0001 1 * * * * * * * * * * * * * * * * * 2 3 4 TEXAS LOTTERY COMMISSION 5 MEETING 6 7 DECEMBER 15, 2005 8 9 * * * * * * * * * * * * * * * * * 10 11 12 13 14 15 16 17 BE IT REMEMBERED that the TEXAS LOTTERY 18 COMMISSION meeting was held on the 15TH of DECEMBER, 19 2005, from 8:30 a.m. to 2:45 p.m., before Brenda J. 20 Wright, RPR, CSR in and for the State of Texas, 21 reported by machine shorthand, at the Offices of the 22 Texas Lottery Commission, 611 East Sixth Street, 23 Austin, Texas, whereupon the following proceedings 24 were had: 25 0002 1 APPEARANCES 2 Chairman: Mr. C. Tom Clowe, Jr. 3 Commissioners: 4 Mr. James A. Cox, Jr. 5 General Counsel: Ms. Kimberly L. Kiplin 6 Acting Executive Director: 7 Mr. Gary Grief 8 Charitable Bingo Executive Director: Mr. Billy Atkins 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 INDEX - December 15, 2005 2 PAGE 3 Appearances.................................... 2 AGENDA ITEMS 4 Item Number I.................................. 5 5 The Texas Lottery Commission will call the meeting to order 6 Item Number II................................. 74 7 Report, possible discussion and/or action on the electronic bingo quarterly report filing process 8 Item Number III................................ 80 9 Report, possible discussion and/or action on lottery sales and revenue, game 10 performance, new game opportunities, including Powerball, and trends 11 Item Number IV................................. 117 12 Report, possible discussion and/or action on the agency's financial status 13 Item Number V.................................. 125 14 Report, possible discussion and/or action on the Mega Millions game and/or contract 15 Item Number VI................................. 135 16 Report, possible discussion and/or action on GTECH Corporation 17 Item Number VII................................ 136 18 Report, possible discussion and/or action on the lottery terminal functionality, including the 19 quick pick feature for all games and/or impact to players 20 Item Number VIII............................... 150 21 Report, possible discussion and/or action on the lottery advertising and promotions 22 Item Number IX................................. 152 23 Report, possible discussion and/or action on HUB and/or minority business participation, 24 including the agency's mentor/protege program 25 0004 1 INDEX - CONTINUED - December 15, 2005 2 PAGE 3 Item Number X.................................. 153 Report, possible discussion and/or action on the 4 agency's contracts 5 Item Number XI................................. 155 Report, possible discussion and/or action on 6 the 79th Legislature 7 Item Number XII................................ 156 Consideration of and possible discussion and/or 8 action on external and internal audits and/or reviews relating to the Texas Lottery Commission and/or on 9 the Internal Audit Department's activities 10 Item Number XIII............................... 68 Consideration of and possible discussion and/or 11 action on the appointment and employment of an Executive Director 12 Item Number XIV................................ 72, 13 Commission may meet in Executive Session: 148 14 Item Number XV................................. 72, Return to open session for further deliberation 149 15 and possible action on any matter discussed in Executive Session 16 Item Number XVI................................ 5, 17 Consideration of the status and possible entry 158 of orders in Dockets A through F 18 Item Number XVII............................... 164 19 Report by the Acting Executive Director and/or possible discussion and/or action on the agency's 20 operational status, and FTE status 21 Item Number XVIII.............................. 165 Report by the Charitable Bingo Operations Director 22 and possible discussion and/or action on the Charitable Bingo Operations Division's activities 23 Item Number XIX................................ 168 Public comment 24 Item Number XX................................. 168 Adjournment 25 Reporter's Certificate......................... 169 0005 1 DECEMBER 15, 2005 2 CHAIRMAN CLOWE: If everyone will be 3 seated, we'll come to order. Good morning. It's 4 8:30 a.m. This is December the 15th, 2005. 5 Commissioner Cox is here. My name is Tom Clowe. 6 We'll call this meeting of the Texas Lottery 7 Commission to order. 8 And, Commissioner Cox, with your 9 permission, I would like to move to, out of order, 10 item 16, Docket Number 362-03-0248.B (Consolidated), 11 in respect to an attorney who represents these 12 entities, as he has an appointment with another legal 13 entity, I believe, district court, later today. 14 And -- 15 COMMISSIONER COX: Letter E? 16 CHAIRMAN CLOWE: Yes. 17 COMMISSIONER COX: Okay. 18 CHAIRMAN CLOWE: Letter E. And we'll 19 handle that out of order if you would, then. 20 I'll call that item on the agenda, 21 then. And, Mr. White, would you come forward. And, 22 Mr. Bledsoe, would you come forward, please. 23 We have a couple of procedural items to 24 deal with before we go further with this item. The 25 first is that of an ex parte communication. 0006 1 Counselor, will you give us the current status of that 2 issue? 3 MS. KIPLIN: Yes, sir, I'll be happy 4 to. As you know, several meetings ago, Mr. Atkins put 5 on the record a communication he had with Commissioner 6 Cox while both attorneys were present, Mr. White, 7 representing the staff, and Mr. Bledsoe representing 8 the respondents. Each were given an opportunity at 9 that point to respond to the information provided. 10 Mr. Bledsoe, at your invitation, Chairman Clowe, 11 decided that he would prefer to have time to consider 12 the matter and then file a response. He did at -- at 13 a subsequent meeting. It was the -- the last 14 Commission meeting. I then asked if you would 15 consider passing the matter and give me the 16 opportunity to review the pleading. Staff has since 17 then filed a response that would have been served on 18 Mr. Bledsoe. And I have taken a look at the 19 responses. And as it relates to the particular ex 20 parte communication, my view is it can be cured if all 21 the parties are informed of the communication and 22 they're given an opportunity to respond. 23 In this particular matter, Mr. Bledsoe 24 has had several opportunities to respond, as -- as 25 well as Mr. White. And as a result, while it is 0007 1 Commissioner Cox's decision whether he should recuse 2 himself, as requested by Mr. Bledsoe, I don't see any 3 legal reason or basis requiring such recusal. 4 CHAIRMAN CLOWE: Thank you. 5 So, Commissioner Cox, then, are you 6 prepared to determine whether you intend to hear this 7 case or recuse yourself, please? 8 COMMISSIONER COX: Yes, I am. 9 CHAIRMAN CLOWE: And would you state 10 your intentions. 11 COMMISSIONER COX: Yes. I have 12 listened to Mr. Bledsoe's concerns, and I frankly 13 don't remember what Mr. Atkins told me. And, 14 secondly, I don't think he told me anything that 15 wasn't part of the record. And I don't see a basis 16 for any concern that I can't be fair and impartial on 17 this matter. 18 CHAIRMAN CLOWE: Very good. 19 COMMISSIONER COX: Now, if -- if you 20 believe that might be a problem for the Commission 21 here or down the road, then I would certainly like to 22 hear your thoughts. 23 CHAIRMAN CLOWE: Absolutely not. So 24 we're ready to go forward on this issue. 25 MR. BLEDSOE: Mr. Chairman, can I put 0008 1 some things on the record in regards to that? 2 CHAIRMAN CLOWE: You may. 3 MR. BLEDSOE: Okay. Thank you. 4 CHAIRMAN CLOWE: I think -- before you 5 do that, I want to recognize Representative Ron 6 Wilson. Very happy to see you this morning, sir. 7 REPRESENTATIVE WILSON: Mr. Chairman, 8 good to be here. 9 MR. BLEDSOE: I -- I wanted to mention 10 there are several things in regards to the ex parte 11 communication that I did want to say. 12 First of all, one of the things that 13 the staff has indicated, they cited a publication bill 14 on administrative law in terms of there being an 15 opportunity to respond. They didn't go further in 16 actually reading what was actually stated in bill. 17 What bill actually says is that you then should 18 actually have a special hearing conducted for the 19 purpose of determining whether or not there is a 20 problem with that communication. So the very same 21 page and the very same citation, they omitted the part 22 that requires a special hearing for the purpose of 23 probing into and where both sides can investigate and 24 there can be a proper determination as to whether or 25 not there was an ex parte communication. So we 0009 1 clearly would request that, and the staff has cited 2 that for authority. I actually have copies of the 3 publication here with me now, with those excerpts, 4 that I think make it very clear. 5 Secondly, I want to put on the record 6 that one of the things that the staff indicated was 7 that Mr. Atkins was not a participant in the 8 proceedings. I have brought for you today some things 9 that I intend to provide to you. Let me just mention 10 to you what they are. In the interrogatory answers in 11 the case, they indicate very clearly that he is one of 12 the individuals that made the decision and has 13 knowledge of relevant facts. Secondly, in the Marco 14 Martinez deposition, which I have copies for you here 15 today, on page 22, we have taken the position that, 16 based on nefarious information that had come to 17 Mr. Martinez, that, indeed, that is why the 18 investigation started out to begin with -- or the 19 audits. And, indeed, the allegations were made both 20 against Mr. Atkins and against one of the members of 21 the Red Men. And so I think, clearly, he has 22 knowledge of relevant facts as a participant to the 23 proceedings. 24 Also, I have copies of his depositions. 25 And in his deposition, both in the current case that's 0010 1 pending and in the other case, he indicated he was the 2 decision maker involving the Red Men case, that he is 3 the one that signed the documents that allowed for the 4 charges to go forward. I think what is -- what is 5 important there is the Hammock case that is cited by 6 the staff, in regards to -- in their response to our 7 motion, indicates very clearly that an individual who 8 signs a pleading is an individual who would be someone 9 presumptively to be involved in the litigation. And 10 the actual pleadings in this case were the actual 11 charges that went over to SOAH. And those documents 12 were signed, and the depositions will indicate that, 13 by Mr. Atkins. So he approved things before they went 14 forward, and the decisions were made with his 15 blessing. So we think that there is a problem there. 16 Secondly, it's -- it's clearly not -- 17 not harmless because going through it -- and I know, 18 Commissioner, you may not recall some of those things, 19 but very clearly, you reached a judgment based on the 20 rendition of the facts that Mr. Atkins had given. 21 Secondly, there is a -- a lot of info 22 that's outside the record in going over the comments, 23 again, from Mr. Atkins. The information relating to 24 the -- the bank records, the -- the -- the staff cited 25 references indicating that no backs of -- of checks 0011 1 were found -- were -- were provided. However, what -- 2 what Mr. Atkins said is that he told Commissioner Cox 3 that illegible copies of records were produced. So 4 there is a very clear distinction between someone 5 saying that no backs of records were produced, 6 compared to saying that the backs of records were 7 produced and that they were not legible. So there is 8 a big distinction. So all the references and the 9 staff citations don't really -- don't really -- are 10 not significant. 11 Thirdly, the -- one of the things -- 12 one of the -- Mr. Atkins gives an opinion about the 13 acceptability of checks in audits and whether or not 14 there is sufficient information to prove up charitable 15 distribution. We have had no opportunity to respond 16 to this and to address that. And, also, it's clear 17 that there might have been other communications with 18 other staff that were communicated, and there is a -- 19 an Attorney General's opinion, DM-144. And DM-144 20 says very clearly that you cannot indirectly 21 communicate information from a staff that -- member 22 that has been involved in litigation. So what we 23 would -- we would ask is that we would resubmit and 24 request the -- that the Commissioner recuse himself; 25 but if not, we would ask for the hearing that bill 0012 1 lays out. And if you would like, I can provide you 2 with a copy of the book that staff is invoking for 3 authority. You can't take half the author's authority 4 and not go along with the other half. He didn't say, 5 we had an opportunity just to respond. He said, there 6 should be a separate hearing conducted for that 7 purpose. That's what bill said. 8 CHAIRMAN CLOWE: Thank you, 9 Mr. Bledsoe. Your comments are part of the record, 10 and the Commissioner has ruled that he will not recuse 11 himself, so we'll go forward on this item. 12 The next procedural item is late filed 13 material by Mr. Bledsoe which he wishes to make a part 14 of this record. And my inclination, Commissioner, 15 is -- I have that material in my hand here, and I have 16 reviewed it. And my material -- my inclination is to 17 allow this material to come in and be part of the 18 record. 19 COMMISSIONER COX: Mr. Chairman, I 20 received this at about 7:45 this morning, and I have 21 not read it. 22 CHAIRMAN CLOWE: What would you like to 23 do in regard to this? 24 COMMISSIONER COX: I have -- I guess 25 if -- since you have read it, if there is anything in 0013 1 there that -- that you consider is relevant to our 2 considerations here, I am -- I am sure that that will 3 be apparent in your deliberation, so -- 4 CHAIRMAN CLOWE: I -- I think it is a 5 good practice, where possible, to allow the record to 6 be as open as possible. And Mr. Bledsoe has asked the 7 Commission to make this a part of the record. I've 8 reviewed it. I -- I -- my inclination is to allow it 9 to come in. 10 COMMISSIONER COX: I'm good with that. 11 CHAIRMAN CLOWE: Are you? All right. 12 It doesn't require a motion, does it, 13 Counsel. 14 MS. KIPLIN: No, I think -- I think 15 it's enough that you're allowing it to come in. And 16 Commissioner Cox, Mr. Bledsoe is here, and any 17 questions that you would like to ask him regarding 18 those materials or any information that Mr. Bledsoe 19 would like to provide regarding those materials, I'm 20 sure that this is a good opportunity for that to 21 occur. 22 CHAIRMAN CLOWE: Very good. 23 Mr. Bledsoe, this will be allowed into 24 the record, then, and made part of it. 25 MR. BLEDSOE: Thank you, Mr. Chairman. 0014 1 Thank you, Commissioner. 2 CHAIRMAN CLOWE: Now we're ready to 3 deal with the issue of this case. And, gentlemen, we 4 have heard from both of you extensively in the past. 5 I would like to ask you to be as concise and give us 6 perhaps a ten-minute, at the most, summary of your 7 positions on this. And then we perhaps may have some 8 questions. We'll be ready to deliberate. 9 Mr. White, I'll ask you to go first, if 10 you will. 11 MR. WHITE: Yes, sir. Thank you. For 12 the record, my name is Stephen White, and I'm the 13 Chief of Enforcement. 14 I apologize. This is the third time 15 around, and I might be a bit redundant. 16 Unfortunately, I cannot respond to the most recent 17 documents submitted by Mr. Bledsoe as it was not -- he 18 did not have the courtesy of providing counselor 19 copies, as mandated by the rules of ethics there are. 20 The administrative law judge found in 21 this case that the Red Men wrongfully disbursed over 22 60,000 dollars in charitable proceeds, including, most 23 egregious, 45,000 dollars to Charles Isbell for the 24 purpose of building a private retreat on Mr. Isbell's 25 private island. Charles Isbell is the owner of four 0015 1 bingo halls where the Red Men conduct bingo. The 2 Red Men have tried to confuse the issue by arguing 3 that if the Red Men have been a for profit company, 4 which they are not, and the 45,000 dollars in payments 5 to Mr. Isbell had been a business expense, which they 6 are not, the IRS would have looked at whether these -- 7 this 45,000 dollars in payments was a fair rental 8 value, which it is not, and may have allowed it as a 9 business expense. Whether the IRS would or would not 10 have allowed this 45,000 dollars in payments to 11 Charles Isbell on their income taxes, had this been on 12 their income taxes and had they been claiming it as a 13 business expense, is completely irrelevant and has 14 nothing to do with this case. The issue in this case 15 is that these payments fall within the definition of a 16 charitable purpose. 17 The first prong of the definition of a 18 charitable purpose then in effect was the requirement 19 the recipient be a needy or deserving person. 20 Mr. Isbell himself testified he was not a needy person 21 or a person deserving of charity. Mr. Isbell's real 22 estate holdings that we know of include a 250-acre 23 private island, a condominium in Puerto Vallarta, 24 Mexico, and a private residence in Brownsville. The 25 definition of charity -- this is off the Internet. 0016 1 The first -- the first prong definition is a provision 2 to help or relief to the poor. Charity to the rich is 3 an oxymoron. So, first, it did not meet the 4 definition of providing charity to a needy or 5 deserving person. 6 Second, even if the Commission would 7 ignore the administrative law judge's finding that 8 Mr. Isbell was not a needy person or a person 9 deserving of charity, the second issue is, should the 10 Commission ignore the finding of the administrative 11 law judge that this 45,000 dollars in wrongful 12 disbursements was made in direct violation of Section 13 2001.002(19)(A) of the Bingo Act, which states that a 14 nonprofitable organization may not disburse any of 15 their income to its members, officers, or governing 16 body, other than reasonable compensation for services. 17 Mr. Isbell was in -- a member and officer of one of 18 these organizations. 19 The third issue, if there is any 20 reason -- is -- asks, is there any reason or legal 21 authority for the Commission to ignore Section 22 2001.105(a)(3) of the Bingo Enabling Act, which states 23 the Commission shall renew a license to conduct bingo 24 only if it determines that the applicant's bingo 25 proceeds are being disbursed with and in accordance 0017 1 with the Act. In the conclusion of law number seven, 2 the administrative law judge found the applicants had 3 not disposed of bingo proceeds in accordance with the 4 Act. The administrative law judge cites no authority 5 that would allow the Commission to ignore Section 6 2001.105(a)(3) in renewing the applicant's license. 7 Moving on to the findings of the 8 administrative law judge that the applicants violated 9 the Bingo Enabling Act, Sections 2001.302, 505(b), and 10 Bingo Rule 402.590(d) by failing to produce general 11 account records requested by the Commission. This 12 violation is perhaps even more egregious than the 13 wrongful disbursement of charitable proceeds. When 14 Commission auditors attempted to do their job in 15 accordance with the Bingo Enabling Act and obtain 16 records and documents the applicants are required to 17 maintain and provide to the Commission, they were 18 told, we are not going to give you those records; 19 we're never going to give you those records. 20 From the Commission's auditors' point 21 of view, they have never even been able to complete 22 their audits because of the refusal of these 23 organizations to provide the necessary documents, 24 despite written demands, subpoenas, orders of the 25 Executive Director, orders of the administrative law 0018 1 judge to produce the documents. 2 The staff recommends, in sum, that the 3 Commission adopt all of the administrative law judge's 4 findings of fact and conclusions of law, with the 5 exception of conclusions of law numbers 10 and 11. 6 Conclusion of law number 10 states, based on the 7 foregoing, the Commission should renew the applicant's 8 bingo operator's license. Number 11 states, the 9 Commission should monitor the Red Men organizations 10 involved in this case to ensure compliance with the 11 Commission rules and the Act. These are not 12 conclusions of law, but are recommendations for an 13 appropriate licensing action, mischaracterized as 14 conclusions of law. It is the sole responsibility of 15 the Commission to decide what is the appropriate 16 licensing act -- licensing action, not the 17 administrative law judge's. The ALJ may recommend a 18 licensing action, but he cannot dictate one. The 19 ALJ's recommended licensing action is inconsistent 20 with the Bingo Act and long-standing policy of this 21 Commission. 22 The violations committed by the 23 applicants in this case are deliberate, intentional, 24 and ongoing. They have yet to pay back a single penny 25 of their wrongfully disbursed proceeds, not even the 0019 1 proceeds that their own paid experts said were not 2 charitable -- for charitable purposes. They have 3 still not produced the documents repeatedly ordered by 4 the Commission. Nonrenewal of the applicants' 5 licenses is the only action consistent with the Bingo 6 Enabling Act and long-standing agency policy. It is 7 the only action consistent with the agency's duty to 8 regulate the bingo industry. There is no legal 9 justification for deviating from the mandates of the 10 Bingo Enabling Act and long-standing agency policy. 11 With that being said, should the 12 Commission choose to renew the licenses, the staff 13 recommends that these organizations be -- at least be 14 ordered to repay the disallowed disbursements and 15 ordered to pay for the costs of the audits, pursuant 16 to the Bingo Enabling Act, Section 2001.560(d), which 17 authorizes the Commission to assess the cost of 18 audits. 19 That's all I have. Thank you. 20 CHAIRMAN CLOWE: Thank you for that 21 succinct and brief summary. 22 Do you have any questions, Commissioner 23 Cox. 24 COMMISSIONER COX: No, sir, I do not. 25 CHAIRMAN CLOWE: I have a couple, 0020 1 Mr. White, before we move on to Mr. Bledsoe's 2 comments. 3 The Red Men are conducting currently? 4 MR. WHITE: Yes, sir. 5 CHAIRMAN CLOWE: On page seven, there 6 is a total of the disallowed disbursements, starting 7 on page six of the material you furnished, is totaling 8 $77,056.28. And then there is another total, labeled 9 the actual disbursement amounts and to whom 10 disallowments -- disallowed disbursements were paid, 11 totaling $84,765. I'm needing some help on the 12 reconciliation of those two different amounts. 13 MR. WHITE: Yes, sir. The difference 14 is attributable to -- that several of these 15 organizations -- I think there were two -- had monies 16 in their general fund from other sources other than 17 bingo. So when they -- the -- the auditors 18 initially -- they claimed this 84,000 as charitable 19 disbursements from -- from bingo money. When we 20 disallowed that, they were basically given a credit 21 for the money -- the other money they had in their 22 general account funds, of 13,000, or whatever it was. 23 So even though they claimed this as charitable 24 disbursements from bingo money and they were counted 25 towards they -- their requirement of 35 percent 0021 1 disbursement, and -- Mr. Sanderson is looking at me if 2 I say something wrong. You -- you know, since they 3 had extra money, this is sort of an accounting 4 mechanism. We gave them the benefit of the doubt 5 because of this other money in their general account. 6 And we said, okay, they could have just used that 7 other money and made these disbursements. So let's 8 just make an accounting correction, so to speak, 9 and -- and assume that this 13,000 of -- of this 10 84,000 was -- came from other -- sources other than 11 bingo funds, since it was in their general account. 12 CHAIRMAN CLOWE: Did you understand 13 that answer? 14 COMMISSIONER COX: No, sir. And I -- I 15 see a 7700 dollar difference, but I have no more idea 16 what it was than I did before. 17 CHAIRMAN CLOWE: Okay. I don't either. 18 MR. WHITE: Let me -- let me try again, 19 and then maybe Mr. Sanderson can give a shot at it. 20 They had other money in -- the 21 disbursements come from the general account, not the 22 bingo funds. 23 COMMISSIONER COX: Okay. Let -- let me 24 approach -- can I ask a question here? Maybe I have a 25 clue. 0022 1 CHAIRMAN CLOWE: All right. 