Aye. 2 CHAIRMAN WILLIAMSON: Motion passes. 3 MS. KIPLIN: And with your permission, 4 I'll just hold the orders until we go through the 5 entire docket. 6 Letters B through I are all lottery 7 insufficient funds at the time that we swept their 8 accounts. In each one of these cases, the 9 Administrative Law Judge at the State Office of 10 Administrative Hearings is recommending revocation of 11 the license, and the staff requests that you approve 12 the recommendation. 13 CHAIRMAN WILLIAMSON: Commissioners, do 14 you have any questions or discussion? 15 COMMISSIONER SCHENCK: No. I move we 16 adopt staff recommendation. 17 COMMISSIONER KRAUSE: Second. 18 CHAIRMAN WILLIAMSON: All in favor? 19 COMMISSIONER SCHENCK: Aye. 20 CHAIRMAN WILLIAMSON: Aye. 21 COMMISSIONER KRAUSE: Aye. 22 CHAIRMAN WILLIAMSON: Motion passes. 23 MS. KIPLIN: And the remaining docket is 24 a proposed settlement agreement and proposed agreed 25 order. That's the Village Market matter. This is a 170 1 proposed 30-day suspension. In this case, the 2 licensee accepted coupons from an 8-liner machine and 3 redeemed them for lottery tickets. 4 The statute that's in question on this 5 is a statute that says the only way that you can 6 purchase or obtain a lottery ticket from our retailers 7 is either through a debit card, a check or cash. 8 Those are the only forms -- or a coupon or voucher 9 that's issued by the Lottery Commission. Those are 10 the only forms. 11 COMMISSIONER SCHENCK: How inconsiderate 12 of us not to take slot machine winnings, which 13 suggests that the slot machine in this case was 14 probably close enough to the lottery counter that 15 people could be confused as to the origin of the -- or 16 the sponsorship of a slot machine activity. What is 17 the punishment recommended for this, Ms. Kiplin? 18 MS. KIPLIN: The proposed punishment, 19 which is out of a settlement agreement or proposed 20 order, is a 30-day license suspension. I will tell 21 you -- I put this on the record, with your 22 permission -- the Commission has established a 23 precedent in these particular cases of this as being 24 the outcome. Now, that's not to say that you have to 25 stick with that. But that is the precedent in terms 171 1 of the -- you know, obviously not these three 2 Commissioners but past commissions, three-member 3 commissions. 4 The Commission has also adopted by 5 rulemaking a standard penalty guideline, and this fits 6 within that. I will say that it's a non-binding 7 standard penalty guideline. So if you wanted to 8 deviate based on mitigating or aggravating 9 circumstances, you could. 10 The actions that you can take today, 11 because what's before you is a proposed agreed order, 12 is you can approve the agreed order or you can reject 13 the agreed order and give direction to the Lottery 14 Operations Division Director on how you want to 15 proceed. 16 CHAIRMAN WILLIAMSON: I'm sure one of my 17 Commissioners at least has a comment or a question. 18 COMMISSIONER KRAUSE: Well, my comment 19 is, is that, you know, if they're going to compete 20 with out games, then they don't need to be licensees 21 of ours, and I don't think that they ought to have a 22 license. 23 COMMISSIONER SCHENCK: I agree with you. 24 It's funny how much I do that, especially on these 25 matters. But, you know, the problem we have -- and 172 1 this is something that our previous commissioners have 2 commented on, is that the incentive for people to 3 participate in the lottery is not really, financially 4 speaking, that great, particularly when compared to 5 the lucrative alternatives of the 8-liner -- I'll call 6 them slot machine alternative. So what ends up 7 happening in cases like this is that the school 8 children of Texas lose and the people running the 9 8-liners win. 10 COMMISSIONER KRAUSE: And I hate that 11 result. 