2 COMMISSIONER COX: Table one, the first 3 table there, that comes to 77,056, is by organization. 4 MR. WHITE: Yes, sir. 5 COMMISSIONER COX: The second table, 6 that comes to 84,765, is by type of disbursement. And 7 so what we've got here is a matrix. Type of 8 disbursement, let's say, is on the left. Organization 9 is on the top, across the top. And they didn't 10 balance. 11 MR. WHITE: Well, I -- I think they -- 12 these numbers, I believe, should have been -- been 13 equal. 14 COMMISSIONER COX: We agree. 15 MR. WHITE: Right. Well, I mean, to 16 the extent -- 17 COMMISSIONER COX: At least I do. 18 MR. WHITE: Whether you're talking the 19 77,000 or 84,000, one is -- they're just characterized 20 different. One is by organization. The other table 21 is by, you know, type of disbursement. But they -- in 22 either case -- and, you -- you know, they could have 23 done it either way. Again, I mean, the -- again, 24 you -- you know, I'll -- 25 CHAIRMAN CLOWE: Let me try and 0023 1 approach it like this. Which one is right? 2 MR. WHITE: Well, they're -- they're 3 both correct in a sense. You know, I guess, 4 ultimately it's the -- you know, the 77,000 dollars is 5 what we're saying was -- 6 CHAIRMAN CLOWE: They -- they both 7 can't be right. If I ask you the question, what is 8 the amount of the disallowed disbursements, period, 9 what answer would you give me? 10 MR. WHITE: 84,765. 11 CHAIRMAN CLOWE: Okay. So maybe there 12 was an adjustment between the different organizations, 13 the way that matrix is presented. But, in fact, the 14 auditors disallowed 84,000-plus in disbursements. 15 MR. WHITE: Yes, sir. 16 CHAIRMAN CLOWE: That is the correct 17 amount. 18 MR. WHITE: Yes, sir. 19 COMMISSIONER COX: So what's -- 20 CHAIRMAN CLOWE: I understand that. 21 COMMISSIONER COX: I -- well, what I 22 don't understand is how you disallow more than they 23 spend. 24 MR. WHITE: Well, they -- that's how 25 much they disbursed from their general funds. 0024 1 CHAIRMAN CLOWE: It's a cash -- I think 2 it's a cash entry against the organization. It's a 3 total disbursement by type of dis -- type of expense. 4 COMMISSIONER COX: Who -- okay. You've 5 disallowed 77,000 against one, two, three, four, five, 6 six, seven organizations. Who did you disallow the 7 other 7700 against? 8 MR. WHITE: We disallowed 80 -- they 9 disallowed 84,000 dollars in expenses for these 10 organizations. Some of these -- two of these 11 organizations had money in their accounts from sources 12 other than bingo, so they were given a credit. That 13 may be a better way of wording it, for this 7,000. If 14 they had -- if the difference is 7,000, they had 7,000 15 dollars in their general accounts from sources other 16 than bingo funds, they were given credit for that 17 amount. 18 CHAIRMAN CLOWE: That was a legitimate 19 allocation of cash which was there to be called on. 20 And that's a credit against the 84,000, the way I 21 understand what he is saying. 22 COMMISSIONER COX: I think I know 23 enough, Mr. Chairman. 24 CHAIRMAN CLOWE: So what you -- what 25 you have and what you're telling us is that the total 0025 1 disallowed disbursements was, in fact, 84,765 dollars? 2 MR. WHITE: Yes, sir. 3 CHAIRMAN CLOWE: Okay. Mr. Bledsoe, 4 may we hear from you, please. 5 MR. BLEDSOE: Thank you, Mr. Chairman. 6 That's not my recollection of the 7 difference, but I don't want to spend my time talking 8 about that right now. Let me mention a couple of 9 things to you because I think it's important. I think 10 you have a lot of distorted information, information 11 that's just really and truly not -- not solid, not 12 valid information, for whatever reason. 13 First of all, I think that one of the 14 things that -- that everyone must make note of is that 15 the agency and the staff -- I think this reveals the 16 bias that exists. They're asking for the exact same 17 punishment as to each of the different Red Men 18 organizations. Now, if you'll look at page seven of 19 the ALJ's opinion, you'll see where there are varying 20 amounts of the questioned costs. And two of them have 21 costs -- one has 395 dollars in questioned costs, and 22 another has 416 dollars in questioned costs. So, 23 Commissioners, you have to ponder, why is it that the 24 staff would ask their license not be renewed for such 25 de minimis amounts? It's clear that the staff has a 0026 1 bias that is inappropriate. 2 Now, I also want to point out to you 3 that you really need to look at, you know, what the 4 ALJ said, because the ALJ was trying to be fair and 5 steer individuals to some kind of resolution of this 6 case. But as you can see by the presentation 7 Mr. White has given to you, that this thing could go 8 on forever and ever and ever. But let me just read 9 that because I think this needs to be part of the 10 record in -- in -- in regards to why he is 11 recommending that we resolve things this way. It 12 says, based on the findings -- 13 CHAIRMAN CLOWE: Now, Mr. Bledsoe, 14 where are you going to read from? 15 MR. BLEDSOE: The conclusion, on page 16 17. 17 CHAIRMAN CLOWE: Good. 18 MR. BLEDSOE: Based on the findings 19 discussed in the proposal for a decision, the ALJ 20 recommends that the Commission renew the license of 21 the Red Men organizations for the following reasons: 22 First, the applicants have been operating in Texas for 23 approximately 20 years. Second, the applicants 24 provide charitable support for many organizations in 25 Texas. Third, the applicants have not been previously 0027 1 cited for violation of the Bingo Enabling Act. 2 Fourth, at the time of the audits, the definition of 3 charitable purpose was vague, leaving the applicants 4 to interpret the phrase "benefits and a definite 5 number of needy or deserving persons." Found -- 6 although the ALJ finds that the applicants have 7 violated the Bingo Enabling Act, those violations and 8 the evidence in this case do not warrant the 9 ultimate penalty of nonrenewal of their bingo license. 10 The -- so -- what -- and -- and let me 11 indicate here, there -- there are several things that 12 I want to point out that truly support that. And I'm 13 going to provide you with copies of these. The staff 14 has copies. I'll provide them with a copy as well. 15 I've cited this in the written documentation, but the 16 Sunset Advisory Commission, 2003, looked at the laws 17 that are involved in this case. And the -- one of the 18 findings of the Sunset Review Commission, finding 4.3, 19 says, the Commission should clarify the definition of 20 charitable purpose and authorized expense. The 21 charitable distribution regulation is confusing, not 22 only because of the complexity of the formula, but 23 also because of the confusion about how charities can 24 spend bingo proceeds. This recommendation would 25 direct the Commission to use its existing authority to 0028 1 pass rules clarifying and providing examples of what 2 are acceptable distributions and expenses within the 3 scope of the statute. So we have -- it -- it's clear 4 here, the ALJ says it's confusing and vague, the -- 5 and it's clear here that the Sunset Review Commission 6 says that it's confusing and vague. Now, I think it's 7 important to note here that even your staff 8 acknowledged that it's confusing and -- and vague. 9 The -- Phil Sanderson, in -- let's see here -- on 10 pages 180 -- 83 and 84 of the transcript of the 11 hearing -- I think that was volume three -- he says 12 that clearly the statute was confusing. And he agreed 13 with the definition being a problem for those 14 individuals who were the charities in the state. So 15 you have Phil Sanderson saying it's confusing, 16 admitting it. You have the Sunset Review Commission 17 saying it's vague and confusing. And yet they're 18 seeking to take someone's license away for not 19 complying with that provision because 20 that's essentially all that was ruled by the ALJ. 21 Now, I think it's important to note 22 several things here. I provided to you copies of 23 other audits, other audits where they -- numerous 24 material violations found, substantial amounts of 25 money that are involved in those material -- or 0029 1 noncompliances, but they are allowed to keep their 2 licenses. I ask you, why the difference in those 3 cases and this case. I think clearly there is a bias 4 that has been evidenced. 5 Now, the -- what we're talking about 6 here, the biggest that the ALJ that would -- 7 basically, would have two -- two expenses here, and 8 then there are other -- other things that are 9 de minimis. But contrary to what Mr. White said in -- 10 we repaid those other amounts, the other 11 discrepancies, some time ago. We're talking about 12 coin wrappers and -- and things that are not of great 13 significance, a very small part of the opinion. And 14 we copied Mr. White on that. He clearly knows that 15 those items were repaid. We sent written 16 correspondence to the ALJ, letting him know that we 17 repaid those small items. The only issues to be 18 resolved really were the convention expenses and 19 the -- and the Dos Rios property. And the convention 20 expenses are about the 32,000 or what have you. And 21 the ALJ said that was appropriate and those expenses 22 should be allowed. 23 Now, let me tell you a little bit about 24 Dos Rios and why Dos Rios is -- is clearly a 25 legitimate expenditure. And, clearly, it would be 0030 1 acceptable under the current law. One thing I forgot 2 to mention that shows further evidence that the law 3 was unclear and vague is the legislature changed the 4 law in 2003. And it changed the law to clear up the 5 definition. And now, if you're spending funds to 6 further your 501(c) purpose, that is a legitimate 7 expense. So what we're saying now is we want to take 8 the license away from someone who could do that very 9 clearly today because this law wasn't in effect 10 before. This -- the Dos Rios island is a tract of 11 land that was leased by the Red Men organizations from 12 Mr. Charles Isbell. The -- it's a 285-acre tract, and 13 it was used by the Red Men organizations for meetings. 14 That's clear from the testimony. It was used by them 15 for retreats. It was used by them to allow other 16 groups, such as Boy Scouts, Girl Scouts, and schools, 17 to go and have retreats there. Members of the 18 legislature were allowed to have retreats with their 19 staff there. Clearly, there were charitable purposes 20 that were being used. One of the things I have for 21 you, two letters that were part of Marsha Metz's -- 22 Marsha Metz's expert witness report, and that -- 23 they've objected to, but the expert witness report 24 that we provided you is the actual one introduced at 25 trial. But it just shows the Boy Scouts and 0031 1 Girl Scouts were going to use the property. So it is 2 clear the Red Men had an exclusive right to use that 3 property, to the exclusion of Mr. Isbell, for five 4 years. I think the ALJ had concerns because they were 5 having retreats or able to take their families there 6 and things of that nature. And I -- so I think the 7 ALJ had concerns, but the ALJ did not dispute that -- 8 that entities such as Boy Scouts and Girl Scouts went 9 there and received a benefit as well. He said the 10 primary beneficiaries were Mr. Isbell and the -- and 11 the Red Men. But now it's clear that they could be 12 the beneficiaries. That's clearly -- it should have 13 been the case back then. We still maintain that that 14 part of the decision is not correct and that, indeed, 15 it was a -- a proper arrangement to take place. 16 Clearly, if some other organization goes out and 17 leases property, buys a piece of property, to further 18 their purposes, those are acceptable expenses. We -- 19 we had -- your staff has -- has given different 20 explanations for who can and cannot actually purchase 21 property. Mr. Sanderson's opinion is different from 22 Mr. Hare's. So it's clear that it was confusing as to 23 what the problem was. If you -- if you don't agree 24 with the expense, it was not done in bad faith. It 25 was clearly done in good faith. If there was 0032 1 something in bad faith, why is it that when the audit 2 took place in January, that indeed they clearly 3 revealed the Dos Rios property and said that, indeed, 4 this is what -- this is what we're doing. This is how 5 we spent our money. 6 Now, another thing I think that clearly 7 shows why it is confusing. When your auditors go out, 8 your auditors have a form, and that form requires you 9 to list charitable distributions. And it defines 10 charitable distributions on that form, and it gives 11 you a code designation. It gives you a code 12 designation for benevolent expenditures, it gives you 13 a code designation for fraternal expenditures. So how 14 am I, if I'm being audited and you give me this form, 15 and on this form for me to list charitable 16 distributions it has a specific code for fraternal 17 expenditures, how is it that I cannot believe that my 18 expenditures for Dos Rios, which is -- even if it was 19 for only a fraternal purpose, that it's not 20 legitimate. And so whether or not you agree with the 21 expenditure, it was not done in bad faith. 22 Now, Mr. White is -- is, again, truly 23 misrepresenting when he says that the documents 24 haven't been turned over. The ALJ mentions that 25 with -- what the Red Men testified to is that all the 0033 1 documents available were -- were provided at the 2 audit. He doesn't think that -- that we provided 3 those at the audit, apparently, but he didn't issue a 4 finding against us on that. But I will say very 5 clearly that the only issue was -- was invoices. And 6 Commissioner Cox even raised questions about that in 7 the ex parte communication, you know. And so the 8 question is, were the invoices to support checks. And 9 there were invoices, but not all the invoices were 10 available. 11 And -- and another thing that's very 12 important to note here is not every single Red Men 13 organization did not have invoices, but the staff is 14 treating them all the same. If you look at the actual 15 audits, there were at least two of them that actually 16 had the invoices, and this was not a problem with 17 Mr. Hare. Mr. Hare acknowledged that everything that 18 was done could have been done in good faith. 19 What we're talking about here -- what 20 we're -- what this is really reduced to is, we're 21 talking about convention expenses, which is completely 22 legitimate, according to the ALJ, and this Dos Rios 23 operation. We've tried to say, in good faith, why 24 don't we compromise this situation. Even though we 25 don't think we owe this expense, maybe in an effort -- 0034 1 in an abundance of caution and just camaraderie, to 2 say we -- our guys want to work with your staff. So 3 let's go ahead and accept this, repay these monies. 4 What we would ask you to do is to adopt the ALJ's 5 opinion. We might agree with the staff that maybe 6 number 11 shouldn't be adopted. But we think no 7 additional requirements -- no additional requirements 8 should be added and that the Red Men should get their 9 licenses. Let me just say, very clearly, that the 10 restitution monies that Mr. White is now seeking were 11 asked for in the -- in the administrative hearing. 12 The ALJ did not authorize those. 13 Now, I think it's clear -- and I'll -- 14 and I'll say this in finality because they wanted 15 to -- to limit it to -- to ten minutes. In -- in 16 finality, I think what you're -- what you're trying to 17 do -- the staff is trying to do, because of bias, is 18 to enforce an unconstitutional law. I think the 19 evidence is just overwhelming and compelling that 20 because of the confusion and the lack of definition of 21 charitable distribution, when you have your own Bingo 22 Advisory Commission -- Committee saying that it's 23 vague and confusing, you have the Sunset Review 24 Commission saying it, you have our expert, who is a 25 former IRS agent, who is a practicing CPA and tax 0035 1 attorney now, saying that it's biased or that it's 2 confusing, when you have Phil Sanderson admitting that 3 it's vague and it's confusing, why would we go forward 4 and try to take their licenses based on the fact of -- 5 of their expenditures under a vague and confusing law 6 when they clearly had a good faith basis to believe 7 that this was a proper expenditure. So I would ask 8 you to -- to compromise and please give our clients 9 the licenses and allow us to -- to move forward. 10 CHAIRMAN CLOWE: Thank you, 11 Mr. Bledsoe. 12 Commissioner Cox, do you have 13 questions? 14 COMMISSIONER COX: I do. 15 Mr. White, Mr. Bledsoe has said that 16 there are, I believe, seven organizations here. And 17 in your tables that we were talking about earlier, 18 it's indicated that two of them have disbursements 19 that were disallowed of 416 dollars and 395 dollars. 20 And Mr. Bledsoe questions whether those folks qualify 21 for the same harsh treatment, in his characterization, 22 that you're providing for the other folks. Would you 23 help us with that? 24 MR. WHITE: I don't know if they do or 25 don't. I mean, that -- in terms of the wrongful 0036 1 disbursements, their -- their amounts are smaller than 2 some of the others. In terms of the failure to 3 produce documents, these organizations are just as 4 guilty as the others. They refused to provide 5 invoices, refused to produce Form 1090s. They still 6 have not produced -- refused to produce the bank 7 records and the Dos Rios bank account, which they 8 still have not produced. So to that extent, you know, 9 they're equally as liable as the other organization. 10 Yes, their amounts are smaller. Should there have 11 been separate findings of fact and conclusions of law 12 for these organization? That was my recommendation to 13 the administrative law judge. He chose to -- one big 14 PFD, so to speak, with one set of findings of fact and 15 conclusions of law. But to the answer, I mean, 16 obviously, 400 dollars is less than the larger amount 17 of 20,000 dollars, or whatever it is. Does that 18 warrant something less than denial of the license? 19 I -- you know, steal 400 dollars versus 20,000 -- I 20 mean, it's obviously not as serious, but I think it 21 still warrants denial of the license, particularly in 22 view of the -- you know, perhaps, again, was -- 23 perhaps the more egregious violation is their total 24 unwillingness to cooperate with the Commission, to 25 cooperate with the auditors, to produce and maintain 0037 1 records and documents. 2 COMMISSIONER COX: Thank you. Now, I'm 3 confused on charitable purpose. And, Mr. Chairman, I 4 don't know who I'm asking this question to, but I'm 5 confused on a couple of things here. Mr. Bledsoe says 6 that, under today's law, and I -- this isn't a quote, 7 but this is the best I can do -- you can spend money 8 legitimately for your 501(c) purpose. I hear 9 Mr. White saying nothing about fraternal purposes. I 10 hear him talking only about charitable purposes. And 11 I guess I need some clarification on whether fraternal 12 purposes are permitted by state law or whether we're 13 talking here about, in one instance, they're okay for 14 the IRS, but they're not okay for state law, or are 15 they really okay for both or neither. 16 CHAIRMAN CLOWE: Are we in the record 17 on this? 18 MR. WHITE: I'm -- I'm not sure if I 19 understood the question. But I've -- and this may not 20 be answering your question. I apologize. But it is 21 something I wanted to bring out -- 22 MS. KIPLIN: The question is -- 23 MR. WHITE: -- is that -- I'm sorry. 24 CHAIRMAN CLOWE: My question, I think, 25 which precedes your answer to Commissioner Cox's 0038 1 question is, are we in the record. Is this -- are you 2 able to answer this within the record that was made on 3 this case? 4 MR. WHITE: I think he -- what he is 5 asking for is more kind of an interpretation of the 6 evidence and the law, as opposed to what's in the 7 record. So I think my answer is probably, yes, if 8 I -- if I understood the question. 9 MS. KIPLIN: Mr. Chairman, I -- I 10 believe this was a point of contention, and it was an 11 issue that was argued before the administrative law 12 judge, and I do believe it's part of the record. 13 CHAIRMAN CLOWE: That's fine. That's 14 fine. Then I think Commissioner Cox is asking you for 15 your interpretation. 16 MR. WHITE: Okay. I think it kind of 17 goes to the assertion by Mr. Bledsoe that these 18 payments to Dos Rios island would -- would now be 19 permitted under the new definition of charitable 20 disbursement because of consistency with fraternal 21 purpose of the organization. And I say, no. And 22 the -- and reason is that the prohibition of Section 23 2001.105(a)(3) still exists, and that is, you cannot 24 disburse fund to an officer or member of the 25 organization. So that has to be read inconsistent 0039 1 with, you can spend funds for a fraternal -- 2 consistent with your fraternal purpose. And the way I 3 read that is, you know, most fraternal purpose -- you 4 know, in their bylaws, including the Red Men, have a 5 number of fraternal -- you know, what their purpose -- 6 COMMISSIONER COX: Excuse me, 7 Mr. White, but you're going to have to take me a step 8 at a time here. The first -- the -- the question I 9 asked was, help me understand whether these 10 expenditures were -- if they were legitimate fraternal 11 expenses, would have been permitted. You're getting 12 into the legitimacy, and I hadn't asked that question 13 yet. I'm just saying, Mr. Bledsoe says these are 14 legitimate fraternal expenses. My question is, are 15 legitimate fraternal expenses, presently, at the past, 16 or at any other time, been permissible as 17 charitable -- appropriate charitable disbursements of 18 bingo proceeds? 19 MR. WHITE: I think my answer is, it 20 would be, certain fraternal purposes are authorized. 21 COMMISSIONER COX: Okay. Good. 22 MR. WHITE: Not these. 23 COMMISSIONER COX: Now, was the -- did 24 the administrative law judge address the issue of 25 whether these were legitimate as fraternal 0040 1 organization expenses? 2 MR. WHITE: I do not believe he did. 3 You know, the definition of -- of charitable purpose 4 at the time did not -- you know, that was not in the 5 definition, so it wasn't necessary. So, I mean, I -- 6 I don't think he did. 7 COMMISSIONER COX: Okay. So what I 8 understand is that there seems to be, if not a 9 consensus, at least agreement both on our staff and on 10 the other folks' side, Mr. Bledsoe's side, that there 11 was some vagueness in this law, that this was not a 12 law that was easy to understand. I am told that 13 Mr. Sanderson said this law is not clear. So while 14 you may not agree that it wasn't clear, is it true 15 that the law was generally acknowledged to be not the 16 best and, thus, it was amended? 17 MR. WHITE: I -- I can't -- I can't 18 agree with that. I mean, the law was changed -- the 19 definition was changed of charitable purposes. I'm 20 not sure if it's any clearer now than it was then. In 21 my personal opinion, it was clearer back then. My own 22 opinion is that -- that this current law is -- if 23 anything, is harder to follow. But, I mean, it was -- 24 it's different. I mean, that's all I can say. 25 COMMISSIONER COX: Okay. So the -- the 0041 1 previous law, the law that was in effect at the time 2 these expenditures were made, you're telling me, did 3 not permit organizations to spend for anything other 4 than charitable purposes. They could not spend -- 5 clearly could not spend for fraternal purposes? 6 MR. WHITE: No, I'm not -- I mean, I'm 7 not sure -- fraternal -- I'm not sure what you mean by 8 fraternal purposes, I guess. You -- you know, to me, 9 fraternal -- you know, in terms of -- the Red Men have 10 bylaws. These are our, you know, purposes, this is 11 why we exist, and they include a number of things. 12 Some of them are, we raise money for charity, in 13 essence, to summarize. I'm -- 14 COMMISSIONER COX: Well, just -- I'm -- 15 well, let me just tell you my general understanding of 16 what's the difference between charitable and 17 fraternal, is that types of things -- charitable 18 things are like you're talking about. They have to be 19 disbursed to needy people for those kinds of reasons. 20 Fraternal organizations, to me, are those where people 21 with things in common meet and work for specific 22 purposes that are not necessarily purposes that would 23 be within your strict definition of charity. 24 Mr. Bledsoe referenced 501(c), not 501(c)(3). And 25 while I'm not a lawyer, I recognize the distinction 0042 1 that he is making. 2 MR. WHITE: Again, I mean, the -- the 3 definition is just -- is -- is different. I mean, the 4 old definition mentions some of those things which 5 arguably are fraternal purposes. It has in it the 6 opportunity for religious or educational advancement. 7 I don't know, basically, if you consider that a 8 fraternal purpose or a charitable purpose. 9 COMMISSIONER COX: I -- I don't know 10 either. 11 MR. WHITE: Okay. Well, then -- 12 COMMISSIONER COX: And I don't think 13 it's our purpose here to try to find out. The 14 question was far more general than that. You said 15 that spending money for fraternal purposes was 16 prohibited by the old law. And I'm asking you, did I 17 understand you correctly when I -- I thought that was 18 what you said. 19 MR. WHITE: No -- I think I just -- so 20 if you're referring to the reference to the statute, 21 which is still in force, that a fraternal organization 22 cannot disburse funds for purposes other than for 23 services rendered to its own members or officers or 24 directors, that statute is still in force, and that's 25 what I'm saying. They have to be read consistent with 0043 1 the definition of charitable -- current definition of 2 charitable purpose. So to that extent, you know, 3 these -- under the new law, these disbursements to the 4 Dos Rios would not be allowed. 5 COMMISSIONER COX: Okay. So you and 6 Mr. Bledsoe disagree on that? 7 MR. WHITE: Yes. Very strongly. 8 MR. BLEDSOE: Commissioner, could I add 9 something on that if I might? Let me point you out 10 something. On Ms. Metz's -- she has got actually -- 11 she is -- has the new law included in her expert 12 witness report. And the new law just says that -- the 13 pertinent parts is, except as otherwise provided by 14 law, the net proceeds derived from bingo in a rental 15 of premises dedicated to the charitable purposes of 16 the organization only in direct -- cause or activity 17 as consistent with the federal tax exemption the 18 organization obtained under 26 U.S.C., Section 501, 19 and under which the organization qualifies as a 20 nonprofit organization, as defined by Section 21 2001.002. 22 Also, what we tendered to you 23 previously was. There was an expert witness report 24 from -- or not -- a deposition -- excuse me -- from 25 Mr. James Hendrick, an Internal Revenue Service agent 0044 1 that was first called by the agency. When it turned 2 out that his testimony was -- was in our favor, they 3 sought to have him excluded at the hearing. But the 4 ALJ allowed his testimony to come in. And he 5 indicated that such an arrangement is acceptable as 6 long as there is an appropriate quid pro quo. 7 And what Ms. Metz -- Ms. Metz did an 8 analysis and -- and -- and found that the Red Men were 9 paying about 40 dollars a day, is what it amounted to, 10 for the exclusive use of this property to the 11 exclusion of Mr. Isbell, when the market value rate 12 would have been about 400 dollars a day. So, clearly, 13 the Red Men were getting a good deal. And that's the 14 analysis that she did. 15 Secondly, the ALJ addressed that issue 16 specifically. If you look on page 13 of the ALJ's 17 opinion, it says, at the time of the audits in 2001, 18 the Commission statute did not clearly define 19 charitable purpose. And rules did not exist in 2001 20 defining charitable purpose, especially with regard to 21 the definition of a needy or deserving person. In 22 2003, the Sunset Advisory Commission recommended that 23 the Commission clarify the definition of charitable 24 purpose because the current definition was confusing. 25 It did not give organizations guidance about how they 0045 1 could spend bingo proceeds. Effective September 1, 2 2003, Texas Occupation Code, Annotated Section 3 2001.454, was amended to more clearly define an 4 acceptable charitable disbursement. So that was what 5 the purpose of what the legislature did, according to 6 the ALJ, and that's my analysis as well. 7 COMMISSIONER COX: Thank you. 8 Mr. Chairman, I have... 9 MR. WHITE: Well, let me clarify for 10 just -- you know, Mr. Hendrick, once again, never 11 testified to any shape or form with regards to what 12 constitutes charitable purposes regarding the Bingo 13 Enabling Act. Those questions, once again, dealt 14 with -- 15 COMMISSIONER COX: That was my 16 question, Mr. White, but I guess you didn't answer it. 17 Is there a difference between the Internal Revenue 18 Code and the Bingo Enabling Act as to what is an 19 appropriate disbursement? 20 MR. WHITE: Well, it -- what is a 21 charitable disbursement for purposes of a deduction on 22 your -- on your taxes versus what is a charitable 23 disbursement under the Bingo Act? 24 COMMISSIONER COX: Well, I don't know 25 about deduction for your taxes. We're talking about 0046 1 expenditures by 501(c) organizations, not to 501(c) 2 organizations. 3 MR. WHITE: Right. But -- 4 COMMISSIONER COX: My question is, is 5 it possible that an expenditure could be okay within 6 the charitable purpose, as determined by the Internal 7 Revenue Service, and not be okay within the Bingo 8 Enabling Act? 9 MR. WHITE: Yes, I think so. I think 10 there -- if I understand your question. I mean, they 11 are apples and oranges. I mean, they're -- 12 COMMISSIONER COX: They're not apples 13 and oranges. 14 MR. WHITE: The definitions -- 15 COMMISSIONER COX: What we're talking 16 about here, as I understand it, because I hear 17 Mr. Bledsoe saying that what the Red Men did would 18 presently be permissible by the Internal Revenue 19 Service, consistent with their charitable purpose, but 20 I hear you saying that never at any time, now or past, 21 was it legitimate for purposes of the Bingo Enabling 22 Act. That's what I hear. Maybe that's not what 23 you're saying. 24 MR. WHITE: I -- I think that's -- yes, 25 that's correct. I mean, the IRS does not regulate -- 0047 1 does not define or regulate, in any shape or form, 2 what constitutes a charitable disbursement under the 3 charitable Bingo Act. 4 COMMISSIONER COX: Okay. So you're 5 saying that charitable disbursements under the Bingo 6 Enabling Act are a subset of the appropriate 7 disbursements for Internal Revenue purposes? 8 MR. WHITE: I -- they're probably a 9 subset. There isn't -- you know, whether a subset or 10 larger, I mean, they're just different. 11 COMMISSIONER COX: No, that's -- okay. 12 So they -- they're not exactly the same. One could be 13 okay for one and not okay for the other? 14 MR. WHITE: Yes, sir. 15 COMMISSIONER COX: Okay. 16 MR. WHITE: But more importantly, you 17 know, Mr. Hendrick wasn't even testifying in that 18 regard. He was testifying -- the -- the quotes 19 from -- were -- had to deal with whether or not, 20 again -- once again, whether or not he -- 21 COMMISSIONER COX: My questions are 22 more general than that, Mr. White. 23 Mr. Chairman -- 24 MR. BLEDSOE: Commissioner, could I add 25 one thing to that? 0048 1 COMMISSIONER COX: Sure. 2 MR. BLEDSOE: Under 505, where they 3 keep talking about disbursement to your -- the -- 4 the -- the only requirement -- I -- I don't think that 5 the lottery rule absolutely prohibits an expenditure 6 that goes to a member of an organization. In -- in -- 7 in five of the audits, there were expenditures to a 8 member of the organization for handling bookkeeping 9 expenses, and those were allowed. The general rule, 10 according to that auditor, was that as long as it's a 11 proper expenditure or a quid pro quo, I think that's 12 what the rule is. So you have to do that analysis. 13 There is not an absolute prohibition. In other words, 14 what they're saying is, you can go out and lease 15 property. If you -- but if -- if you have a -- a 16 member that has a facility and that member wants to 17 lease you property for ten dollars a month, to save 18 money and to help the needy people, so you'll have 19 more money to distribute, you can't lease from that 20 member because that ten dollars goes to that member. 21 That is ridiculous. That is not the law. The law is 22 very clear. The question is whether there was a quid 23 pro quo, and the only evidence on that shows very 24 clearly that it was a fair market deal. It was a 25 great deal for the organizations. 0049 1 MR. WHITE: The -- you know, the issue 2 is not whether it's a quid pro quo. The -- the 3 example of -- of bookkeeping services, well, that's -- 4 what is it -- you cannot disburse for reasons other 5 than services rendered. If you are providing 6 bookkeeping services for organizations, you're a 7 member of the organization, then that's a service 8 rendered, and it can be considered a bingo expense. 9 It's still not a charitable disbursement, but is 10 considered a bingo expense. In this case, they were 11 giving -- simply giving 45,000 dollars to one of their 12 members to build a private retreat on his private 13 island, which he owns free and clear. And the -- 14 none -- you know, going back, what -- what did -- what 15 charitable purposes was there? The only evidence in 16 the record -- on one occasion during the audit period 17 there was evidence one time of a Boy Scout troop going 18 out and spent some time on the island during the 19 audit. Two other -- or two or three other letters 20 indicated on two or three other occasions, other Boy 21 Scouts went out there outside the audit period. So 22 Boy Scout troops went to their -- out to this private 23 island on one occasion, and they're claiming that 24 the -- you know, all the -- the building of the entire 25 retreat is a charitable deduction. It's equivalent to 0050 1 me, you know, inviting the Boy Scouts over -- my son's 2 Boy Scout troop over to my house for a day and then 3 deducting my mortgage payments for the -- the rest of 4 the 30-year mortgage. 5 COMMISSIONER COX: Thank you, 6 Mr. White. Mr. Chairman. 7 CHAIRMAN CLOWE: No other questions? 8 COMMISSIONER COX: No, sir. Not at 9 this time. 10 CHAIRMAN CLOWE: Relative to the seven 11 lodges that are involved in this disbursed amounts 12 that were disallowed, are they all under common 13 control? 14 MR. WHITE: The seven organizations? 15 I'm sorry. Could you repeat your question? 16 CHAIRMAN CLOWE: Regarding the seven 17 tribes that are listed in the first schedule, 18 beginning on page six, ending on page seven, with 19 varying amounts of disallowed disbursements, are they 20 all under common control? 21 MR. WHITE: I mean, the short answer 22 is, probably not. I mean, they're -- they're all 23 member organizations of the larger national Red Men 24 organization. They all play bingo in the same bingo 25 halls. The -- you know, the Isbell family members are 0051 1 members of all different -- these different 2 organizations. They all -- Charles Isbell is the 3 owner of the bingo halls where they all play. Many of 4 the members are employed by Charles Isbell in the 5 bingo halls. I mean, so on paper, they're -- I mean, 6 you can make some sort of argument that they're 7 controlled by the Isbell family, but, you know, 8 that's -- wasn't really alleged. If -- I mean, there 9 is evidence, and those are the facts. But, you know, 10 I'm not quite sure what you mean by, all under the 11 same control. 12 CHAIRMAN CLOWE: I think it's very 13 simple. I don't think it's complex. 14 MR. WHITE: Okay. I think the short 15 answer is, no. 16 CHAIRMAN CLOWE: They're not. 17 Under the conclusions, the ALJ stated, 18 on page 17, the applicants have all been in business 19 for approximately 20 years, all of these lodges. 20 MR. WHITE: I don't know that. I mean, 21 I -- for sure. I mean, I don't have any dates of when 22 they were first licensed. 23 CHAIRMAN CLOWE: Do you know that, 24 Mr. Bledsoe? 25 MR. BLEDSOE: Yes, Mr. Chairman. 0052 1 They -- they had different numbers, but they were all, 2 I think, more than 15 or very lengthy. But they -- 3 they don't all have the exact same starting year. 4 CHAIRMAN CLOWE: And, Mr. White, can 5 you tell us with certainty that the applicants have 6 not been previously cited for violations of the Bingo 7 Enabling Act? Is that conclusion valid? 8 MR. WHITE: I'm getting some assistance 9 from Mr. Sanderson. 10 CHAIRMAN CLOWE: If it's -- if it -- I 11 assume it's in the record. It's a conclusion, so I 12 would assume it's in the record. 13 MR. SANDERSON: Phil Sanderson, 14 Assistant Director, Charitable Bingo Division. 15 Since the bingo has been regulated at 16 this agency here, I do not believe there has been any 17 prior violations of these natures against those 18 organizations. 19 CHAIRMAN CLOWE: But they've been 20 audited? 21 MR. SANDERSON: They've been audited. 22 Yes, sir. 23 CHAIRMAN CLOWE: Okay. How do you feel 24 about this? 25 COMMISSIONER COX: I feel that the 0053 1 structure that was built on the island is very murky. 2 I have significant concern about refusal to give this 3 agency the audit evidence it requested to make a 4 determination as to whether expenditures were 5 legitimate. 6 CHAIRMAN CLOWE: We've got a clear 7 disagreement between the two parties. One says, we 8 have given everything we've got. That doesn't 9 necessarily mean everything that was asked for. And 10 the other is saying, we haven't got everything we need 11 or we have asked for. Am I... 12 COMMISSIONER COX: Yes, sir. And one 13 of the things that is not clear -- well, I will say 14 this. One of the things that is clear is that this 15 auditor asked for some things that were not, in my 16 view, as an auditor, I did this thing -- I did 17 auditing for 15 years. And the auditor asked for some 18 things that, to me, were not what is called sufficient 19 competent evidential matter. An invoice from a 20 charity to its benefactor is, in my view, only issued 21 when there is a pledge. And I get invoices from my 22 church to pay my pledge. But when the charity is 23 generating money independently, and at the appropriate 24 time, when it has sufficient funds on hand to disburse 25 money to charity without affecting its working 0054 1 capital, that is not a time for an invoice. That's 2 just a contribution that is made, because in the 3 determination of the -- of the operator of the 4 charity, there is the appropriate -- it's appropriate 5 to make that disbursement, to get that money out of 6 there, consistent with the idea of the Act to get 7 money out of the charity's bingo operating account and 8 into the charity for charitable purposes. So I think 9 that the information, the evidence that the auditor 10 asked for, as far as an invoice, was a bad request. 11 It is not clear to me whether the 12 auditor asked for copies, front and back, of canceled 13 checks. It is clear that -- the record seems to 14 indicate that canceled checks were provided. And it 15 indicates that the fronts were fine, the backs were 16 illegible. Now, as an auditor, if I had been in that 17 situation, I would have said, folks, go to your bank 18 and get legible copies. The banks have copies, front 19 and back, of these documents. Go get them and give 20 them to me. I don't know whether that request was 21 made or not. 22 CHAIRMAN CLOWE: I agree. And I think 23 you're being kind when you use the word murky on this 24 island situation. I'm concerned about that. And I'm 25 not satisfied, really, with the result we have gotten 0055 1 from the ALJ, totally. The issue of common control of 2 these different lodges is less than satisfactorily 3 clear in my mind. And the amounts of improper 4 disbursements is -- is a question in my mind. It 5 seems at this point, to me, harsh to not renew these 6 licenses. But I am concerned about what is happening 7 here with these lodges. And I think, certainly, this 8 money ought to be repaid to the charitable activities 9 of the lodges, at a minimum. And I am wondering about 10 a sanction or a penalty, and I'm wondering if this 11 Commission has the authority to levy that type of 12 action. I have asked that question, and I don't think 13 I -- to this point, I've gotten an answer from the 14 legal staff. And I would like to ask that question on 15 the record and get an answer on the record. Can you 16 help us with that, Counselor? 17 MS. KIPLIN: Yes, Mr. Chairman, I can. 18 I do think that the Commission does have the authority 19 to impose an administrative penalty monetary 20 forfeiture as a disciplinary sanction, and I think 21 that's clearly set out in the Bingo Enabling Act. I'm 22 saying that as a general statement. I think, as it 23 relates to any particular case, particularly in an -- 24 in an application for a -- pardon me -- a denial of 25 a -- of a license application, I think the issue goes 0056 1 back to the notice of hearing, and whether that was 2 with it -- contained within the notice of hearing that 3 went to the parties, and particularly the respondents, 4 from a perspective of due process. I think if it was 5 not part of the notice of hearing, and I'm thinking it 6 was not, but I'll have to ask the parties to help me 7 on that, then in this particular case, at this 8 particular time, I don't believe the Commission could 9 consider the imposition of an administrative penalty 10 if one were warranted. I'm hearing the Commission 11 express an interest in -- in that as a sanction if 12 warranted. I'm not presuming to know where the 13 Commission will land, but if that is the Commission's 14 desire and if the notice of hearing did not contain 15 it, and I'm thinking the PFD that I read was silent as 16 to a request on the part of the -- the staff, silent 17 as to a response by the respondent to that, then it -- 18 as the counsel for you all, it would be my 19 recommendation that you consider whether you would 20 like to remand this matter back to the State Office of 21 Administrative Hearings and -- and provide for an -- 22 an amended notice of hearing to go, to take further 23 evidence on that particular matter and argument on 24 that particular matter to determine whether, once you 25 receive that evidence -- and -- and what I'm thinking 0057 1 in my mind, Commissioners, is that when you're 2 imposing an administrative penalty, there are several 3 factors that should be taken into consideration. One 4 are mitigating factors, aggravating factors, the 5 amount of the sanction, if one were warranted, that 6 would send a message as a matter of public policy. I 7 would -- would say to you all that until that evidence 8 is developed, if that is the -- the desire of the 9 Commission, I know you're -- you just asked me a 10 question, and I'm giving you maybe more than you ever 11 wanted, but -- 12 CHAIRMAN CLOWE: No. You're -- you're 13 going to the heart of the question. 14 MS. KIPLIN: Okay. Until that matter 15 is taken up and until there is a fact-finding into 16 the -- the particular elements that are to be 17 considered in the imposition of a monetary sanction, 18 you all are -- are not in a position of even forming a 19 judgment or a conclusion whether you think a sanction 20 would be warranted, because that evidence hasn't been 21 developed. And it -- and it would come back to you -- 22 the parties would have an opportunity to focus in on 23 that as part of this -- this matter. 24 CHAIRMAN CLOWE: Commissioner, I think 25 we've got an imperfect case before us. 0058 1 COMMISSIONER COX: You're very kind, 2 sir. 3 CHAIRMAN CLOWE: And I -- I would like 4 to avoid voting on something that, in my opinion, is 5 imperfect on both sides, quite frankly. 6 COMMISSIONER COX: Yes. 7 CHAIRMAN CLOWE: And that makes me a 8 party to that imperfection if I vote on it. I -- my 9 sense is that there have been violations here which 10 need to be redressed, and possibly a sanction or a 11 penalty is part of the settlement that could be 12 proposed. But it's not within the notice, according 13 to our general counsel, and I think both you and I 14 have asked some questions that are not fully answered 15 at this point in time. And if it's within the purview 16 of this Commission's authority, based on the record 17 that we have created over the times this has been 18 brought before us, I would be in favor of -- of 19 remanding this, after our deliberations, back and 20 asking SOAH to re-hear it and to open it up to the 21 possibility of a settlement that would be brought to 22 us by way of an -- in -- in addition to the 23 reimbursement of the disallowed disbursements, some 24 monetary penalty. 25 COMMISSIONER COX: Well, that approach 0059 1 would address what is probably my principal concern, 2 and that is, what is the structure? Is it property 3 that benefits primarily the owner of the land? Is it 4 property that serves primarily the fraternal purpose 5 of the organization? Is it property that is used for 6 charitable purposes? Whichever it is, is that 7 permitted under the Bingo Enabling Act? And if it is 8 the former, that is, property that's primarily for the 9 benefit of the landowner, why shouldn't he pay the 10 charity back? 11 Now, I hesitate to raise this, but if 12 we're going to send it back, we haven't talked about 13 all the problems this opinion has. 14 CHAIRMAN CLOWE: That's correct. 15 COMMISSIONER COX: And, for instance, 16 the conclusions on whether convention expenses are 17 permitted and whether these -- if so, these convention 18 expenses qualify, to me, is very murky as well. And I 19 think maybe we should consider, if we're going to send 20 it back, let's just send it all back. 21 CHAIRMAN CLOWE: Well, I think that's 22 right. And I think Mr. Bledsoe said that, out of the 23 willingness to settle this and not lose their 24 licenses, they have made that offer. He indicated 25 that they didn't want to, but they were willing to, if 0060 1 I heard what he said correctly. So I think we -- we 2 need to open it all up to reexamination and try to 3 have, as a result, a clear recommendation from this 4 Commission. 5 COMMISSIONER COX: I'm in complete 6 agreement. 7 CHAIRMAN CLOWE: Are we within the law, 8 Counselor, if that's our -- our wish? 9 MS. KIPLIN: I heard the word 10 settlement, and the settlement would be between the 11 parties. I don't know if you intended to use that 12 word versus sending it back to the State Office of 13 Administrative Hearings for further fact-finding and 14 further application of the facts to the law in terms 15 of -- of determinations on particular issues that you 16 have concerns that you would want further developed. 17 I also -- 18 CHAIRMAN CLOWE: I heard -- I heard -- 19 after I used the word settlement, I believe I heard 20 you say, that is not within the notice. 21 MS. KIPLIN: What I heard you ask me -- 22 and maybe I'm wrong -- is the ability to impose a 23 monetary -- monetary forfeiture or -- or sanction. 24 CHAIRMAN CLOWE: Sanction or penalty of 25 some sort. 0061 1 MS. KIPLIN: Correct. And my answer to 2 you, generally, is that this Commission has the 3 authority to impose a sanction. 4 CHAIRMAN CLOWE: Generally, but in this 5 case it's not within the notice. 6 MS. KIPLIN: In this case, I have not 7 heard either party correct me on whether it's in the 8 notice. I've read this PFD. I do not see it. So 9 my -- I'm making the assumption, and I'm asking people 10 to tell me, it's silent, which makes me think it's 11 not. You -- 12 CHAIRMAN CLOWE: I -- I think that's 13 right, and this idea came from my mind. It didn't 14 come from the PFD. But I -- I'm trying to reach 15 somewhere that I am comfortable between not issuing 16 these licenses to these seven lodges, which is, in my 17 opinion, the worst that could happen to them, and 18 something much less than that. 19 MS. KIPLIN: I hear you, but -- 20 CHAIRMAN CLOWE: Based on a clear 21 statement of what all these facts are and the answers 22 to all these questions that we've raised. 23 MS. KIPLIN: Your use of the word 24 settlement makes me think an agreement between the 25 parties versus an evidentiary hearing at the State 0062 1 Office of Administrative Hearings, where an 2 administrative law judge would take further evidence 3 into a record and apply law to that evidence to 4 develop conclusions of law with the findings of fact. 5 I am not suggesting that, as part of that formal 6 proceeding, even -- even before, that the parties 7 could not entertain, once again, settlement 8 discussions or mediation discussions. But what I 9 would say to you is that the State Office of 10 Administrative Hearings does not have the authority to 11 impose a settlement decision on the parties. 12 CHAIRMAN CLOWE: I -- I understand. 