12 COMMISSIONER SCHENCK: And, Nelda, it's 13 so nice that you've come back to join us, because I 14 know from the past we've made recommendations from 15 this bench that what we need in the Legislature is 16 some other form of remedy for these circumstances, 17 beyond simply revoking or suspending a license, 18 something else that we can do, but the Legislature 19 hasn't given us those alternatives. 20 All we can do is withdraw the license or 21 suspend it, which really just results in a diminution 22 in the recovery to the School Foundation Fund. So if 23 you can make a mental note. And when we get closer to 24 the Legislature, one or all of us can remind our 25 legislators that we really need better tools than the 173 1 ones that we have right now. 2 But with respect to this particular 3 case, I think I agree that 30 days is not enough. 4 COMMISSIONER KRAUSE: License 5 revocation. 6 CHAIRMAN WILLIAMSON: For how long? 7 COMMISSIONER KRAUSE: Ever. 8 COMMISSIONER SCHENCK: Fine by me. 9 MS. KIPLIN: Because this is in the form 10 of a proposed agreed order, my sense from the 11 Commission is that you're -- 12 COMMISSIONER SCHENCK: We're declining 13 the settlement offer they've made with us; yes, we're 14 declining. 15 MS. KIPLIN: You're rejecting that? 16 COMMISSIONER SCHENCK: As far as I'm 17 concerned. 18 CHAIRMAN WILLIAMSON: And, like I said, 19 I appreciate where everyone is coming from. I think, 20 Michael, if you have any comments or observations you 21 would like to share, just in general and punitive -- 22 "punitive" is a strong word -- "punishment actions" -- 23 that may be a strong word, too. 24 COMMISSIONER SCHENCK: Corrective. 25 CHAIRMAN WILLIAMSON: Corrective 174 1 actions. 2 MR. ANGER: Well, I'm completely 3 respectful of Commissioner Krause and Commissioner 4 Schenck's comments, both during this discussion and 5 also during the earlier agenda item with regard to 6 professional gamblers and concerns about 8-liners. 7 And they're competition for our products. I couldn't 8 agree with you more. 9 There are certainly certain challenges 10 in enforcing action. In this particular matter, we 11 took this item up, as Kim alluded to, with regard to 12 the standard penalty chart associated with licensing, 13 intentionally or knowingly selling a ticket and 14 accepting anything for payment. And specifically, 15 that's not specifically allowed under the State 16 Lottery Act. 17 And that was the focus in proceeding 18 with regard to this order. This did involve 8-liners 19 and 8-liner coupons, the legality of which wasn't 20 addressed as a part of the investigation, and I did 21 not focus on that particular item. 22 COMMISSIONER SCHENCK: Can you remind 23 me, Michael, what county was this in? 24 Kim, do you have that in front of you? 25 MR. ANGER: Bear with me for just a 175 1 moment. 2 MS. KIPLIN: Ector, Texas. 3 COMMISSIONER SCHENCK: Ector. 4 MR. ANGER: Yes. 5 CHAIRMAN WILLIAMSON: West Texas. 6 Right? 7 MR. ANGER: I believe that's West Texas, 8 yes. 9 COMMISSIONER SCHENCK: Do they have a 10 sheriff? 11 MR. ANGER: I'm assuming that they do, 12 yes. 13 COMMISSIONER SCHENCK: Does he know they 14 have 8-liners (inaudible) lottery? 15 MR. ANGER: Actually, in the 16 investigative report with our investigator, there were 17 discussions with the local jurisdiction. And I 18 believe that the investigator coordinated with the 19 local jurisdiction involving this matter. The 20 investigator did go to the location on more than one 21 occasion and played the 8-liners and was able to 22 redeem the proceeds from the 8-liner for a lottery 23 ticket. 24 The second time they did so in 25 coordination with local law enforcement in an effort 176 1 to see if they could receive a cash payment which the 2 retailer declined, which was apparently the area of 3 interest for the local law enforcement. 4 MR. GRIEF: Perhaps I could make a 5 suggestion, hearing from the Commission like we have. 6 Michael pointed out correctly that our standard 7 penalty chart lays out the suggested penalties for 8 accepting anything other than those specific types of 9 payments that are allowed by statute for the payment 10 of lottery tickets. 