13 Commissioner Cox? 14 COMMISSIONER COX: Could we say, then, 15 that we want this thing to go back to the Office of 16 Administrative Hearings, and failing the parties 17 agreeing to something other than that, before it 18 happens, we will hear from the administrative law 19 judge and go from there? 20 MS. KIPLIN: Well, when you say, hear 21 from the administrative law judge -- 22 COMMISSIONER COX: Get another one of 23 these opinions. 24 MS. KIPLIN: Okay. In other words, 25 there would be a process. What I would say is, in the 0063 1 past, when the Commission has remanded -- well, I 2 should say this. If -- if the Commission remands a 3 matter back to the State Office of Administrative 4 Hearings, it is pretty critical to say for what 5 purpose, because as -- the judge is going to say, I 6 heard this case. What in -- what in particular do you 7 want. The evidence is the evidence. It's part of the 8 record. The findings are the findings based on that. 9 What I'm hearing is that there are matters that you do 10 not believe were developed to the extent that you 11 think that they should be developed to be able to have 12 more specific findings as it relates to each of the 13 organizations and conclusions as they relate to each 14 of those findings. That's what I'm hearing. 15 CHAIRMAN CLOWE: And that's a good 16 answer. I understand you. And that's where we're -- 17 we're lacking a little bit of -- of muscle that we 18 need to get this back in their hands and tell them 19 what we want, as I see it. 20 COMMISSIONER COX: Well, I can be as 21 specific as you like, Ms. Kiplin, about some of these 22 things. For instance, I could tell you that the 23 evidence that the record states, or at least the 24 record that I have states, that was provided to 25 support these convention expenses was not adequate 0064 1 audit support. And the judge found it was. So how 2 specific do you want us to be? 3 MS. KIPLIN: I think it's, you -- you 4 know, up to you all to decide what information you 5 think you need to be able to form a decision. But 6 what I am saying is, to send something back for 7 further evidence is probably not helpful to a judge. 8 And, instead, maybe the broader -- maybe the topics, 9 the areas that you want further information -- further 10 evidence developed, further facts developed on. 11 COMMISSIONER COX: Well, another 12 question, I guess, would be, if, in fact, he found 13 that this structure was an inappropriate expenditure 14 of charitable funds, why didn't he require that it be 15 paid back as a condition of the continuation of the 16 license? 17 CHAIRMAN CLOWE: And the issue of 18 common control is unanswered in my mind between these 19 seven lodges, and the issue of why there was such a 20 great variance between the lodges in -- in the 21 disbursement of disallowed funds. 22 COMMISSIONER COX: And to add to that 23 one, for those -- since there was not a 24 reconciliation, a matrix, that said, here are 25 disallowed funds by organization, those numbers could 0065 1 have been part of the unlocated difference, the 7700 2 dollars in difference between amounts per organization 3 and amounts by type of expenditure. 4 MS. KIPLIN: So what I'm hearing is, 5 you want specific factual information developed as to 6 each organization. 7 COMMISSIONER COX: That's correct. 8 MS. KIPLIN: And you want clear 9 findings as to each organization. 10 COMMISSIONER COX: That's correct. 11 Yes. 12 CHAIRMAN CLOWE: At this point I would 13 not be willing to vote to revoke or not issue the 14 licenses to all seven of these lodges, based on the 15 evidence that is before us. 16 COMMISSIONER COX: I agree. 17 MS. KIPLIN: Okay. We will develop a 18 remand order, which you will need -- will need to -- 19 to sign to remand this matter back, and we'll do the 20 best we can to be very specific. 21 Mr. Bledsoe, I know that you've got an 22 engagement this afternoon in -- over in -- I believe 23 it's Judge Livingston's court. But if I could, I 24 would like the parties to work on that order now. 25 CHAIRMAN CLOWE: Do we need a vote on 0066 1 that? 2 MS. KIPLIN: I think the -- the vote 3 will come when you see the order and you are satisfied 4 with your remand order. 5 CHAIRMAN CLOWE: Okay. We'll be in 6 session throughout the day. Thank you, gentlemen. 7 The next item is -- 8 MR. BLEDSOE: Mr. Chairman, could we 9 maybe mention one thing in reference to what you just 10 said? We -- we tried to compromise these matters, and 11 even though we weren't ordered to pay back the monies, 12 agree to pay that back and maybe even make -- make a 13 contribution to another charity or to the Lottery 14 Commission but not have a penalty attached, because a 15 penalty under these circumstances would be clearly 16 inappropriate because of the -- the law that is at 17 issue. We tried to resolve that and move things 18 forward so people could go on. So we had actually 19 made that good faith offer that, I think, is kind of 20 in line with what you all were suggesting. 21 CHAIRMAN CLOWE: Is that offer within 22 the scope of where we are? 23 MS. KIPLIN: No. No, sir, it's not. 24 That was a confidential mediation that -- between the 25 two parties, as settlement discussions are wont to be. 0067 1 And I think your -- your comments are on the record, 2 and the parties can take those comments as -- as they 3 are. I guess my recommendation to the Commissioners 4 are -- are not to respond to what your thinking is on 5 whether you think an -- a penalty would be 6 appropriate, or even an amount, because you don't have 7 that developed yet. And if the parties -- before this 8 matter goes to hearing again or before it comes to you 9 again, the parties can reach out and work out an 10 agreement. The terms of that agreement will come to 11 you, and you all can take a look at -- 12 CHAIRMAN CLOWE: I think that's a 13 proper legal answer, and -- and I think you've made 14 your point, Mr. Bledsoe. Thank you, gentlemen. 15 We're going to take a recess -- a short 16 recess. But when we return, I'm going to call item 17 number 13, consideration of and possible discussion 18 and/or action on the appointment and employment of the 19 Executive Director. And I'm going to recognize the 20 members of the executive search committee at that 21 time. I believe most of them that are going to be 22 here are in the audience. So we'll take a short 23 recess at this time. 24 (RECESS.) 25 CHAIRMAN CLOWE: If everyone will be 0068 1 seated, we'll come back to order. 2 Commissioner Cox, with your permission, 3 what I would like to do now is call on Diane Morris to 4 make a report relative to item 13 on the agenda, and 5 then move that we go into executive session and invite 6 the executive search committee in on that session so 7 that they can report to us together, as they have not 8 been able to do in the past under the rules of 9 executive session. 10 COMMISSIONER COX: Yes, sir. 11 CHAIRMAN CLOWE: Diane, I'll call on 12 you under item 13, consideration of and possible 13 discussion and/or action on the appointment and 14 employment of an Executive Director. 15 MS. MORRIS: Good morning. 16 CHAIRMAN CLOWE: Good morning. 17 MS. MORRIS: Diane Morris, the Human 18 Resources Director. 19 The Executive Director search committee 20 interviewed eight candidates on October the 14th in 21 Austin, Texas, here at headquarters. On December the 22 6th, the Executive Director search committee 23 interviewed an additional candidate. To date, the 24 agency has received 146 applications. By way of 25 reminder, the members of the Executive Director search 0069 1 committee, Chairman Clowe served as the chair of the 2 committee, Professor Gerald Busald, John Edwards, 3 David Heinlein, Francisco Hernandez, Rick Johnson, 4 Anthony Sadberry, Leticia Vasquez, and Elizabeth or 5 Betsy Whitaker. To date, the Executive Director 6 search committee has recommended that four candidates 7 be interviewed by the Commissioners of the Texas 8 Lottery Commission for the position of Executive 9 Director. Those individuals are Robert Shipe, Sue 10 McNabb, James Loyd, Juan Cabezas, and Talmadge Heflin. 11 CHAIRMAN CLOWE: Did you say four 12 candidates? 13 MS. MORRIS: I'm sorry. Five. 14 CHAIRMAN CLOWE: Five. 15 MS. MORRIS: Four candidates were not 16 recommended to be interviewed. 17 CHAIRMAN CLOWE: Okay. You don't need 18 to name them. 19 MS. MORRIS: And, again, remember that 20 while individuals may not have been recommended to be 21 interviewed, that the Commissioners are free to 22 recommend -- or to interview any candidate, even those 23 not interviewed or recommended to be interviewed by 24 the Executive Director search committee. 25 The Executive Director search committee 0070 1 also had recommended that the Commission post the 2 position and advertise, which we have done. At this 3 point, I'm able to report that, as I understand it, 4 the five candidates that were recommended to be 5 interviewed by the Commissioners have been 6 individually interviewed by the Commissioners. 7 And that's the end of my report. 8 CHAIRMAN CLOWE: Any comments or 9 questions, Commissioner Cox? 10 COMMISSIONER COX: No, sir. 11 CHAIRMAN CLOWE: Thank you, Diane. I 12 want to recognize those members of the executive 13 search committee that are here this morning, and I 14 have seen, in the audience, David Heinlein, Gerald 15 Busald, Rick Johnson, Anthony Sadberry, and Leticia 16 Vasquez. Is Francisco Hernandez here? I believe not, 17 then. And Elizabeth Whitaker is not here, and John 18 Edwards is not here. 19 I want to state on the record how hard 20 this group has worked and the beneficial result that 21 the agency and the people of Texas are deriving from 22 having this citizen involvement in this project. It 23 is a large undertaking that has a great challenge to 24 it, in that we are searching from a number of 25 candidates for the person most qualified, best 0071 1 qualified. And it has been an aid, I think I can say, 2 to Commissioner Cox as well as myself, to have these 3 hardworking individuals who have shared this search 4 burden with us. Their aid and support has been 5 invaluable to the Commissioners, and they have done 6 yeoman service. They have reported to us now after 7 two work sessions. They have agreed to continue to 8 serve. And we are most grateful for their public 9 service. I would like to mention a fact that I think 10 is important and worth noting, and that is, they have 11 traveled and they have come to Austin and given of 12 their time, paying their own expenses, and there has 13 been no reimbursement on behalf of the State 14 whatsoever. 15 They have not been able to communicate 16 with the Commissioners in session, either in public or 17 in executive session. They have had to communicate 18 with each Commissioner individually. And we've been 19 scrupulous in those communications, and it has been 20 beneficial to us. However, at this time, we are going 21 to move that we go into executive session. And we're 22 going to ask the search committee to come in so that 23 they can make any further reports they wish to, to the 24 Commissioners, in executive session. We will be under 25 the rules of the Open Meeting Act, and they will be 0072 1 briefed on the rules that apply to executive session. 2 So, Commissioner Cox, with your 3 permission, at this time I move the Texas Lottery 4 Commission go into executive session to deliberate the 5 appointment, employment and duties of the Executive 6 Director, Acting Executive Director, and/or Deputy 7 Executive Director, pursuant to Section 551.074 of the 8 Texas Government Code. Is there a second? 9 COMMISSIONER COX: Second. 10 CHAIRMAN CLOWE: All in favor say aye. 11 The vote is two-zero. The Texas Lottery Commission 12 will go into executive session. The time is 13 10:09 a.m. Today is December the 15th, 2005. 14 (EXECUTIVE SESSION) 15 CHAIRMAN CLOWE: The Texas Lottery 16 Commission is out of executive session. The time is 17 11:02 a.m. Is there any action to be taken as a 18 result of the executive session? If not, we'll move 19 on to the next item. I would like to announce before 20 we leave item 13, which we have been discussing, that 21 Mr. Talmadge Heflin has withdrawn his application, and 22 so the process continues. We'll now go to item -- 23 MS. KIPLIN: Mr. Chairman, I hate to 24 interrupt you, but I do have a remand order if you all 25 would consider possibly taking it up and taking a look 0073 1 at it. 2 CHAIRMAN CLOWE: Sure. Sure. That was 3 quick. 4 MS. KIPLIN: Well, we had the parties 5 locked in a room, and they stayed until they -- 6 CHAIRMAN CLOWE: Do you have two copies 7 of it? 8 MS. KIPLIN: I'm sorry, I don't. We -- 9 and I should have -- I should have -- that was my 10 oversight, my bad, and I apologize for that. It's a 11 page and a half. I had both attorneys and the 12 assistant -- the Assistant Attorneys General that are 13 out of the financial litigation, as well as 14 Ms. Joseph, hammering that out. And I think it's 15 specific enough to capture the -- the particular 16 interests, but yet broad enough to cover those other 17 matters that might be of concern. 18 CHAIRMAN CLOWE: Is there a motion? 19 COMMISSIONER COX: Just a question 20 first, Mr. Chairman. 21 They'll have access to the record if 22 they want more details on the things that we talked 23 about. 24 MS. KIPLIN: Oh, absolutely. 25 COMMISSIONER COX: I move that we 0074 1 approve this order and sign it. 2 CHAIRMAN CLOWE: I second it. All in 3 favor please say aye. Opposed no. The vote is 4 two-zero in favor. 5 Next will be item number two on the 6 agenda, report, possible discussion and/or action on 7 the electronic bingo quarterly reports filing process. 8 Mr. Atkins. 9 MR. ATKINS: Thank you, Commissioners. 10 Commissioners, as you know, the division has been 11 working hard to improve the access to useful 12 information for our licensees as well as improving the 13 means of complying with the regulatory requirements of 14 the Act and rules. For example, we have developed and 15 implemented the Bingo Services Center that went live 16 on September 1st of this year and the ongoing 17 development of our forms into interactive pdf format. 18 The presentation today is going to 19 highlight another development that the Division will 20 be implementing soon -- actually, next quarter. Since 21 2003, manufacturers and distributors have had the 22 opportunity to file their quarterly reports 23 electronically. Now, beginning with the first quarter 24 of 2006, bingo conductors, including those who are 25 members of accounting units, as well as lessors, may 0075 1 use the electronic format to file their quarterly 2 reports. Licensees will not be required to file 3 electronically, but the option will be made available 4 to them. Also, the automated forms manual currently 5 available on the Division Web site will be modified to 6 further assist with the electronic filing process. 7 Licensees will have two different options to file 8 electronically, a stand-alone quarterly report form or 9 the quarterly report that is included as a part of the 10 automated forms manual. Today's brief demonstration 11 will give you an idea of just how simple the process 12 is. 13 So to begin with, the licensee, after 14 they open the form and agree to the terms of the form, 15 will enter their taxpayer number, organization name, 16 and select the quarter being filed. This information 17 will then automatically populate all the appropriate 18 pages on the report. And while I'm not going to 19 demonstrate them today -- 20 CHAIRMAN CLOWE: Billy, is all that 21 public information? 22 MR. ATKINS: Yes, sir. This is -- this 23 is actually a -- a demo. 24 CHAIRMAN CLOWE: No. I mean, when the 25 inquirer logs in, is their taxpayer number public 0076 1 information and their organization and -- 2 MR. ATKINS: Yes, sir. 3 CHAIRMAN CLOWE: So anybody who has 4 Internet access, it will all be in on anybody's 5 information? 6 MR. ATKINS: No, sir. What -- what 7 they're going -- what they're going to be doing is, 8 organizations will be submitting this information to 9 us. Now, we capture all that and someone can 10 subsequently request this information. 11 CHAIRMAN CLOWE: This is inputting 12 only? 13 MR. ATKINS: Yes, sir. 14 CHAIRMAN CLOWE: Okay. Thank you. 15 MR. ATKINS: And as I was saying, even 16 though I'm not going to demonstrate them today, I did 17 want you to know that there are a number of features 18 that have been built into this program and the process 19 to assess -- assist organizations in reducing 20 inadvertent errors or omissions. Additionally, the 21 forms come with interactive instructions on how to 22 complete and submit the form. 23 Now, today's demonstration is going to 24 assume that the organization makes use of the 25 automated forms manual provided by the Division. And 0077 1 a benefit to doing that is, by using the automated 2 forms manual, a licensee would only have to manually 3 enter five fields on the quarterly report form. All 4 of the other fields, those that you see up here, would 5 have been electronically populated by the automated 6 forms manual. The five fields requiring manual entry 7 are line 14, which is rental income received, and for 8 our purposes we're going to assume that this conductor 9 organization also serves as a lessor. Line 15 10 requires manual entry. Line 16, line 17, and then, 11 scrolling on down, line 36, previous proceeds 12 undistributed. 13 Now, after the organization has 14 completed their quarterly report form, which we've 15 just now done, they would then move on to schedule A. 16 They would enter their charitable distributions, as 17 has been done here. And then those totals are 18 calculated at the bottom. And, again, as a feature 19 for our licensees, this total figure here of 10,000 20 dollars is linked back to line 38 of the quarterly 21 report form, again, with the intent to help the 22 organizations from making an error when transferring 23 that figure between their schedule A and the quarterly 24 report form. 25 So now that the organization has 0078 1 completed their quarterly report, as well as schedule 2 A, they would then move on to the payment screen and 3 would be presented with this payment coupon, which 4 summarizes the information and shows here, on this 5 line, the total amount of tax and prize fee due. The 6 organization or the preparer of this form would then 7 enter down here their name and position, phone number, 8 date, print out, sign the document, and attach the 9 check for the required prize fee and rental tax, drop 10 it -- and drop it in the mail. And a copy of this 11 form is included in your notebook. 12 The licensee then has the ability to 13 save the file to their computer and e-mail the 14 completed form, quarterly report form, and schedule A 15 to us by the filing due date. These new forms will be 16 available on our Web site by the first of the year. 17 The Division has been busy promoting this feature to 18 our licensees, via the Web site, Bingo Bulletin, 19 direct mailings, and our operator training program. 20 We've had the opportunity to demonstrate this new 21 feature to the Bingo Advisory Committee at their last 22 meeting, and we've also worked with BAC members and 23 industry representatives to resolve one outstanding 24 issue that we had, related to electronic filing. 25 Commissioners, I want to thank Terry 0079 1 Shankle and the Charitable Bingo Division and her 2 staff, as well as the staff in the agency's 3 Information Resources Department, who have worked very 4 hard to make this service available. And we're very 5 excited about being able to offer yet another feature 6 such as this to our licensees. And I would be able to 7 answer any questions about the electronic filing 8 process that you may have. 9 COMMISSIONER COX: Billy, this is very 10 impressive. I do have one question. You said they 11 can e-mail this form in. Can they request or do they 12 automatically get an acknowledgment, return receipt, 13 if you will, that that e-mail has been received? 14 MR. ATKINS: Commissioner Cox, I do not 15 remember. I do know that that issue was -- actually, 16 I just discussed it today with David Heinlein. So 17 that is something that we'll be looking at. 18 COMMISSIONER COX: I would sure like 19 for -- I think it's mandatory that they be able to 20 request a receipt, and that may be just a function of 21 their Outlook or whatever they're using. I think it 22 would be good if we automatically acknowledged each of 23 those so that they have something for their files that 24 shows that we got it. That would be good for us to 25 look into that. 0080 1 MR. ATKINS: We'll certainly -- 2 certainly look into that. Sure. 3 CHAIRMAN CLOWE: Thank you, 4 Commissioner. Thank you, Billy. 5 Next, item three, report, possible 6 discussion and/or action on lottery sales and revenue, 7 game performance, new game opportunities, including 8 Powerball, and trends. Ms. Pyka. 9 MS. PYKA: Good morning, Commissioners. 10 For the record -- 11 CHAIRMAN CLOWE: Good morning. 12 MS. PYKA: Good morning, Commissioners. 13 For the record, my name is Kathy Pyka. I'm the 14 Controller for the Lottery Commission. Directly to my 15 right is Robert Tirloni and Doctor David Sizemore. 16 Our first chart this morning reflects 17 revenue from sales and net revenue to the State for 18 the period ending December 3rd, 2005. This report 19 reflects 14 weeks of activity. Total sales through 20 the 14-week period amounted to 932 million, while an 21 estimated net revenue to the State for this period was 22 236.4 million. Net revenue to the State does reflect 23 a 3.2 percent increase in comparison to the 229.2 24 million figure for the same period of fiscal year 25 2005. Prize expense as a percent of sales were 62.6 0081 1 percent for this period as compared to 62.5 percent 2 one year ago. 3 Our next slide for you today -- 4 Yes, Commissioner? 5 COMMISSIONER COX: Okay. What does 6 statutory administration appropriation mean? 7 MS. PYKA: Our administrative 8 appropriation is limited to the 7 percent of -- of 9 sales. 10 COMMISSIONER COX: Okay. Does it have 11 anything to do with what we really spent? 12 MS. PYKA: No. 13 COMMISSIONER COX: Why -- why is it on 14 there? 15 MS. PYKA: As we reflect the statutory 16 administrative appropriation, it's a reflection of 17 what the calculation of net revenue to the State is. 18 COMMISSIONER COX: Well, maybe so, but 19 what we actually spent is what matters as far as what 20 the school children of Texas get. And when I got to 21 computing this, and I had in my notebook the -- I 22 guess, maybe a week earlier, but I computed that the 23 statutory administration appropriation increased 13.6 24 percent over last year, and I was going to ask you 25 why. And now I look and I see that in the left-hand 0082 1 column you have 38.6, where the last one had 46.6, but 2 you got 40.1 for the last one and 41.5, or more money. 3 So now it's not 13 percent anymore. So while that 4 might be a great form for somebody to put in a slot 5 somewhere, it doesn't help me understand what we're 6 doing for the school children of Texas. 7 MS. PYKA: And, Commissioner, as we 8 move into the next tab of the financial presentation, 9 we will present the actual calculation on the transfer 10 to the Foundation School Fund. 11 COMMISSIONER COX: Okay. Well, in this 12 tab, this is all -- this one page is all I had. 13 MS. PYKA: Okay. 14 COMMISSIONER COX: And it isn't helpful 15 to me. You know, it may serve some statutory purpose, 16 but it doesn't help me with anything that I think this 17 Commission is about. 18 MS. PYKA: We'll look at the format and 19 then revisit that with you and come up with something 20 that -- that's definitely more useful. 21 Our next slide this morning, we're 22 noting our fiscal year 2006 year-to-date sales 23 activity by game. As noted on this slide, 74 percent 24 of sales or 689.4 million is from instant ticket 25 sales, with 7.7 percent of sales or 71.9 million 0083 1 from -- from Pick 3, followed by 7.2 percent and 66.9 2 million for Mega Millions, and 5.8 percent or 54.3 3 million from Lotto Texas. 4 And then our next slide simply provides 5 a graphical presentation of the 932 point million 6 year-to-date sales by game. 7 MR. TIRLONI: Good morning, 8 Commissioners. For the record, my name is Robert 9 Tirloni. I am the Products Manager for the 10 Commission. 