11 It sounds like the Commission might want 12 us to go back and take a look at carving out separate 13 proposed penalty for accepting 8-liner coupons for the 14 payment of lottery tickets and perhaps leave this one 15 alone generically but carve out a special one. That 16 might be something that you want to talk about. 17 COMMISSIONER KRAUSE: Well, I don't 18 know. I mean, you know, guidelines are guidelines. 19 And so, you know, we can see the guidelines and then 20 decide what we think is appropriate. So I don't know 21 why we ought to wait on, you know, this particular 22 case. 23 MR. GRIEF: I'm not suggesting that. 24 Just going forward, perhaps it would be helpful for us 25 to propose -- 177 1 COMMISSIONER KRAUSE: And I think that 2 would be entirely appropriate. We need to change our 3 guidelines. 4 COMMISSIONER SCHENCK: Is there anything 5 that prevents, when we have these negotiations from 6 these people, doing something other than -- when they 7 come into a settlement agreement with us, we can't 8 have them agree, for instance, that a 60-day 9 suspension and disgorgement of their 8-liner proceeds 10 into the School Foundation Fund or anything like that? 11 MS. KIPLIN: I think whatever the 12 parties are willing to agree to, you can have that in 13 terms of an agreement. Could you compel that? If we 14 had to go to a contested case proceeding, no, I don't 15 think you could. I don't think the authority would 16 like that. 17 COMMISSIONER SCHENCK: Well, I totally 18 agree. But by way of settlement, they could agree to 19 things beyond us. I think neither -- none of us, I 20 don't think, are happy with a 30-day suspension in 21 this particular case, so I think that sends you back 22 to SOAH -- correct? -- or to additional negotiations. 23 MS. KIPLIN: Well, I think if the 24 direction from the Commission is nothing short of a 25 revocation would safety the Commission, then I think 178 1 it does lead us back to SOAH. But if there is some 2 room for another type of settlement -- 3 COMMISSIONER SCHENCK: Well, I'm going 4 to predict that there's a majority of us that would 5 probably be willing to accept this deal if we were to 6 happen to drive through Ector, Texas and stop in this 7 location next Friday and not find the 8-liners in 8 there. 9 CHAIRMAN WILLIAMSON: Do we know if the 10 8-liners have been removed from this establishment? 11 MR. ANGER: I don't have any indication 12 from the investigative report that they were, and I 13 don't believe that the work that was coordinated on 14 the part of our Enforcement Division related to the 15 local law enforcement jurisdiction that there was 16 anything that the local law enforcement jurisdiction 17 further acted upon with regard to the placement of the 18 8-liners in the business. 19 CHAIRMAN WILLIAMSON: So they were not 20 compelled to remove them, or they could still be there 21 and still be -- 22 MR. ANGER: They very well could be. 23 CHAIRMAN WILLIAMSON: Okay. 24 COMMISSIONER SCHENCK: Well, I'm with 25 you, Winston. I think these people are at a point 179 1 where they need to make a decision: Do they want to 2 sell our product or do they want to run 8-liners? And 3 mingling the two is not good for us and it's not good 4 for anybody. 5 And even if we end up revoking their 6 license, I would encourage us to continue talking to 7 the Hector -- 8 CHAIRMAN WILLIAMSON: Ector. 9 COMMISSIONER SCHENCK: -- whatever 10 county sheriff this happens to be, because this is 11 unhelpful for obvious reasons. 12 COMMISSIONER KRAUSE: Well, I think that 13 the licensees need to know that if they don't make a 14 settlement agreement that, you know, accomplishes our 15 goals, that they don't need to be licensees, so that 16 would be the backstop for it. And if they don't care 17 about being a licensee, then there is no settlement 18 agreement. 19 CHAIRMAN WILLIAMSON: So I guess the 20 question is, then, if we don't accept this particular 21 agreement, what happens next? 22 MS. KIPLIN: Well, the matter will go 23 back to the Lottery Operations Division, obviously 24 with the assistance of an attorney out of the Legal 25 Services Division. And we'll either be able to reach 180 1 a settlement, you know, in keeping with the direction 2 and the thoughts of the Commission today or we'll 3 proceed to a contested case proceeding or the retailer 4 is free to surrender their license. 5 CHAIRMAN WILLIAMSON: So those are our 6 three options? 7 MS. KIPLIN: Those are the three. 8 CHAIRMAN WILLIAMSON: So, Commissioners, 9 do you have any suggestions, thoughts? Do you want to 10 put it back on Lottery Operations and let them -- 11 COMMISSIONER KRAUSE: Yes, they will do 12 something that is consistent with what our thinking is 13 and come back. 14 MR. ANGER: I understand. 15 One other item, just to follow up on the 16 discussion that Gary raised with regard to clarifying 17 our standard penalty chart. The other item that 18 typically falls into this category is where a retailer 19 has accepted a credit card. And so -- 20 COMMISSIONER SCHENCK: That's a mistake. 21 That's different in my mind. 22 MR. ANGER: And we've approached it as 23 such, depending upon the facts and those 24 circumstances, you know, the range of the penalty has 25 been 10 to 30 days, you know, if it was a one-time 181 1 event. Or if it was a store policy, we've approached 2 it differently. So we would look to probably come 3 back and bring something forward to the Commission 4 where we would carve out the acceptance of 8-liner 5 coupons as a different category. 6 COMMISSIONER SCHENCK: Well, I would 7 just say gaming proceeds, including 8-liner. 8 MR. ANGER: Sure. And we'll work with 9 the Legal Services Division to come up with 10 appropriate language in that regard. 11 MS. KIPLIN: And that will be in the 12 form of a rulemaking if, in fact, what we're talking 13 about is amending or revising the standard penalty 14 guideline, because that's -- it's a policy that -- the 15 Commission has created it by way of a rule. So we'll 16 come back and -- 17 COMMISSIONER SCHENCK: Yes, again as 18 long as they're clear that they're guidelines that are 19 not necessarily binding in any particular area. 20 MS. KIPLIN: Yes. 21 CHAIRMAN WILLIAMSON: Okay. I think 22 that's a good idea. 23 All right. So I guess at this point the 24 action is, it goes back to Lottery Operations. 25 MS. KIPLIN: And then, Commissioners, 182 1 I've got the orders in the other dockets that you've 2 already voted to approve. 3 CHAIRMAN WILLIAMSON: All right. 4 AGENDA ITEM NOS. XXIV AND XXVII 5 CHAIRMAN WILLIAMSON: And as there is no 6 public comment, I believe this concludes the business 7 of the Commission for this meeting. 8 Is there a motion to adjourn? 9 COMMISSIONER SCHENCK: I move to 10 adjourn. 11 COMMISSIONER KRAUSE: I second. 12 CHAIRMAN WILLIAMSON: Seconded. All in 13 favor? 14 COMMISSIONER KRAUSE: Aye. 15 COMMISSIONER SCHENCK: Aye. 16 CHAIRMAN WILLIAMSON: Aye. 17 Vote carries 3-0, at 1:50. 18 (Meeting adjourned: 1:50 p.m.) 19 20 21 22 23 24 25 183 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 I, Aloma J. Kennedy, a Certified 5 Shorthand Reporter in and for the State of Texas, do 6 hereby certify that the above-mentioned matter 7 occurred as hereinbefore set out. 8 I FURTHER CERTIFY THAT the proceedings 9 of such were reported by me or under my supervision, 10 later reduced to typewritten form under my supervision 11 and control and that the foregoing pages are a full, 12 true and correct transcription of the original notes. 13 IN WITNESS WHEREOF, I have hereunto set 14 my hand and seal this 22nd day of February 2010. 15 16 17 ________________________________ 18 Aloma J. Kennedy Certified Shorthand Reporter 19 CSR No. 494 - Expires 12/31/10 20 Firm Registration No. 276 Kennedy Reporting Service, Inc. 21 Cambridge Tower 1801 Lavaca Street, Suite 115 22 Austin, Texas 78701 512.474.2233 23 24 25