11 Our next slide breaks down the 689.4 12 million in instant sales, year to date, by price 13 points. I mentioned last month that the five-dollar 14 price point has become the -- the leader, in terms of 15 all the price points offered by the Commission, 16 followed by the two-dollar price point. The 17 five-dollar price point is making up 25 percent or 172 18 million, followed closely by the two-dollar price 19 point at 21.6 percent and just under 149 million. 20 CHAIRMAN CLOWE: Robert? 21 MR. TIRLONI: Yes, sir. 22 CHAIRMAN CLOWE: Hold on just a minute 23 there, please. 24 MR. TIRLONI: Sure. 25 CHAIRMAN CLOWE: Counselor, is the 0084 1 issue of taking instant ticket games down after the 2 principal prizes have been won covered under this item 3 on the agenda? 4 MS. KIPLIN: Well, I guess it would 5 depend on, you know, the scope of your deliberations. 6 You're under lottery sales and revenue, game 7 performance, new game opportunities, including 8 Powerball, and trends. So I think it would depend on 9 the focus and the expanse of the deliberations in 10 terms of instant games. 11 CHAIRMAN CLOWE: Okay. Let me start 12 with my questions, and then you stop me if I'm outside 13 the agenda. 14 MS. KIPLIN: I will. I think as the -- 15 I think as -- as the questions are relating to the -- 16 the impact or information on sales and revenue or 17 performance, you know, these -- these broader words, 18 I -- I think you're within the scope. 19 CHAIRMAN CLOWE: Well, I -- I think it 20 can be appropriate here. I hope I can stay within the 21 agenda. 22 Robert? 23 MR. TIRLONI: Yes, sir. 24 CHAIRMAN CLOWE: We saw from Kathy's 25 prior slide that revenue is increasing. The take is 0085 1 pretty much even. 2 MR. TIRLONI: Uh-huh. 3 CHAIRMAN CLOWE: And I think that's 4 representative of the fact that -- that we're selling 5 more instant tickets now, and the payout is higher 6 there, and that's the reason for that. 7 MR. TIRLONI: I -- I would agree. 8 Correct. 9 CHAIRMAN CLOWE: And the issue has been 10 raised about why the Commission doesn't take down an 11 instant game when a principal prize has been awarded. 12 MR. TIRLONI: Uh-huh. 13 CHAIRMAN CLOWE: Now, my understanding 14 is, and I'm going to tell you what my understanding is 15 and you correct me if I'm wrong. My understanding is 16 that these games are put out on the street, and we 17 have for the retailers a choice of as many as over 80 18 games at any given time. 19 MR. TIRLONI: That's -- that's correct. 20 CHAIRMAN CLOWE: And that, in printing 21 up a run of tickets, there are a number of factors 22 that go into the decision to print that game up and -- 23 and put it on the street. We make an individual 24 decision to print tickets and put them on the street 25 for each game. It's a lot different than the on-line 0086 1 games. They're fixed. They're -- only change 2 currently by rule. But we have that flexibility, so 3 we maneuver from one game to another as we think it 4 will appeal to the playing public. 5 MR. TIRLONI: That's correct also. 6 CHAIRMAN CLOWE: And to measure the 7 cost of doing this, a ticket run can cost the State as 8 much as 300,000 dollars for a printing. 9 MR. TIRLONI: That's correct. And that 10 is -- that is typically on some of our core games like 11 Weekly Grand and Break the Bank, in which we print 12 larger runs because of their popularity. Yeah. 13 That's correct, though. 14 CHAIRMAN CLOWE: So we make a cost 15 commitment when we select a game like that, and we put 16 that money up front as an expense to the State. 17 MR. TIRLONI: Yes. That's accurate. 18 CHAIRMAN CLOWE: Now, within that game, 19 I am assuming that there is the assumption that not 20 only the principal prize or, if there is more than 21 one, the principal prizes will be won and a number of 22 other secondary prizes or third or fourth level, 23 whatever they may be, prizes will be won as well. 24 MR. TIRLONI: Absolutely. 25 CHAIRMAN CLOWE: And I would further 0087 1 assume that, in making those assumptions, we compute 2 the odds of the benefit to the State and the payout to 3 the player, taking that the game will be sold to some 4 point before we take it off the street, and I think 5 our practice is about 7 -- about 85 percent before we 6 take a -- an instant ticket game down. 7 MR. TIRLONI: Our -- our internal 8 procedure states that at 85 percent -- yeah, that -- 9 that is pretty much the -- the benchmark, 85 percent, 10 that we really start looking at that game. Some games 11 stay out much longer than that. Some games, due to 12 performance, we may close earlier than 85 percent 13 sold. 14 CHAIRMAN CLOWE: Okay. And that's 15 within our discretion. 16 MR. TIRLONI: Yes, sir. 17 CHAIRMAN CLOWE: So if, when a 18 principal prize or a -- or a number of principal 19 prizes were won, if we took the game down then, there 20 would be two things that would happen. It would 21 change the opportunity for second, third, and fourth 22 level prizes, whatever they might be, to be won, and 23 it would change the odds totally of putting the game 24 on the street that we've assumed when we decide to 25 make that game available to the players. 0088 1 MR. TIRLONI: I don't know that it 2 would change the odds of winning at the other 3 subsequent prize levels. It would definitely 4 impact -- 5 CHAIRMAN CLOWE: The -- the odds -- 6 excuse me. Let me clarify that question. The odds of 7 the prizes that would be won -- we figure all prizes 8 to a certain extent, I assume -- and the odds of the 9 return to the State. 10 MR. TIRLONI: Basically, when we start 11 to evaluate games in -- in coordination with -- with 12 GTECH sales and marketing staff, before we ever close 13 a game, we have -- we have pretty much run it through 14 a cost-benefit analysis to look at those factors that 15 you're discussing. So we consider what it costs to -- 16 what it costs us to print that game. We look at what 17 we have paid out in prizes. And we look at what the 18 sales are over the -- on that game during the past few 19 weeks, compared to what we feel the sales would be for 20 a newly introduced game that would replace that game. 21 CHAIRMAN CLOWE: Okay. And that's a 22 cost-benefit analysis that we run, and that's the 23 basis of our decisions. And that's within our rules 24 and practice. 25 MR. TIRLONI: That's correct. 0089 1 CHAIRMAN CLOWE: Now, what if we took 2 down an instant scratch-off game as soon as the 3 principal prize or the principal prizes were won? 4 MR. TIRLONI: One of the factors that 5 you could -- that we could realize is that we'd 6 basically be in the red, so to speak, on that game, 7 based on the fact that as soon as we receive those 8 tickets from the vendor, we're invoiced for those. 9 Thirty days after receipt of that invoice, we're 10 obligated to pay for the printing and production and 11 delivery of those tickets. And then if the top prizes 12 are paid out, pretty -- you know, towards the 13 beginning of the run of the game, let's say, there is 14 the possibility that you have a very high payout on 15 that game because you're -- you've paid out the top 16 prizes, and you haven't sold through the game to the 17 point of where we -- where we break even or where 18 we're in the black on that game. 19 CHAIRMAN CLOWE: So the State would 20 lose money? 21 MR. TIRLONI: Possibly, yes. 22 CHAIRMAN CLOWE: And then what we would 23 probably have to do is recalculate every game that we 24 put on the street, if we adopted the policy of taking 25 it down after the principal prize was won, in order to 0090 1 change the odds of winning and the payout so the State 2 would not lose money. 3 MR. TIRLONI: I would think that that 4 would be correct, yes. 5 CHAIRMAN CLOWE: So what it means is, 6 in a game of chance, the odds, where we're talking 7 about lottery tickets, are in favor of the State. 8 MR. TIRLONI: Yes. 9 CHAIRMAN CLOWE: The games are designed 10 so the State makes money. 11 MR. TIRLONI: Absolutely correct. 12 CHAIRMAN CLOWE: There are winners, and 13 we want there to be winners, but in the end, when a 14 game comes down, the net result that the legislature 15 has directed the Lottery Commission to achieve is that 16 the State make money. 17 MR. TIRLONI: Absolutely. And I think 18 the Commission would look poorly on my department 19 if -- if that wasn't the case and we were closing 20 games before they were -- before they were in the 21 black. 22 CHAIRMAN CLOWE: Okay. Now, are there 23 any states that you know of that close a game down 24 when the principal prize is won? 25 MR. TIRLONI: Yes. 0091 1 CHAIRMAN CLOWE: What are they? How 2 many are there? What do you know about them? 3 MR. TIRLONI: From what I've -- from 4 what I've seen, and -- from what I've seen here 5 recently, I -- it's approximately 15 or 16 states will 6 close or pull a game when the -- when all the top 7 prizes in that game have been claimed. 8 CHAIRMAN CLOWE: Okay. I think there 9 are 14 states. 10 MR. TIRLONI: Is it? I -- I may be 11 wrong. 12 CHAIRMAN CLOWE: But -- but we won't 13 argue over one state. Now, how do those states run 14 those games if they shut them down when the principal 15 prize is won? Do you know? 16 MR. TIRLONI: Not -- not specifically, 17 no, I don't know. 18 CHAIRMAN CLOWE: Okay. We want you to 19 find that out and report it back to us. 20 MR. TIRLONI: And when you say "run," 21 you mean in terms of -- 22 CHAIRMAN CLOWE: How do they figure the 23 odds? How do they make money? You've just told us 24 that if we do that, we'll lose money. So if they're 25 doing it, and there are 14 or 15 or 16, how do they do 0092 1 that and not lose money for their states? 2 MR. TIRLONI: We'll look into that, and 3 we'll get that information for you. 4 CHAIRMAN CLOWE: All right. Then, if 5 there are somewhere between 14 and 16 states that do 6 do that, does that mean the remainder of the states 7 that have legally authorized lotteries don't do it? 8 MR. TIRLONI: That's my understanding, 9 yes. 10 CHAIRMAN CLOWE: So there are now, 11 what, 40 some-odd states that have legal lotteries in 12 their state? 13 MR. TIRLONI: Approximately. 14 CHAIRMAN CLOWE: So that would be the 15 preponderance that are doing what we're doing. Is 16 that right? 17 MR. TIRLONI: We're in the majority. 18 That's correct. 19 CHAIRMAN CLOWE: We're in the majority? 20 MR. TIRLONI: Uh-huh. 21 CHAIRMAN CLOWE: All right. I -- I 22 would like you to bring that information back to the 23 Commission, and not only what the states do that take 24 the game down do, but what the states do that don't 25 take them down and if we're doing what those states 0093 1 do. Not that I care what any other state is doing, 2 but it's just good information to have. We'll get to 3 the Powerball later. 4 COMMISSIONER COX: Yes, sir. 5 MR. TIRLONI: We'll absolutely find out 6 how those scenarios work in all of those different 7 states. 8 CHAIRMAN CLOWE: All right. Now, I 9 want to move to another subject relating -- 10 COMMISSIONER COX: Can I -- on that 11 subject? 12 CHAIRMAN CLOWE: Sure. I -- I'm still 13 on instant tickets. 14 COMMISSIONER COX: Are you still on 15 whether -- when we pull the game down? 16 CHAIRMAN CLOWE: No. Come on in at 17 this point. 18 COMMISSIONER COX: Okay. 19 MS. KIPLIN: We're still focused on 20 lottery sales, revenue? 21 CHAIRMAN CLOWE: We are indeed. 22 COMMISSIONER COX: Yes, we are indeed. 23 MS. KIPLIN: New game opportunities -- 24 COMMISSIONER COX: There was a -- the 25 press brought my attention to this. You -- as I guess 0094 1 the press brought your attention to the issue, 2 Mr. Chairman? 3 CHAIRMAN CLOWE: Oh, I was looking at 4 it long before the press -- 5 COMMISSIONER COX: Brought it in? 6 CHAIRMAN CLOWE: Yeah. 7 COMMISSIONER COX: Perhaps show us that 8 they brought it into sharp focus for us. At any rate, 9 I've met three times, I think, now with staff on this 10 issue. And I think I can tell you that this is very 11 much like an iceberg. There is far more of this issue 12 below the surface than there is above the surface. 13 And I have asked the staff the following question: Is 14 whether the -- the prizes have been won or not won the 15 appropriate place for focus. Is rather the place for 16 focus, how is the game doing? And if it's selling 17 above average, it ought to be out there. If it's 18 selling below average, we ought to pull it. And 19 the -- whether the prizes have been won is a matter 20 that may or may not have anything to do with whether 21 it's selling or what. But if it isn't selling, we 22 shouldn't leave it out there taking up the most 23 valuable asset which we have, which is space on those 24 retailers' shelves. 25 CHAIRMAN CLOWE: Right. 0095 1 COMMISSIONER COX: So I -- that's not a 2 conclusion of mine, but that's a question I've asked 3 the staff. And I've asked Gary to give us a complete 4 report on what is under the water on this iceberg and 5 those kinds of issues. 6 CHAIRMAN CLOWE: Great. I bow to your 7 superior knowledge, and I'm glad you're on it. 8 COMMISSIONER COX: Not superior, 9 just perhaps different. 10 CHAIRMAN CLOWE: I -- I want to -- I 11 want to then move to an area that I think is very 12 important, and that is, my concern about player 13 notification. I understand that the rules are printed 14 on the back of every ticket. I -- I don't think many 15 players look at the backs of the tickets. I think 16 most of them look at the fronts of the tickets. I 17 also understand that we print a sheet and send it out. 18 I question whether those are being distributed timely 19 and if they're up to date. What -- what would your 20 response to that be? 21 MR. TIRLONI: I think you're probably 22 referring to the -- the sell-in-sheets? 23 CHAIRMAN CLOWE: Yes. 24 MR. TIRLONI: That go to retailers? 25 CHAIRMAN CLOWE: Yes. 0096 1 MR. TIRLONI: My understanding is that 2 those are being -- we're -- we're pretty far ahead on 3 our game plan right now, meaning, games that we're 4 working on right now in my department are probably 5 scheduled for launch in anywhere from late January to 6 sometime in mid-February. So as we're executing those 7 games, we're also creating those sell-in-sheets. So 8 my understanding, in terms of the sell-in-sheets, we 9 are current and on schedule with distribution on 10 those. 11 COMMISSIONER COX: Mr. Chairman, if I 12 could? 13 CHAIRMAN CLOWE: Sir. 14 COMMISSIONER COX: I believe that the 15 Chairman is addressing the report that goes out to the 16 retailers on what prizes have not been claimed. 17 CHAIRMAN CLOWE: That's it. 18 MR. TIRLONI: Oh, we -- okay. That's 19 the -- 20 CHAIRMAN CLOWE: What's the correct 21 nomenclature? 22 MR. TIRLONI: That -- that sheet is 23 called Winning Tickets Remaining. That's a flyer that 24 we've produced for years. 25 CHAIRMAN CLOWE: That's the one I was 0097 1 focused on. 2 MR. TIRLONI: Okay. In terms of 3 schedule on that, for years now, because of logistics 4 and because of delivery, the information on that sheet 5 is always outdated by about two to three weeks. 6 CHAIRMAN CLOWE: And whose 7 responsibility is that, ours or GTECH's? 8 MR. TIRLONI: It's a combination of, 9 Chairman. We receive prize tables from GTECH every 10 week regarding the number of prizes claimed and 11 unclaimed in a game. That sheet is created in-house 12 by our graphics department. And then it is sent off 13 to a print shop where it's printed and then gets 14 delivered to GTECH, in sync with when their sales 15 meetings fall. And then once they receive those, they 16 have a pretty much two-week time frame in which they 17 cover the state and all 16,000 some-odd retail 18 locations. Now, Winning Tickets Remaining, that -- 19 that same information is updated on our -- on our Web 20 site, though, every week. So that is -- that is more 21 current than the actual printed flyer. 22 CHAIRMAN CLOWE: That's the best 23 information we have? 24 MR. TIRLONI: That is. Or players can 25 also call the 800 number and can talk to customer 0098 1 service about prizes remaining or prizes claimed, 2 unclaimed in an -- in an actual game. And they can 3 receive that information via that -- that line as 4 well. 5 CHAIRMAN CLOWE: Customer service will 6 give them that information? 7 MR. TIRLONI: That's correct. Yes, 8 they will. 9 CHAIRMAN CLOWE: What are your thoughts 10 on that? 11 COMMISSIONER COX: Again, with respect 12 to that discussion, based on the further discussions 13 I've had with staff, I know that about five-sixths of 14 that discussion is below the surface, too. And I 15 would really like for us to have a very thorough 16 briefing on this at the earliest possible meeting so 17 that you and I can have the same understanding the 18 staff does of these issues and ask them questions on a 19 detailed presentation. 20 CHAIRMAN CLOWE: Good. My underlying 21 philosophy is that we're in the lottery business to 22 make money for the State. And the idea that we're in 23 the business of paying out prizes is to create winners 24 so that there is interest in lottery. But the end 25 result will be that the Foundation School Fund will 0099 1 receive monies from these activities. And the element 2 of fairness, in my mind, rests in full communication. 3 COMMISSIONER COX: Yes. 4 CHAIRMAN CLOWE: And in informing, as 5 timely as possible, the player what the odds are and 6 what the risks are. And then if the player chooses to 7 play, they're risking whatever amount they play. 8 COMMISSIONER COX: Exactly. 9 CHAIRMAN CLOWE: And so that's the 10 thrust of my questioning. I -- I think the State must 11 make money from these operations. I think that when 12 you set a game up, you predetermine what the odds are, 13 and what the take is -- is going to be, and you can't 14 change it in the middle of it, or you have got to 15 readjust the rules of the game. But everybody should 16 know the rules of the game, and as the game 17 progresses, you ought to give the players as timely 18 and as accurate information as possible. 19 COMMISSIONER COX: Yes. The -- one 20 thing I would add, Mr. Chairman, is that if -- if we 21 took the game down solely upon the criteria of, have 22 all the major prizes been claimed, taking this to an 23 extreme, perhaps ridiculous, conclusion, if nobody is 24 buying any of those tickets, then what we have got is 25 a stalemate on one of those slots that we have in that 0100 1 retailer, because what we have got is a dead game 2 sitting and taking up space that could be occupied by 3 a live game. And ultimately, we will end up with 4 every space in that retailer's operation taken up by a 5 dead game because we can't take them down. You can't 6 run a railroad that way. There has to be another 7 criteria than that for whether you take a game down or 8 leave it up. 9 CHAIRMAN CLOWE: I -- I think we've 10 gone to the core of this issue now, and these facts 11 are very beneficial to me. And I concur in 12 Commissioner Cox's desire to have a full and complete 13 report as soon as possible so we can judge, in my 14 opinion, on the fairness and the level of 15 communication and the propriety of the game. 16 COMMISSIONER COX: Correct. 17 CHAIRMAN CLOWE: Gary, do you have 18 anything to add at this point? 19 MR. GRIEF: Mr. Chairman, I have had a 20 chance to have in-depth conversations with 21 Commissioner Cox on this issue. As much as I would 22 like this to be an exact science, the instant ticket 23 games are not. And we will -- we are working on 24 providing more information, and we'll be happy to 25 provide that in a Commission meeting. I give you one 0101 1 example. If we were to print an instant ticket game, 2 and we have, where there are four top prizes printed 3 in that particular game, and we go through a period of 4 time where, for example, three of the top prizes have 5 been claimed, and the game is selling well, and on the 6 outside, to all appearances, it looks like it's a 7 no-brainer to keep that game going, keep it out for 8 sale -- there is a top prize remaining -- the reality 9 may be that that fourth top prize was caught up in a 10 fire at a retailer location, was washed and destroyed 11 at someone's home, or is sitting in the warehouse and 12 for whatever reason has never been issued. So there 13 is a flip side to that. By keeping some games open, 14 if -- some of these states, I'm curious how they 15 guarantee the other side to the players. And I could 16 give you a thousand and one examples. And like 17 Commissioner Cox said, the iceberg that's beneath the 18 surface on all of this, there are untold amount of 19 details and -- and unique situations that are brought 20 to bear when you're dealing with a paper product like 21 the instant tickets. So I give you just that 22 information by way of example, and we'll be happy to 23 come back and give you a more thorough overview. 24 CHAIRMAN CLOWE: Well, I think we'd 25 appreciate that, and I want to point out to you that I 0102 1 think this is a valid area of interest because it is 2 so large in our sales picture, and it is growing. And 3 it's obviously attractive to the players, so we need 4 to know more about it. We focus so much of our 5 attention on the on-line games. We talk a lot about 6 those. These games are extremely important to the 7 State, and we need to have the kind of information 8 that, obviously, Commissioner Cox has been working 9 with you and others on for some time. 10 MR. GRIEF: Very good. 11 CHAIRMAN CLOWE: Thank you. 12 Anything else? 13 COMMISSIONER COX: No, sir. 14 CHAIRMAN CLOWE: Thank you, Robert. 15 MR. TIRLONI: You're welcome. One -- 16 one other piece of follow-up. Commissioner Cox, last 17 month you asked us about this slide, but for on-line, 18 so we could look at and measure transactions on the 19 on-line games. And I want to let you know, we are 20 working with GTECH. We will probably have that for 21 you next month at the January meeting. 22 COMMISSIONER COX: Thank you. 23 MR. TIRLONI: So we can look at that by 24 game, and we can look at it overall for all of 25 on-line. 0103 1 I do have a brief Mega Millions update 2 for you. There was a 35 million dollar jackpot ticket 3 sold on Tuesday, November 29th. There were two 4 tickets sold. One of those was sold in Michigan and 5 the other in California. And if you recall, 6 California sold a 315 million dollar jackpot ticket a 7 few weeks prior to that. So they've had two jackpot 8 wins pretty close together. The Michigan ticket has 9 already been claimed as a cash value prize. My 10 understanding as of earlier this week is the 11 California prize has not yet been claimed. 12 We also have an update for you on this. 13 Last month we spent some time talking about cash value 14 option versus 25 annual payments, and we are 15 continuing to gather information about that as well. 16 And I know Kathy and her staff are working on an 17 analysis, and we should also have that for you in 18 January also. 19 This next and last slide is a little 20 bit of follow-up from last month as well. I showed 21 you a slide last month that compared three different 22 Mega Millions roll cycles, and I pointed out a 23 deviation from the normal pattern that we had observed 24 in previous roll cycles. When we rolled up to 315 25 million dollars, the deviation I pointed out -- when I 0104 1 showed you that, I -- I told you that there was a 2 Megaplier advertising campaign that was running. 3 Commissioner Cox, you asked us to delve into that a 4 little deeper, and we have tried to do that here. And 5 I'll -- I'll walk you through what this is showing. 6 Basically, this is Megaplier draw sales, and the red 7 bars are the actual draw sales. This was a 250 8 million dollar jackpot win. These were the Megaplier 9 draw sales that lead up to the 315 million dollar 10 jackpot win that I just talked about a second ago. 11 And then the blue line is Megaplier as a percentage of 12 Mega Millions sales. And so this is a trend that 13 is -- that is typical and we've seen for some time. 14 As the jackpot climbs, the draw sales increase. But 15 as a percentage, Megaplier decreases. And our 16 experience and feedback on that is because players are 17 taking that extra dollar that they spend on Megaplier, 18 putting it into the base game for the -- hopefully, 19 the chance of winning millions or hundreds of millions 20 instead of just multiplying a prize. 21 COMMISSIONER COX: Or maybe you've just 22 got more people that are looking just at the big 23 prize, and the new players that have come into the 24 game -- 25 MR. TIRLONI: The jackpot. 0105 1 COMMISSIONER COX: -- for just the big 2 prize, they don't care about winning a million. They 3 want 235 million. 4 MR. TIRLONI: Absolutely correct. And 5 they may not -- those jackpot chasers that just come 6 in when we reach these triple digit jackpots may not 7 even be aware of -- of Megaplier or -- or understand 8 the -- the game feature itself. So, as I said, this 9 is -- this is a pretty typical pattern that we see. 10 This -- and this blue bar shows where that -- that 11 Megaplier advertising -- and it was -- we call it a 12 refresh campaign because it had run earlier over the 13 summer when we -- when we actually made the Mega 14 Millions matrix change. But this would be the 15 anticipated trend line, and as you can see, this is 16 the actual. So we did yield a -- a bit of an 17 increase. And now, this seems to be in sync with the 18 advertising campaign. We would hate to -- we would 19 hesitate to say that that -- we could identify that as 20 the sole reason of -- of that difference. There were 21 other things going on in the marketplace 22 simultaneously. GTECH had a sales rep incentive where 23 they were incentifying sales staff based on Megaplier 24 sales. There were other things going on in the 25 market. Some of our holiday scratch offs had just hit 0106 1 the market, and there was promotion -- promotional 2 efforts behind that. 3 So we've tried to delve into this 4 and -- and look at it. I think there are some 5 positives. One -- one positive I do want to point out 6 is, you notice from the beginning of this roll cycle 7 to the beginning of this roll cycle, we did see a 8 decrease after that 315 million dollar jackpot win. 9 We seem to hold pretty steady in terms of that 10 Megaplier percentage of sales. So we think that -- 11 COMMISSIONER COX: Robert, were we 12 running that Megaplier advertising in all markets? 13 MR. TIRLONI: Yes. 14 COMMISSIONER COX: Okay. 15 MR. TIRLONI: Yes, sir. 16 COMMISSIONER COX: So if we had run it 17 in all but one market, we might have even more 18 conclusive data? 19 MR. TIRLONI: We might. 20 And that concludes this portion, but I 21 know Gary has some information to add. 22 MR. GRIEF: Yes. Commissioners, I have 23 some additional information to report to you today 24 under this item, specifically as it relates to a 25 potential impact on sales and revenue. I've been 0107 1 sharing with you, over the past few months, data 2 that's been collected by our research firm, 3 Ipsos-Reid, relating to the public's perception of the 4 Texas Lottery. And at the last Commission meeting, 5 Commissioner Cox had asked for some historical 6 perspective on that data. Specifically, Commissioner, 7 you had asked what were the highest positive levels we 8 had ever reached on those particular charts. So to 9 that end and to respond to the Commissioner's 10 questions, I've asked David Sizemore, from our 11 research department, to look into that matter. And 12 David has a brief presentation that I hope will answer 13 your questions, and he'll also be providing you with 14 the latest results of the survey. 15 I think we may need to dim the lights 16 just a little bit for David's presentation. 17 MR. SIZEMORE: Thank you, Gary. Good 18 morning, Commissioner, Chairman. I am David Sizemore, 19 Research Coordinator for the Texas Lottery Commission, 20 and I have the pleasure of presenting some brief 21 opinion data with reference to what is going on in 22 our -- the state's mind, as it were, about the Texas 23 Lottery Commission and their sentiments toward it. 24 Most of this is historical, and you'll see on the 25 chart on the right, going back all the way to 1997, 0108 1 data having to do essentially with a general opinion 2 or an overall opinion of what the people in Texas 3 think about the Texas Lottery and the Texas Lottery 4 Commission. There is a fairly stable positive opinion 5 of the Texas Lottery and Texas Lottery Commission. 6 And you'll notice about a five or seven percentage 7 point difference across time, ranging from about 29, a 8 low in 2000, 29 percent of people thinking that they 9 had positive opinions of the Texas Lottery, to 38 in 10 90 -- 7 in '98, which were, for this series of data, 11 the -- the peak points. Fortunately, though, this 12 year, data suggests that a larger percentage of the 13 population actually has a positive view of the Texas 14 Lottery. And there are some reasons for this that 15 I'll get into as we go along. But, generally, the 16 range is about 29 to 41 percent, which is what we find 17 in this year's -- in this year's segmentation study, 18 41 percent of the population thinking positively about 19 the Texas Lottery Commission. And there are some 20 preparatory comments that need to be made with 21 reference to how the questionnaire itself was 22 designed, and methodological issues, and so on. 23 And you'll notice, of course, in -- 24 between 2001 and 2002, a significant jump in negative 25 opinions. And that is at least partly the consequence 0109 1 of how the questionnaire itself was designed. The 2 instrument moved from a four-point scale -- strongly 3 disagree, somewhat disagree, somewhat agree, strongly 4 disagree -- to a seven-point scale that just left the 5 range fairly open -- strongly agree to strongly 6 disagree. And in many ways there was a -- a neutral 7 position that was eliminated from this and changed 8 over to basically a don't-know position. Although the 9 don't-know existed prior to 2002. And you'll see a 10 significant jump, in fact, doubling, from 22 11 percent -- almost doubling -- to 43 percent in 2002, 12 of negative opinions toward the Lottery Commission. 13 And this is, again, partly the consequence of how the 14 question was worded. 15 Historically speaking, if we look at 16 segmentation data, and most of this data is drawn from 17 the segmentation studies that occur in October, and 18 this material was selected largely because it's a 19 larger and more substantive sample of about 1200 20 people. However, tracking data is included, and 21 you'll see it on the top right. The slide is drawing 22 from the tracking studies that occur each month, and 23 they have a smaller sample of roughly 400. 24 Going back to 1994, 62 percent of 25 respondents agreed -- I'm sorry -- this is the fair 0110 1 and honest measure -- this is not the general 2 opinion -- agreed that the Texas Lottery Commission 3 was operated fairly and honestly. The peak point for 4 this series of data at this point was 73 percent 5 agreeing that the Texas Lottery Commission was run 6 fairly -- or operated fairly and honestly. 7 Some data, however, suggest in the next 8 slide a much higher rating. And, again, the issue of 9 questionnaire phrasing and -- and semantics comes 10 into -- into play here. In 2001, it was basically 11 a -- a four-point scale as well, and then it changed 12 to a seven-point scale. So we see a major shift in 13 the fair and honest perception, from 80 percent to 56 14 percent, represented by the orange line and boxes. 15 There is favorable news, of course, 16 with reference to the general opinion in most recent 17 years, and you'll see that depicted in the -- the blue 18 bars from left to right. And, again, as I mentioned 19 earlier, the peak seems to be in this -- this most 20 recent segmentation study, when about 41 percent of 21 the population agreed to have a favorable opinion or 22 an affirmative opinion of the Texas Lottery. In -- 23 and as we go along, I'll also have some more 24 commentary about how things have changed a little bit 25 in recent years with the wording of the questions as 0111 1 well. As you know, I suspect the word "Commission" 2 was removed from the question, such that formerly it 3 was, how do you feel about the Texas Lottery 4 Commission. Now it is simply, how do you feel about 5 the Texas Lottery. 6 COMMISSIONER COX: Let me stop you at 7 that point. 8 MR. SIZEMORE: Yes, sir. 9 COMMISSIONER COX: 2001, you've got a 10 four-point scale. 11 MR. SIZEMORE: Yes, sir. 12 COMMISSIONER COX: 2002, you had a 13 seven-point scale. 14 MR. SIZEMORE: Yes, sir. 15 COMMISSIONER COX: And the reason you 16 have an even number, if I remember, is that so no one 17 can ride the fence. They've got to go one way or the 18 other. 19 MR. SIZEMORE: Arguably so. 20 COMMISSIONER COX: And without getting 21 into whether that is the appropriate way to design one 22 or whether you should give people a middle of the road 23 or a cop-out, what we did in 2002 is give them a 24 cop-out. 25 MR. SIZEMORE: Correct. 0112 1 COMMISSIONER COX: Intuitively, what 2 would then happen is that both the positive and the 3 negative would go down and the neutral would increase. 4 Why didn't that happen? 5 MR. SIZEMORE: With the shift in 2002, 6 you mean? To the seven-point scale? 7 COMMISSIONER COX: What happened was, 8 the neutral, which should have gone up, went down, and 9 the negative, which should have gone down, went up. 10 MR. SIZEMORE: No. There is really no 11 neutral position at this point anymore. The neutral 12 measure, as it were, or the don't-know measure 13 actually becomes just a -- one point in that 14 seven-point scale. So it's -- one, two, three are 15 negative. Four is neutral. Five, six, seven -- 16 COMMISSIONER COX: And I was -- my 17 intuition was, the negative was three, positive was 18 three, and neutral was one. But you're telling me 19 maybe it was two, two, and three, or what was it? 20 MR. SIZEMORE: The neutral -- the 21 neutral would be middle of the road on that 22 seven-point scale. If someone marked a four -- 23 COMMISSIONER COX: So one point. So 24 neutral -- what that has to say is -- let me ask you 25 this. How did you have a neutral, then, in 2001, when 0113 1 you're on a four-point scale? 2 MR. SIZEMORE: Well, actually, that -- 3 that is more -- looking at the survey instrument 4 itself, it's the don't-know position or uncertain 5 position. And as you see listed up there, it's 6 neutral, DK, don't know. So in other words, they 7 don't know where they really stand on the -- the issue 8 of opinion. Respondents do not know where they stand. 9 COMMISSIONER COX: Okay. Thank you. 10 Go ahead. 11 MR. SIZEMORE: And it -- that's 12 actually some interesting stuff in all this because 13 one of the things you do see is -- is a -- a flare to 14 the extremes. And -- and it's partly about the way 15 the question was worded. Now, respondents have more 16 options, and they can actually say a little bit more 17 about how they feel. And, you know, of course, you'll 18 see it shifts from 2001 to 2002. The neutral position 19 or don't-know position drops 50 percent, roughly, 20 while the extremes, agree and disagree, or positive 21 negative, flare up. But over time, and this is 22 perhaps personally interesting to me -- it should be 23 of interest to us, I think -- the -- the negative 24 positions are in a downward swing, and the positive 25 positions are increasingly going up. 0114 1 COMMISSIONER COX: And that's all we 2 know, because you take 2001 off the scale and 3 everything before that, because they changed the 4 question, the stuff is no longer comparable. 5 MR. SIZEMORE: Correct. And I actually 6 mention that down at the bottom here as a footnote. 7 The -- it -- it's difficult to compare these two 8 measures because the questionnaire itself was not the 9 same. 10 COMMISSIONER COX: We shouldn't even 11 try. They -- they have messed it up to a point where 12 we don't have comparable data anymore. 13 MR. SIZEMORE: I would argue similarly, 14 yeah. However, consistent findings do exist since 15 2002, when the questionnaire was roughly the same. 16 COMMISSIONER COX: Yes. 17 MR. SIZEMORE: So we have some 18 longitudinal data here that give us a good impression 19 of what people have been thinking over time. And one 20 of the interesting things, again, is that the neutral 21 position or the don't-know position, or however we 22 want to word this, has remained relatively stable, and 23 there has been a declination or a decline in negative 24 positioning here. We could argue that people are more 25 positive about the Texas Lottery. Now, it's -- it's 0115 1 also important as a last reference on this slide that, 2 in 2005, dropping the word "Commission" has a host of 3 semantic issues that raise and conjure up images in 4 players' minds or people's minds that -- you know, 5 bureaucracy and government, and things that are 6 negative in people's minds. That may have been -- may 7 have inflated the positive responses as well. 8 COMMISSIONER COX: Do we have any 9 control over these people, or do they just ask what 10 they want to -- 11 MR. SIZEMORE: Ipsos-Reid? 12 COMMISSIONER COX: Uh-huh. 13 MR. SIZEMORE: No, sir. We have 14 control over what they do. 15 COMMISSIONER COX: Well, why do we let 16 them keep changing the questions so that -- maybe it's 17 getting better. Maybe they're more satisfied with it 18 on an absolute basis as professionals, but we don't 19 have any comparability of data. 20 MR. SIZEMORE: Well, it's a -- a hard 21 question to respond to. I think that, as time 22 changed -- time changes, questionnaires need to change 23 as well. Removing the word "Commission," for example, 24 allows, I think, a little more flexibility, perhaps, 25 in how we interpret what people think. 0116 1 COMMISSIONER COX: Perhaps it does. 2 But now you're playing a whole new ball game, and for 3 all you know, you've destroyed your comparability. 4 MR. SIZEMORE: Perhaps. 5 We also have some more longitudinal 6 data, as well, from '97 through 2004. And this has to 7 do, again, with the overall opinion, and it gives you 8 a little more detail. It's nothing that we haven't 9 already seen at this point. It breaks things down by 10 the actual items on the questionnaire, in terms of 11 point scale. And here you'll see that, in 2002, 12 the -- the questionnaire is actually broken out -- or 13 the responses are actually broken out when the 14 question changed. And you'll see the major drop from 15 80 percent having a positive view to 57 percent. 16 And, finally, the most recent tracking 17 results -- unfortunately, it's not the highest 18 quality -- but we do see in, from October to November, 19 a slight drop in overall opinion of one percentage 20 point, and then, from October to November of this 21 year, a much more substantial drop in the fair and 22 honest measure, from 53 to 42 percent. Now, it should 23 be noted that the November tracking and the October 24 track segmentation studies are two different things. 25 October was a sample of 1200, which is far more 0117 1 representative and perhaps reliable than is the 2 November sample of only about 400. 3 Thank you. Do you have any questions? 4 CHAIRMAN CLOWE: I don't believe so. 5 MR. GRIEF: Mr. Chairman, if I could 6 just comment. Not about the results, but I want to 7 commend David on his work. This is the type of 8 analysis that, up until November of 2004, when we went 9 through our agency reorganization and decided to 10 implement a research department, that I can tell you 11 that we would not have been able to present you with 12 this without going outside the agency for different 13 sources. So we have loaded up the research department 14 here in our agency. We keep them busy. Commissioner 15 Cox keeps them quite busy doing different analyses. 16 And I'm -- I'm very pleased to have David and his 17 colleagues on board to help us through these matters. 18 CHAIRMAN CLOWE: Thank you. 19 Counselor, I handed you, I think, 20 appearance forms on this item on the agenda. I 21 believe I had three, possibly four, and I handed you 22 those by mistake. I meant to hand you these. Okay. 23 That's -- thank you very much. 24 Next, we'll take up item four, report, 25 possible discussion and/or action on the agency's 0118 1 financial status. Ms. Pyka. 2 MS. PYKA: Commissioners, tab four, 3 this is information on the agency's financial status. 4 The first report reflects the transfers and 5 allocations to the Foundation School Fund and the 6 allocation of unclaimed prizes as of November-December 7 2005. Total transfers to the State amounted to 247.5 8 million through December, and this represents a one 9 percent increase over the amount transferred in 10 November -- or December of 2004. 11 The second page in your notebook does 12 reflect the detailed information for the monthly 13 transfers. Of the 247.5 million transferred to the 14 State, 233.6 million was the amount transferred to the 15 Foundation School Fund, and 13.9 million was the 16 balance transferred from unclaimed lottery prizes. 17 And I want to note, for fiscal years 2006 and 2007, we 18 do have a new allocation for unclaimed lottery prize 19 transfers. In this biennium we will be transferring 20 10 million to the Texas Department of State Health 21 Services, with the balance of any excess funds 22 transferred directly to general revenue. There is no 23 longer a transfer to the Health and Human Service 24 Commission for the Graduate Medical School Education 25 Program. So I wanted to note that, and we have made 0119 1 the 10 million dollar transfer in December over to the 2 other agency. So from this point forward, everything 3 else will be going directly into general revenue. 4 COMMISSIONER COX: So does that make it 5 no longer true that all of the lottery's net revenue 6 goes to education? 7 MS. PYKA: When we look at the net 8 revenue, that is going to the Foundation School Fund. 9 But these are the specific unclaimed -- unclaimed 10 lottery prizes. 11 COMMISSIONER COX: Okay. If we were 12 doing a -- a for-profit P&L, that would be part of 13 that P&L. 14 MS. PYKA: Correct. 15 COMMISSIONER COX: But I don't know how 16 that works here. 17 MS. PYKA: As we disclose everything on 18 our true operating statement, we're disclosing those 19 as simple transfers to other agencies. 20 COMMISSIONER COX: So your -- you don't 21 run those through our P&L? 22 MS. PYKA: We -- we run them as 23 operating transfers, as an operating activity 24 transfer. 25 COMMISSIONER COX: Okay. Where -- does 0120 1 that go in the income section of the P&L or the 2 expense section? 3 MS. PYKA: It goes in -- if we're 4 looking at the cap where it's going under the expense 5 section as an intergovernmental payment. 6 COMMISSIONER COX: Okay. Well, I'm -- 7 I'm going to -- I am trying to decide whether, when 8 I'm asked, where does the money go, I need to say, all 9 of it goes to education, or do I now have to say, 10 substantially all of it goes to education? 11 MS. PYKA: I think it's still very 12 clear to say that the net revenue, a hundred percent 13 of that, is going to education. 14 MR. GRIEF: Commissioner, that's -- 15 that's not a change. For many years, unclaimed prizes 16 have gone to various things other than education, as 17 deemed by the legislature. 18 COMMISSIONER COX: Okay. But they all 19 went for kind of philanthropic or any -- even if it 20 wasn't very kind of sounding things, not to the 21 general revenue fund. 22 MR. GRIEF: Indigent -- indigent care, 23 for example. 24 COMMISSIONER COX: Yeah, that kind of 25 thing. But when it just says, general revenue fund, 0121 1 that clearly isn't going to anything like charity. 2 That's going to the general revenue fund. 3 MS. PYKA: That's correct. And last 4 year our allocation included the two elements that 5 were transfers to other State agencies, with the third 6 being general revenue as well for the unclaimed 7 prizes. 8 COMMISSIONER COX: Okay. 9 MS. PYKA: So... 10 COMMISSIONER COX: So you have to kind 11 of close your eyes when you say, all of it goes to 12 education. Most all of it goes to -- 13 MS. PYKA: The majority. 14 COMMISSIONER COX: Mr. Chairman, I 15 would probably be guided by what you say in that 16 regard. 17 MR. GRIEF: I would suggest that you 18 could say -- Kathy, correct me if I'm wrong -- all of 19 the revenue generated from sales goes to education. 20 MS. PYKA: That is correct. That is 21 correct. 22 CHAIRMAN CLOWE: That's right. 23 COMMISSIONER COX: Okay. 24 CHAIRMAN CLOWE: And -- and, 25 historically, the legislature has directed those funds 0122 1 to go to those recipients. And then we have 2 traditionally given back from our administrative funds 3 to the general fund. 4 MS. PYKA: The administrative funds 5 that are unspent are presently going to the Foundation 6 School Fund. 7 CHAIRMAN CLOWE: So they go to the 8 Foundation School Fund, too. 9 MS. PYKA: That's correct. Yes, sir. 10 CHAIRMAN CLOWE: And we've given back 11 every fiscal period since the lottery was created, 12 have we not? 13 MR. GRIEF: Yes. 14 MS. PYKA: Correct. For example, last 15 fiscal year we gave back a little bit over 24 million 16 as our final transfer from unspent administrative 17 funds. 18 COMMISSIONER COX: So, Gary, how did 19 you say that again? 20 MR. GRIEF: All of the revenue 21 generated from the sale of lottery tickets goes to 22 education. 23 COMMISSIONER COX: Good. Okay. Thank 24 you. Thank you, Kathy. 25 MS. PYKA: The next document in your 0123 1 packet is at the actual calculation of the monthly 2 transfer amount. And, Commissioner Cox, under tab 3 three, we spoke about the seven percent allocation 4 except the admin. And I want to note, as -- as we're 5 calculating this transfer, we're still using that 6 allocation figure because a lot of our expenditures -- 7 as we look at our appropriation, a lot of our 8 expenditures are not incurred in a -- a monthly 9 fashion that we would expect of some other entities. 10 There is a lag on the expenditures. But in the very 11 end, we are still transferring unspent administrative 12 funds, as we talked about, in the year-end to the 13 Foundation School Fund. 14 COMMISSIONER COX: So, in effect, 15 you've leveled operating expenses? 16 MS. PYKA: Exactly. On this transfer. 17 Okay? 18 And then the last -- or the next 19 document in a -- in your handout is where we've noted 20 the actual amount of expenditures and transfers from 21 fiscal year 1992 to the present. You'll notice I've 22 changed the format of this this month to try to 23 condense it to one page. In the past we've looked at 24 a five-page document that I think was a little 25 difficult to read. So we're noting here that our 0124 1 transfers through December of this year has totaled 2 233.6 million on the cumulative transfer to the 3 Foundation School of 7.86 billion through the month of 4 December. 5 Then I'll take you to the next tab 6 behind the blue divider, and we have the fiscal year 7 2006 monthly financing summary for the Commission. 8 The first item presented is the Lottery Commission 9 Fund 5025 budget, and you'll note that the 10 appropriation for that budget is 182.3 million. To 11 date, we have obligated 50.8 million, including the 12 expenditures and encumbrances. And that represents 13 19.1 percent expended and 72.1 percent expended and 14 committed. And then moving down to bingo, fund one, 15 their budget is 13.5 million, with, to date, 3.4 16 million expended and another 68,000 committed. And 17 the expenditure did rise in this month because we've 18 included the first allocation, the quarterly 19 allocation for bingo, and so that's reflected in the 20 month of November. So at this point they've expended 21 and committed 25.6 percent of their budget. 22 All of the other operating categories 23 are pretty much on course for what we would expect for 24 expenditures in the first quarter, and I would be 25 happy to answer any questions. 0125 1 COMMISSIONER COX: No. 2 CHAIRMAN CLOWE: Thank you, Kathy. 3 MS. PYKA: Thank you, Commissioners. 4 CHAIRMAN CLOWE: Next, item five, 5 report, possible discussion and/or action on the Mega 6 Millions game and/or contract. Mr. Grief. 7 MR. GRIEF: Commissioners, on 8 December 6th, I attended a Mega Millions state 9 directors meeting in New York. And all of the party 10 lottery states involved in Mega Millions were 11 represented at that meeting, either in person or by 12 telephone. And there were two agenda items at that 13 meeting that are of particular interest to the Texas 14 Lottery Commission. 15 The first item dealt with the Mega 16 Millions agreement itself. The discussion of that 17 item focused on section 22 of the Mega Millions 18 agreement, which requires the unanimous execution of a 19 new written agreement in order for the agreement to be 20 changed. When Texas joined the Mega Millions game, 21 our State asked that that language be included in the 22 agreement that we ultimately signed. And I explained 23 to the group at this meeting in New York that Texas's 24 position on that item has not changed. My sense is 25 that some members of the Mega Millions group believe 0126 1 that this unanimity clause, for lack of a better word, 2 is not workable, and they have a desire to change that 3 or remove it completely from the agreement. But I do 4 believe that they recognize that changing that clause 5 would require all the party lotteries to execute a new 6 written agreement. After much discussion -- 7 CHAIRMAN CLOWE: So you have to have 8 unanimity to remove the unanimity clause. Is that 9 right? 10 MR. GRIEF: I think everyone was clear 11 on that. So we had much discussion on that item, and 12 we reached an agreement, at least as to the next 13 course of action that we would take. I offered to 14 have our legal team put together a position paper for 15 Texas on section 22 of the agreement. And the Mega 16 Millions group agreed to review that document, once 17 they receive it, provide their own legal analysis as 18 well, and then, most importantly, provide their 19 specific concerns to Texas about that existing 20 contractual language. That is something that I could 21 not get my arms around at the meeting. I committed to 22 providing that position paper to them in approximately 23 two weeks. 24 The second agenda item that was of 25 great interest to us was regarding our state's 0127 1 interest in the Powerball game. I have not received a 2 final response, a final written response, from the 3 Mega Millions group, as they committed to doing, to my 4 letter of November 16th on that matter. In our 5 discussions at the meeting in New York, a -- the Mega 6 Millions group was considering that a potential 7 conflict of interest might exist if a Mega Millions 8 member state were to join another multi-jurisdictional 9 game. And I questioned the logic of that idea with 10 the Mega Millions group. And by way of example, I 11 laid out to them my impression that the Mega Millions 12 group was very opposed to Texas joining Powerball, 13 based on what I heard them say was the potential 14 negative impact on overall Mega Millions revenue, but 15 the group didn't seem to have strong feelings at all 16 about any other gaming or game initiatives that the 17 State of Texas might undertake. And my thought was 18 that if they were truly concerned just about the 19 potential cannibalization effect of Texas joining Mega 20 Million -- or joining Powerball, then they should be 21 just as concerned about any other gaming or game 22 initiatives that might occur in this state. I want 23 you to know that I raised those issues, and I did not 24 get satisfactory answers to the questions that I 25 raised. 0128 1 Finally, I asked the group if there had 2 been any discussions in the past between the Mega 3 Millions group and the Powerball group about a 4 possible combining of those two games. And to my 5 surprise, I was told that discussions had been held 6 three years ago between certain directors of each 7 consortium and again, as recently as one year ago. 8 COMMISSIONER COX: After we got into 9 the game? 10 MR. GRIEF: That's correct. After we 11 got into the game. As I understand it, the decision 12 was reached both times by the Mega Millions directors 13 involved -- and I'm assuming Texas was not included in 14 those discussions -- that the odds of winning the top 15 prize would increase and become too large under a 16 combined game, and/or there would not be enough 17 jackpot winners in each state to satisfy the customer 18 bases. I'm thinking that a thorough, formal analysis 19 of that proposal may not have been performed. And I 20 have asked the Mega Millions group to send me the 21 notes that they have on both of those series of 22 discussions. They committed to do that. And I'm -- 23 I'm looking for those to arrive in the future, I hope. 24 And I'll provide the Commission with the written 25 response from the Mega Millions group regarding the 0129 1 Powerball issue just as soon as I receive it. 2 And I would be happy to answer any 3 questions. 4 COMMISSIONER COX: No, sir. 5 CHAIRMAN CLOWE: You're not going to 6 touch it? 7 COMMISSIONER COX: No, sir. 8 CHAIRMAN CLOWE: So they got together 9 and talked about it, and we weren't included. Is that 10 what you're telling us? 11 MR. GRIEF: That's my impression. 12 CHAIRMAN CLOWE: I don't ever remember 13 the former Executive Director, during that time, 14 reporting that he was in a meeting where the joining 15 of those two was discussed. Do you? 16 MR. GRIEF: I'm not aware of his 17 participation in any such meeting. 18 CHAIRMAN CLOWE: So there is a power 19 group there that we're not a part of. How does that 20 make you feel? 21 MR. GRIEF: It makes me feel 22 unappreciated. 23 COMMISSIONER COX: I can't stay out of 24 this. 25 CHAIRMAN CLOWE: Get in it. You're 0130 1 going to make a comment about the notes we're supposed 2 to get from the meeting? 3 COMMISSIONER COX: Well, you know, 4 I'll -- the check is in the mail. Right? We'll see 5 if it comes. 6 What did they say, specifically, Gary, 7 about the point that, gosh, we really don't want this 8 to be unanimous, but we know it would have to be 9 unanimous before we could change it? And I guess they 10 have already figured out that Texas isn't going to 11 vote to change it. So how are they going to get -- 12 what are they going to do with that? Do you have any 13 idea? 14 MR. GRIEF: No, Commissioner, I don't. 15 I -- I felt, to get us off the dime, we -- we had 16 reached an impasse in the meeting on that issue. And 17 I know that the legal committee of the Mega Millions 18 group had had discussions and conference calls about 19 that issue, and my impression from the Executive 20 Director from Michigan, I believe, who heads up the 21 legal committee, was he felt like Texas was being 22 inflexible on that point and didn't understand what 23 position we were coming from, hence my offer to have a 24 position paper drafted and provided to them. 25 Ultimately, I don't know where that would go. I see 0131 1 an immovable object meeting an irresistible force on 2 that one. And I'm not sure where we'll end up. 3 COMMISSIONER COX: Thank you for 4 representing us there. 5 CHAIRMAN CLOWE: Yes. Gary, we 6 understand that you are the representative, and you're 7 bringing this information back to us. And you're not 8 sponsoring it, other than just representing that's 9 what they told you. And so I want you to be certain 10 that there is no misunderstanding on your part about 11 our remarks of dissatisfaction in the answers. It's 12 not directed at you personally or in your official 13 capacity. But I think we've got two problems here. 14 One is that there is a -- a structure within the 15 organization that is not all-inclusive, and although 16 the bylaws, the structure of the organization, calls 17 for unanimity, there have been actions taken, I'm 18 told, without unanimous consent in the past. 19 MR. GRIEF: And -- and just to be 20 clear, there are a few actions that have been carved 21 out from the unanimity provision, such as the voting 22 of a head of the organization, such as the setting of 23 the jackpots that require less than unanimous. So my 24 continued probing of them was, what items are there 25 that cause you the heartache on the unanimity? If we 0132 1 can discuss those matters, perhaps we could then 2 consider carving those out to something that would be 3 satisfactory to both parties. But I just couldn't get 4 there. 5 CHAIRMAN CLOWE: And I think our legal 6 staff, when we entered this agreement, took a very 7 firm position on this issue. And we took a firm 8 position on auditing as well. And we've been less 9 than totally successful in more formal activity by 10 this organization in those areas. 11 On the joining of Powerball, I -- I 12 would say that I -- I think I understand, probably, 13 the opposition to that. There is probably some pride 14 of building the game, pride of membership in the game, 15 pride of the track record that Mega Millions has 16 created. And when we interviewed those two entities, 17 I saw the Mega Millions group as having one culture 18 and the Powerball group as having another culture. 19 And it's interesting that Powerball has said, we would 20 be glad to have you, and Mega Millions said, 21 absolutely not. I -- I don't think I'm prepared to 22 recommend any action at this time, but I want to keep 23 this subject before us. And I want to say, I think 24 it's incumbent on us to represent the players of the 25 state to achieve what is the best results for them. 0133 1 And my sense is, this is not going to go away in our 2 minds, and we want to continue to ask these questions 3 and get better answers than we have received at this 4 point in time. I think over a period of time, we will 5 win over thinking to the beneficial result of where 6 we're headed on these issues because I think it's a 7 more businesslike approach, and I think it's a more 8 formalized, professional approach. And I think it can 9 very likely benefit the players to have some 10 intermingling of the game. 11 COMMISSIONER COX: Gary, if you can, I 12 would like to see a cost-benefit analysis on this, and 13 y'all are probably already working on this. In a 14 perfect world, let's assume everybody loved each other 15 and we can do anything we wanted to. Would we make 16 more money if we were in both Powerball and Mega 17 Millions? And then we could see what kind of margin 18 there is against which we would have to weigh the 19 difficulty we might have with Mega Millions if we took 20 that action, whatever that difficulty might be defined 21 as by the lawyers. 22 MR. GRIEF: Very good. 23 CHAIRMAN CLOWE: Thank you, Gary. 24 Anything further? 25 MR. GRIEF: No, sir. 0134 1 CHAIRMAN CLOWE: Did you have 2 something, Andy? 3 MR. MARKER: No, Mr. Chairman. I was 4 just here to answer any questions if you have them. 5 CHAIRMAN CLOWE: You did a great job. 6 There -- there is just one other item 7 here. Actually, item seven, I think we have some 8 public persons who want to make a comment. Could we 9 go to that item? And then -- 10 COMMISSIONER COX: Of course. 11 CHAIRMAN CLOWE: -- following that 12 we'll go back to the public agenda. Gary, is your 13 report on the GTECH Corporation lengthy? 14 MR. GRIEF: No, sir, it's not. It's 15 not lengthy. 16 CHAIRMAN CLOWE: Let's take six, and 17 then we'll take seven, and then we'll go into 18 executive session, if we may, Commissioner. 19 COMMISSIONER COX: It might be a little 20 bit longer than that. 21 CHAIRMAN CLOWE: You think it might be? 22 COMMISSIONER COX: It might be. 23 CHAIRMAN CLOWE: Okay. 24 COMMISSIONER COX: Take a short break 25 now? 0135 1 CHAIRMAN CLOWE: Yeah, sure. Let's 2 recess very shortly and come back to order. 3 (RECESS.) 4 CHAIRMAN CLOWE: All right. We'll come 5 back to order, and -- and we'll take item number six, 6 report, possible discussion and/or action on GTECH 7 Corporation. Mr. Grief. 8 MR. GRIEF: Commissioners, regarding 9 the potential stock ownership change for GTECH 10 Corporation that's been raised in previous Commission 11 meetings, I have no new developments to report to you 12 on that item. As you know, the agency has issued an 13 RFP for legal services related to that potential 14 transaction. And I would ask Deputy General Counsel 15 Andy Marker to brief you on that matter if that's your 16 pleasure. 17 COMMISSIONER COX: It's up to you, 18 Mr. Chairman. 19 CHAIRMAN CLOWE: I think we're aware. 20 MR. GRIEF: Regarding the ongoing 21 discussions with GTECH about the manner in which our 22 lottery operator is compensated, there have been 23 additional meetings held between senior management at 24 GTECH and from the Texas Lottery, including 25 Commissioner Cox. The focus of these discussions 0136 1 continues to be the net versus gross issue. My sense 2 is these meetings are productive at this point, and I 3 will keep you informed as we continue to make 4 progress. 5 CHAIRMAN CLOWE: Thank you, Gary. 6 Next, item seven, report, possible 7 discussion and/or action on the lottery terminal 8 functionality, including quick pick feature for all 9 games and/or impact to players. Mr. Anger. 10 MR. ANGER: Good morning, Mr. Chairman, 11 Commissioner. For the record, my name is Michael 12 Anger, and I'm the Lottery Operations Director. 13 I'd like to provide you with an update 14 on the status of the agency's review of GTECH terminal 15 functionality related to the quick pick feature. 16 Commissioners, there is two areas that I would like to 17 report to you on today under this agenda item. 18 The first is the status of 19 Doctor Eubank's review of quick pick data sets for all 20 of the Texas on-line games. As I reported in a past 21 meeting, Doctor Eubank has completed his initial 22 review of the data sets, where he identified some 23 concerns related to his testing. This information was 24 communicated to GTECH Corporation. GTECH agreed to 25 provide Doctor Eubank with additional testing data and 0137 1 information regarding the system operations for 2 Doctor Eubank to complete a more thorough analysis and 3 draw final conclusions. I had reported at the last 4 meeting that progress on this interaction between 5 GTECH and Doctor Eubank had been delayed, due to 6 negotiations between the parties related to a 7 nondisclosure agreement that GTECH was pursuing, 8 related to their confidential interests. I am pleased 9 to report that these concerns were overcome and the 10 parties have begun exchanging information. And the 11 sharing of information and testing data is taking 12 place with Doctor Eubank and GTECH personnel at this 13 time. I anticipate that Doctor Eubank will complete 14 his analysis and sharing of information with GTECH in 15 the next couple of weeks, and I hope that he will be 16 able to come forward at the January meeting, depending 17 upon scheduling, to give a full report of his 18 findings. And that concludes my report on that item. 19 Also, I am joined today by 20 representatives from both GTECH and Deloitte and 21 Touche. And -- and, Commissioners, I wanted to bring 22 you up to speed and -- and refresh you on this. This 23 involves the -- the portion of the review related to 24 terminal functionality involving the Pick 3 quick pick 25 feature that was suspended on June 16th of this year, 0138 1 following GTECH's report of a computer code issue 2 that -- that they had identified. Commission staff 3 requested that GTECH engage an independent third party 4 to complete a review of this matter and the events 5 that led up to this occurrence. GTECH agreed and 6 engaged Deloitte and Touche to complete this review. 7 Additionally, staff requested that Deloitte and Touche 8 oversee the transfer of data for Doctor Eubank's 9 testing purposes. Deloitte has completed their 10 review, and Curtis Stewart, two to my right here, the 11 Director of Enterprise Risk Services for Deloitte and 12 Touche, and Tim Green at the end of the table, Senior 13 Manager for Deloitte and Touche, are joining me at the 14 table today, as well as Ramon Rivera, the Account 15 General Manager for GTECH Texas. And I believe that 16 Mr. Rivera would like to make some opening statements. 17 MR. RIVERA: Good afternoon, 18 Commissioners. 19 CHAIRMAN CLOWE: Good afternoon. 20 MR. RIVERA: Ramon Rivera, Account 21 General Manager for GTECH. I thought it might be 22 beneficial for the Commission to refresh the -- the 23 facts leading us to the point where we are today and 24 to go over the actual incident that occurred. As you 25 may know, any time that a new on-line game is either 0139 1 changed substantively or if there is a new game, there 2 are a series of tests that GTECH conducts to ensure 3 that the software is acting as it should. A component 4 of those tests is to -- data extraction from terminals 5 to ensure the randomness of Pick 3 data -- oh, excuse 6 me -- the randomness of data from the terminal for 7 that game which are used by players when they select 8 quick pick. In about June of 2005, GTECH engaged in 9 that sort of testing for -- in preparation for the 10 launch of a -- a new matrix for the Mega Millions 11 game. At the -- at that time, in June 2005, it was 12 also decided to test all other on-line games, that is, 13 to test the randomness of quick pick data for all 14 other on-line games. Although this wasn't required, 15 we determined to do that anyway since we hadn't had 16 changes in those games for quite a period of time, and 17 we had also improved our testing methodologies for 18 quick pick for determining randomness of -- of quick 19 pick data. 20 On June 6th -- excuse me. Those tests 21 are conducted by our facility in Rhode Island. The 22 tests of randomness are conducted by our facilities in 23 Rhode Island. 24 On June 16th, our local software 25 facility manager was informed that there was an 0140 1 abnormality in the quick pick data that was sent to 2 Rhode Island. In other words, there -- there -- the 3 quick pick information for Pick 3 appeared to be -- 4 there appeared to be an issue or a problem with that 5 information. The -- the local software organization 6 then began to determine, on June 16th, what could 7 cause that abnormality, and in the course of that 8 investigation, determined that there was an error in 9 the software that extracted data from the random 10 number generator that caused a slight abnormality. At 11 that point, again, on June 16th, I was notified that 12 that had occurred and that we had determined that 13 there was indeed an error in the software. When I was 14 informed, I then called Mike Fernandez, who was 15 director of IT at the time, and then subsequently had 16 a conference call with Gary Grief and other lottery 17 staff. During that -- the course of that discussion, 18 on -- again, on June 16th, it was determined that the 19 game -- the Pick 3 game should be disabled until GTECH 20 were -- was able to implement a correction to that 21 software. So the -- the game was disabled. I don't 22 recall the exact time, somewhere after 6:00 o'clock in 23 the evening. That evening, the evening starting on 24 June 16th, the code to correct the software was tested 25 and, ultimately, put into the system so that the 0141 1 morning of June 17th, we were able to -- again, to -- 2 to activate the Pick 3 game, understanding that the -- 3 the software had been corrected. 4 So that's the -- that -- that is the 5 sequence of events that got us to this point. The -- 6 it -- it may be in the Commission's mind as to when -- 7 who knew what at what time. The -- all of this 8 transpired on -- on June 16th, 2005. And as -- as 9 Mr. Anger mentioned, GTECH did engage Deloitte and 10 Touche to assist us in extracting data and -- and 11 looking at the controls and procedures that we have in 12 place to mitigate that -- this occurrence from 13 happening again. And the reports from Deloitte and 14 Touche have been provided to the Commission for their 15 review. I would be pleased to answer any questions at 16 this time. 17 CHAIRMAN CLOWE: Do you want to ask a 18 question now? Later? 19 COMMISSIONER COX: Is there a later? 20 CHAIRMAN CLOWE: Well, we haven't heard 21 from these folks. 22 COMMISSIONER COX: Oh, okay. Are we 23 going to hear from them next? 24 CHAIRMAN CLOWE: I would think. You -- 25 you want to present some information to us, don't you? 0142 1 MR. STEWART: We were just going to 2 discuss the scope -- we were just prepared to discuss 3 the scope of the procedures that we went through on 4 behalf of GTECH and the Texas Lottery Commission. 5 COMMISSIONER COX: Your pleasure. 6 CHAIRMAN CLOWE: Your pleasure. 7 Whatever you want to do. 8 COMMISSIONER COX: Let's go ahead and 9 hear theirs. 10 CHAIRMAN CLOWE: Okay. Proceed, 11 please. 12 MR. STEWART: Good afternoon, 13 Commissioners. For the record, my name is Curtis 14 Stewart, and I'm a director with the accounting firm 15 of Deloitte and Touche. 16 We were contracted earlier this year to 17 really do three services on behalf of GTECH and Texas 18 Lottery Commission. The first area related to a 19 document that GTECH had prepared and submitted to the 20 Commission. It was referred to as the talking points 21 document, which generally outlined several questions 22 and answers related to the Pick 3 programming issue, 23 how it came about from -- from GTECH's perspective, 24 the ramifications to other on-line games. There were 25 a series of about 10 to 12 categories of topics. The 0143 1 first area that Deloitte and Touche was asked to look 2 into was to independently look at the background 3 related to those issues and provide our -- our 4 independent perspective on those topics. 5 The second area that we were asked to 6 look at were the procedures and control activities 7 that GTECH had instituted more recently, subsequent to 8 this programming issue arising, that would prevent 9 future occurrences from happening or provide some 10 comfort level that -- that similar occurrences would 11 not arise in the future. That second area we actually 12 conducted an audit of from January 1 of this year 13 through July 31st of this year, as it related to those 14 procedures and control activities. 15 The third area that was alluded to by 16 Mr. Anger related to the data that was to be extracted 17 from the live on-line gaming environment, also data 18 that was generated through simulation as it related to 19 the on-line games, to be provided to the -- the 20 Commission's third party statistic -- statistician, 21 Doctor Eubank, to evaluate the randomness of the quick 22 pick functionality, both before the correction was 23 made, on June 16th, to the on-line games, as well as 24 subsequent to that correction, to evaluate statistical 25 validity both before and after that correction. 0144 1 Deloitte and Touche provided service to GTECH and the 2 Commission to provide what we call chain of custody as 3 it related to the -- to the acquisition of that data, 4 the reconciliation of the data to the -- to the live 5 processing production reports that are produced during 6 the course of the normal day-to-day activities of the 7 lottery, and then to provide -- to take physical 8 custody of that data and provide that data to 9 Doctor Eubank. 10 CHAIRMAN CLOWE: Have at it. 11 COMMISSIONER COX: I'm looking at GTECH 12 Corporation, Pick 3 software programming assessment, 13 page three. The third bullet point, up toward the 14 top, says, the Pick 3 programming issue was in 15 operation from March 2002 through June 2005. So for a 16 period of more than three years, we had people playing 17 this game and buying quick picks that were not 18 randomly generated. Is that -- is that true? 19 MR. GRIEF: I don't know if that's the 20 appropriate verbiage. 21 How would you describe that, Ramon? 22 MR. RIVERA: The -- I -- I guess I 23 would respond to your -- your question this way, 24 Commissioner. The -- the actual numbers that are 25 drawn for -- to determine the winning numbers, are 0145 1 totally independent of the terminal. So in that 2 regard, the numbers that are being drawn by the Texas 3 Lottery were random. What the terminal does -- and 4 every individual terminal generates a series of 5 numbers which are quick pick numbers. The abnormality 6 that was found was relatively slight. The 7 abnormality -- if you take -- let's see, and I'm 8 delving here in the world of statisticians, so I don't 9 want to misrepresent anything. 10 COMMISSIONER COX: Let me see if we 11 nonstatisticians -- 12 MR. RIVERA: Yeah. That's good. 13 COMMISSIONER COX: -- can -- can get 14 here. It looks to me like what we've got is on the 15 one hand a truly random number, and that's the 16 winners. 17 MR. RIVERA: Yes, sir. 18 COMMISSIONER COX: And on the other 19 hand, we have numbers that people thought were truly 20 random, and they were actually biased toward one 21 through four. 22 MR. RIVERA: Yes. They were -- they 23 were biased through one through four in that there was 24 an 11 -- less than a -- slightly less than 11 percent 25 chance that the numbers one through four would appear, 0146 1 and a slightly greater chance -- greater than nine 2 percent that the other numbers, that is, five through 3 zero, would appear. 4 COMMISSIONER COX: So you've got truly 5 random over here, in terms of the outcome. You've got 6 not random over here in terms of the supposedly random 7 selection of numbers for the player. What did he end 8 up with? 9 MR. RIVERA: I -- I don't -- I -- I'm 10 not a statistician, sir, so I don't know the -- 11 COMMISSIONER COX: We're not 12 statisticians. Do you end up with a biased result 13 that anybody could claim was -- they were damaged by, 14 or do you end up with -- because one was random, it 15 doesn't matter that the other wasn't? Or where do you 16 end up with all this? 17 MR. ANGER: Commissioner, I may be able 18 to respond to that. Doctor Eubank and -- and as was 19 outlined, part of the analysis that we requested from 20 Doctor Eubank was, one, to go back and look at actual 21 live data before June 16th, to validate that, indeed, 22 the degree of bias that GTECH had identified was 23 actually true and representative of the data that he 24 looked at, and then to go in and look at live data 25 after the fix was implemented to ensure that there did 0147 1 not appear to be any further bias that existed. And 2 these questions were posed to him with regard to the 3 identified bias by GTECH. And the response to that 4 question -- and -- and I'll paraphrase here, as 5 Doctor Eubank is not present -- was essentially, every 6 player who had a quick pick for the game received a 7 set of numbers. And those numbers -- there may have 8 been a bias in the way those numbers were generated, 9 but they received a -- a set of numbers that allowed 10 them to play on the game. And the drawing, where 11 there has been no question about the randomness of the 12 drawings takes place and every number combination has 13 the same probability of coming up. So whereas, there 14 might be a situation where there was a bias and a more 15 likelihood that you might get a one, two, three, or 16 four in a quick pick combination, that bias wouldn't 17 impact your ability to win the game because the 18 drawing is separate and independent, and -- and it's 19 been shown to be random. And that's something that we 20 randomly run data through Doctor Eubank to -- to 21 analyze for us. 22 COMMISSIONER COX: Okay. So we've got 23 an aberration here, but nobody was hurt by it is what 24 I heard you say? 25 MR. ANGER: I believe that's correct. 0148 1 COMMISSIONER COX: Thank you, 2 Mr. Chairman. 3 CHAIRMAN CLOWE: Anything further? 4 Thank you, gentlemen. 5 Commissioner Cox, with your permission, 6 I'll move that we go into executive session. 7 COMMISSIONER COX: Yes, sir. 8 CHAIRMAN CLOWE: At this time I move 9 the Texas Lottery Commission go into executive session 10 to deliberate the appointment, employment, and duties 11 of the Executive Director, acting Executive Director, 12 and or Deputy Executive Director; deliberate the 13 duties and evaluation of the Internal Audit Director 14 and the Charitable Bingo Operations Director; and to 15 deliberate the duties of the General Counsel, pursuant 16 to Section 551.074 of the Texas Government Code; to 17 receive legal advice regarding pending or contemplated 18 litigation, and/or to receive legal advice pursuant to 19 Section 551.071(1)(A) or (B) of the Texas Government 20 Code, or to receive legal advice pursuant to Section 21 551.071(2) of the Texas Government Code, including but 22 not limited to: 23 Patsy Henry versus Texas Lottery Commission 24 Linda Cloud versus Mike McKinney et al. 25 James T. Jongebloed versus Texas Lottery Commission 0149 1 Russell Verney versus Carol Keeton Strayhorn, et al. 2 GameTech International versus Greg Abbott, et al. 3 GameTech International versus -- et al. versus Gregg 4 Abbott, et al. 5 In Regard Matter Involving Assignment of Lottery Prize 6 of Walter Gonzales 7 Michael Sanchez, et al. versus Texas Lottery 8 Commission, et al. 9 Charles Isbell versus Atkins, et al. 10 Texas Lottery Commission versus Joel Bowen and 11 Associates, Inc. d/b/a JB and Associates 12 Employment law, personnel law, procurement law, 13 contract law, evidentiary and procedural law, and 14 general government law and the Lottery Operator 15 contract, Mega Millions game and/or contract. 16 Is there a second? 17 COMMISSIONER COX: Second. 18 CHAIRMAN CLOWE: All in favor, please 19 say aye. The vote is two-zero in favor. The Texas 20 Lottery Commission will go into executive session. 21 The time is 12:48 p.m. Today is December the 15th, 22 2005. 23 (EXECUTIVE SESSION) 24 CHAIRMAN CLOWE: The Texas Lottery 25 Commission is out of the executive session. The time 0150 1 is 2:10 p.m. Is there any action to be taken as a 2 result of the executive session? 3 If not, let's move to item number 4 eight, report, possible discussion and/or action on 5 the lottery advertising and promotions. Mr. Anger. 6 MR. ANGER: Good afternoon, again, 7 Commissioners. For the record, my name is Michael 8 Anger, and I'm the Lottery Operations Director. 9 Commissioners, to update you on our 10 advertising efforts, the holiday instant ticket 11 campaign is currently running in the general and 12 ethnic markets. The television flight began 13 December 5th and will continue through December 24th. 14 The campaign is being supported by radio, outdoor, and 15 POS advertising. And currently we're running live 16 reads on radio at a hundred percent in support of the 17 holiday instant ticket scratch off campaign unless the 18 Megaplier campaign -- unless Mega Millions jackpots 19 raise over 100 million dollar level, in which case we 20 would switch over to supporting that product. 21 And with your permission, 22 Commissioners, I would like to share with you some 23 samples of the agency's holiday television spots, 24 created by Cultura, the agency the DDB Dallas has 25 subcontracted with to assist in conducting the 0151 1 Commission's ethnic market advertising services. 2 (The advertising spot is played.) 3 MR. ANGER: Commissioners, those are 4 our Hispanic English market advertising commercials, 5 and the next spot is the same spot in Spanish. 6 (The advertising spot is played.) 7 MR. ANGER: And, Commissioners, the 8 final spot today is our African-American spot. 9 (The advertising spot is played.) 10 MR. ANGER: And once again, those spots 11 will be running through December 24th, in support of 12 the instant ticket scratch off games. 13 COMMISSIONER COX: Those are actually 14 good. 15 MR. GRIEF: Did the court reporter get 16 that? 17 MR. ANGER: Thank you, Commissioner. 18 COMMISSIONER COX: But whether they're 19 good is not important. Will they sell lottery 20 tickets? 21 MR. ANGER: We're confident that they 22 will, sir. 23 To -- to wrap up, Commissioners, we ran 24 four promotions this month. Three of those were 25 lottery races, conducted in coordination with the 0152 1 Central Texas -- or the Central State Hockey League. 2 The Fort Worth Brown was on December 2nd, the Laredo 3 Bucks on December 10th, and then the final race is 4 scheduled for tomorrow with the Amarillo Gorillas. 5 And we conducted one selling event, which was the 6 Christmas Market in Boerne. That took place on 7 December 10th. That concludes my comments. 8 CHAIRMAN CLOWE: Very good. 9 MR. ANGER: Thank you, Commissioners. 10 CHAIRMAN CLOWE: Thank you. 11 Number nine, report, possible 12 discussion and/or action on HUB and/or minority 13 business participation, including the agency's 14 mentor/protege program. Joyce. 15 MS. BERTOLACINI: Good afternoon, 16 Commissioners. I don't know why we always get so 17 close to my agenda item every time we are ready to 18 adjourn, but for -- for what it's worth, for the 19 record, my name is Joyce Bertolacini, and I'm the 20 Coordinator of the TLC's Historically Underutilized 21 Business program. 22 I have provided some copies of the most 23 current monthly HUB minority contracting activity 24 report, and I have put those into your notebooks 25 behind tab number nine this morning. And the report 0153 1 includes all fiscal year 2006 expenditures paid from 2 September 1st, 2005, through December the 9th, 2005. 3 It's a little bit of a strange cutoff date, but I 4 wanted to make sure that it was as up-to-date as 5 possible. Our total qualifying expenditures as of 6 December 9th were approximately 37.1 million, and our 7 estimated HUB minority utilization was 9.4 million, 8 which equates to 25.31 percent. And so you can see 9 since the last report that we have kind of done 10 that -- the leveling off has happened with the 11 expenditures. 12 Also, I wanted to let you know that 13 we're continuing to work on the FY 2005 minority 14 business participation report. That's the annual 15 report that we have to turn in to the legislature. 16 And I had hoped to be able to present that at next 17 month's meeting, depending on the schedule. 18 And at this point there are no updates 19 on the Mentor/Protege program, but I'm happy to answer 20 any questions you might have. 21 CHAIRMAN CLOWE: Thank you, Joyce. 22 MS. BERTOLACINI: Thank you. 23 CHAIRMAN CLOWE: Next, item ten, 24 report, possible discussion and/or action on the 25 agency's contracts. Tom. 0154 1 MR. JACKSON: Good afternoon, 2 Commissioners. For the record, my name is Tom 3 Jackson, Purchasing and Contracts Manager for the 4 agency. 5 In your notebooks, under agenda item 6 number ten, is a report on prime contracts that have 7 been updated for your review. If you have any 8 questions, I would be happy to respond. 9 CHAIRMAN CLOWE: Are there any 10 questions? 11 COMMISSIONER COX: The Ipsos-Reid 12 contract goes through -- now, this says the initial 13 term is through '05, 8-31. So it's -- one of the 14 options has been taken, and it apparently expires 8-31 15 of '06. 16 MR. JACKSON: That's correct. 17 COMMISSIONER COX: When will 18 considerations begin as to whether that will be rebid 19 or extended? 20 MR. JACKSON: I would imagine that 21 would be taking place shortly after the first of the 22 year, discussions as to what they want to do with 23 those. 24 COMMISSIONER COX: Thank you, 25 Mr. Chairman. 0155 1 MR. JACKSON: Uh-huh. 2 CHAIRMAN CLOWE: Thank you, sir. 3 Next, item 11, report, possible 4 discussion and/or action on the 79th Legislature. 5 Nelda. 6 MS. TREVINO: Good afternoon, 7 Commissioners. For the record, I'm Nelda Trevino, the 8 Director of Governmental Affairs. 9 I want to provide a brief update 10 related to the agency's appearance before the House 11 Licensing and Administrative Procedures Committee, on 12 November the 14th. The agency has provided additional 13 information regarding several issues discussed at the 14 hearing to each member of the committee. 15 Additionally, at our last Commission meeting, I 16 reported that agency staff provided a tour of the 17 disaster recovery site to staff of Representative Kino 18 Flores's office and of Representative Mark Homer's 19 office. And since that report, agency staff has also 20 provided a tour to Representative Charlie Geren. 21 Lastly, we want to -- we will continue 22 to monitor legislative interim committee activities 23 and will keep you up-to-date on any developments 24 related to those matters. That concludes my report, 25 and I'll be happy to answer any questions. 0156 1 COMMISSIONER COX: Nelda, was there any 2 feedback from those staff people or from Chairman 3 Geren about what they saw on that tour? 4 MS. TREVINO: Commissioner Cox, there 5 was -- there was some feedback. The staff person from 6 Chairman Flores's office compiled, in her opinion, 7 kind of a summary of the tour that took place. And 8 she shared that summary with staff and other members 9 of the licensing committee and also shared that with 10 the agency. In regards to -- and then after that 11 communication that she sent out to those members' 12 offices, we have not heard anything else. With 13 regards to Representative Geren and his tour of the 14 site, and I don't want to speak on his behalf, 15 obviously, but it was certainly my impression and 16 based on some of the comments that he made during the 17 tour was that he was very satisfied with what he had 18 seen. 19 COMMISSIONER COX: Okay. Thank you. 20 CHAIRMAN CLOWE: Thank you. Thank you, 21 Nelda. 22 Next, item 12, consideration of and 23 possible discussion and/or action on the external and 24 internal audits and/or reviews relating to the Texas 25 Lottery Commission and/or the Internal Audit 0157 1 Department's activities. Catherine. 2 MS. MELVIN: Good afternoon, 3 Commissioners. For the record, I'm Catherine Melvin, 4 Director of the Internal Audit Division. 5 I have a very brief update on both 6 external and internal audits of the agency. 7 Regarding external reviews, the State 8 Auditor's Office, in conjunction with the independent 9 accounting firm, Maxwell Locke & Ritter, have -- or 10 has completed the annual financial audit. The 11 auditors have also completed the agreed upon 12 procedures related to the Mega Millions game, and I 13 anticipate the auditors presenting the results of 14 their engagement at the next scheduled Commission 15 meeting. 16 The State Auditor's Office does have 17 two audits that are currently in progress, and I 18 believe I've mentioned them at the prior Commission 19 meeting. One is a human resources audit, which 20 includes a job classification compliance component, 21 and the other is a security audit. Internal audit has 22 set up standing periodic status meetings to help 23 facilitate communication regarding the progress of 24 those audits and also to resolve any issues 25 outstanding with the management and the auditors both. 0158 1 And, lastly, we continue to await final 2 results of the post-payment audit performed by the 3 Comptroller's Office. 4 Regarding internal reviews, Internal 5 Audit has completed its review of sales reporting. We 6 held the exit conference with Commissioner Cox and 7 management on Friday, December 9th. The report was 8 released December 12th. A copy of that report has 9 been placed before you. If it is the desire of the 10 Commissioners, the audit team is available and can 11 join me at the table to present more detailed results 12 of that review. 13 COMMISSIONER COX: I've already seen 14 it, Mr. Chairman. 15 CHAIRMAN CLOWE: We're satisfied. 16 Thank you, Catherine. 17 MS. MELVIN: I think that's all I have 18 today. 19 CHAIRMAN CLOWE: Thank you very much. 20 MS. MELVIN: Thank you. 21 CHAIRMAN CLOWE: Next, we'll go to item 22 number 16, consideration of the status and possible 23 entry of orders. And let's consider firstly, 24 Mr. White, those dockets represented by the letters A 25 through D. Those are on 4534 Chevron, Sana Texaco, 0159 1 P&H Food, and Buy Low Stop. 2 MR. WHITE: Yes, sir. For the record, 3 my name is Stephen White, Chief of Enforcement. 4 Those four proposals for decisions are 5 all lottery cases related to retailers who failed to 6 have sufficient funds in their accounts. The 7 administrative law judge recommended revocation in 8 each of those cases, and the staff recommends that you 9 adopt the ALJ's recommendation in each of those cases. 10 CHAIRMAN CLOWE: Any questions? 11 COMMISSIONER COX: No, sir. 12 CHAIRMAN CLOWE: Move the adoption of 13 the staff recommendation. 14 COMMISSIONER COX: Second. 15 CHAIRMAN CLOWE: All in favor, please 16 say aye. The vote is two-zero in favor. 17 Next, the Docket Number 362-05-6464.B, 18 represented by the letter F. Mr. White. 19 MR. WHITE: Yes, sir. This is a case 20 that was continued from the last Commissioners' 21 meeting, the case of Arthur Rothenburg, the hearing to 22 remove him from the registry of approved workers for 23 conducting a bingo occasion outside the licensed time. 24 Again, the administrative law judge found that he did 25 violate a criminal provision of the act of conducting 0160 1 a bingo outside licensed time, outside his license. 2 However, the administrative law judge further 3 recommended a thousand dollars administrative penalty, 4 not recommend that he be removed from the workers 5 registry, based on the fact that his interpretation of 6 the phrase, affects the integrity of any bingo game, 7 was a -- his interpretation of that, a very narrow 8 interpretation of that, only applies to actions that 9 affect, basically, the fairness of the game. To use 10 his words, only if the odds of winning a game are 11 somehow compromised. The staff has urged that the 12 Commission adopt a much broader interpretation of that 13 phrase to include conduct of bingo generally, and we 14 have submitted a brief on that issue and attempted to 15 answer Commissioner Cox's three questions that he 16 presented last time. 17 But, basically, again, to summarize the 18 staff's position, we would ask that you interpret that 19 phrase broadly, to include integrity of the bingo 20 profession in general. And operating outside of a 21 license, particularly when the administrative law 22 judge -- administrative law judge found a violation of 23 the Act in that regard, and particularly a criminal 24 violation, that that should be considered an action 25 contrary to the integrity of a bingo game. And I can 0161 1 answer questions or go into greater detail, although I 2 think my brief, the State lays out the staff's 3 position on that. 4 COMMISSIONER COX: Mr. White, I hear 5 you saying that the -- this is a criminal violation, 6 and I hear you saying that the administrative law 7 judge knew it was a criminal violation and he made a 8 recommendation knowing that. So it's not as though he 9 didn't know that was a criminal violation. So you're 10 asking us to substitute our judgment for his and 11 determine that either this -- the mere fact that it 12 was a criminal violation is more important than he 13 thought it was, or that his determination of integrity 14 of the game and impacting the integrity of the game is 15 inappropriate and we should substitute ours for his. 16 Is that what you're asking? 17 MR. WHITE: Yes, sir. It is more of 18 the latter. This is a policy decision which is a -- 19 the Commission sets policy, not administrative law 20 judges. Their job is to ascertain facts and make 21 conclusions of law, not to dictate to the agency what 22 the agency's policy is -- 23 COMMISSIONER COX: Well, that -- thank 24 you, Mr. White. 25 Mr. Chairman, I'm -- I want to read 0162 1 from the transmittal letter which Mr. White just used 2 some of the language from. This is the transmittal 3 letter from the administrative law judge. 4 The statutory phrase, impacting the 5 integrity of the game, of the Bingo Enabling Act 6 suggests that the odds of winning a bingo game are 7 somehow compromised -- which Mr. White referred to -- 8 that the winner of a bingo game is somehow picked in a 9 nonrandom fashion, or that the winning proceeds are 10 converted. To put it in context, most of this section 11 talks about dishonest events that could happen to a 12 bingo game to impact the fairness, honesty, or 13 integrity of the game. Nothing like that happened in 14 this case. In this case, Mr. Rothenburg simply 15 conducted and extended the game 15 minutes longer than 16 was permitted by the bingo license of the organization 17 for whom he was conducting the game, either 18 accidentally or intentionally. Staff was unable to 19 persuade me that there was anything evil or corrupt 20 about Mr. Rothenburg's actions in this limited 21 situation. I stand right where the judge does. 22 CHAIRMAN CLOWE: Very good. Is there a 23 motion? 24 COMMISSIONER COX: Well, I -- there are 25 a couple more things that I want to address because 0163 1 there were three issues that I asked Mr. White to 2 brief us on. That was one of them. The other was, 3 what is the authority of the bingo auditor, because 4 there is the implication in this case that part of 5 what Mr. Rothenburg did wrong was not shut down the 6 game when the bingo auditor told him to. And I think 7 Mr. White's brief would support my conclusion, which 8 is that operators are operators and regulators are 9 regulators, and we can't regulate if we operate. And 10 if we tell people how to run the game, whether it -- 11 and when to shut it down, what color the balls are to 12 be, or whatever, we are in the business of operating, 13 not regulating. So I hope it's clear that there is a 14 line on the bingo side that's not quite that drawn on 15 the lottery side because we're operating and 16 regulating there. But on the bingo side, I think it's 17 pretty clear that we are regulators and not operators, 18 and that the operators shouldn't do what we say just 19 because we say so on the spot. We've got a notebook. 20 We write it down. We write them up. We administer 21 whatever sanctions are appropriate. But we don't go 22 in and try to tell them how to run the game realtime. 23 Thirdly, as to the final point, as to 24 have we had any other cases like this, it turns out we 25 had one that was kind of like this but not quite the 0164 1 same. And my point really there was, we should be 2 consistent in how we do things. If one person 3 qualifies for a thousand dollars plus the death 4 penalty, everybody that does something of a minor 5 nature like this should qualify for the same thing. 6 And so, Mr. Chairman, I would move that 7 we -- we uphold the recommendation, I believe it is, 8 of the administrative law judge and let the thousand 9 dollar fine that has been sufficed -- that has been 10 assessed suffice for the punishment in this case. 11 CHAIRMAN CLOWE: Second. All in favor, 12 please say aye. Opposed, no. The vote is two-zero. 13 Thank you, Mr. White. 14 Next, item number 17 -- 15 MS. KIPLIN: Mr. Chairman, may I 16 interrupt for just one second? 17 Mr. White, would you draft an order 18 that is consistent with the Commission today? 19 MR. WHITE: Yes, ma'am. I think I have 20 one prepared right now that's -- 21 MS. KIPLIN: Okay. Okay. Thank you, 22 sir. 23 CHAIRMAN CLOWE: Number 17, report by 24 the Acting Executive Director and/or possible 25 discussion and/or action on the agency's operational 0165 1 status and FTE status. Gary. 2 MR. GRIEF: Commissioners, I have 3 nothing further to report today. 4 CHAIRMAN CLOWE: Thank you, sir. 5 Number 18, report by the Charitable 6 Bingo Operations Director -- any questions? 7 COMMISSIONER COX: No, sir. 8 CHAIRMAN CLOWE: Pardon me. 9 Report by the Charitable Bingo 10 Operations Director and possible discussion and/or 11 action on the Charitable Bingo Operations Division's 12 activities. Mr. Atkins. 13 MR. ATKINS: Commissioners, the only 14 additional thing I had planned on having was an update 15 on the status of the BAC nominations, but I haven't 16 received an update from that group yet, so I don't 17 have anything for you at this time. 18 CHAIRMAN CLOWE: And when is the next 19 BAC meeting on the agenda? 20 MR. ATKINS: It is tentatively 21 scheduled for February. And I don't recall the -- the 22 exact date. 23 CHAIRMAN CLOWE: Great. Any questions? 24 COMMISSIONER COX: I do have a 25 question, Billy. And I think I expressed this to you 0166 1 and perhaps to Suzanne as well. And that is, we're 2 losing some very effective people off the BAC. And I 3 hope that -- that there is appropriate consideration 4 given to the balance between getting new blood and 5 keeping the strength that we have in looking at 6 nominations. Said more directly, I hope that there is 7 not a bias that prohibits reappointment of some of 8 those people if they are needed and if they're willing 9 to serve. 10 MR. ATKINS: I don't think there is 11 anything to prohibit anyone from reapplying for 12 consideration. 13 COMMISSIONER COX: And now that you say 14 reapplying, are we doing -- or "we" being your staff 15 or Suzanne or whoever is appropriate, reaching out to 16 people that we think would be good folks and asking 17 them to apply? 18 MR. ATKINS: We have not targeted 19 specific individuals, Commissioner Cox. We have 20 promoted to the industry as a whole every way we know 21 how. As a matter of fact, I just approved today 22 another notice that we're going to be mailing out, 23 particularly as it relates to the commercial lessor 24 position, because I do recall Kimberly Rogers from the 25 BAC telling me that they were in need of nominations 0167 1 in that area. So we're targeting yet another 2 notification to that group specifically. 3 COMMISSIONER COX: And is that the slot 4 that Danny holds now? 5 MR. ATKINS: Danny is a -- I think is a 6 distributor. 7 COMMISSIONER COX: Okay. Who holds the 8 commercial lessor spot? 9 MR. ATKINS: Mario Manio, whose term 10 expired February of this year, and, actually, Suzanne 11 Taylor, I believe, is also a commercial lessor. 12 COMMISSIONER COX: And so what is the 13 expiring scenario? 14 MR. ATKINS: Mario's expired in 15 February of this year. Suzanne's is scheduled to 16 expire in February of '06. And, again, in an attempt 17 to get a broader pool of nominees, we started our 18 process much earlier. We began advertising these 19 vacancies back in -- I believe it was October. 20 COMMISSIONER COX: Well, I -- a year 21 ago I wouldn't have said this, but I -- I think that 22 this committee has significantly improved its 23 effectiveness, and I would hope that people would be 24 more interested in serving on this now than they might 25 have been before. So I am glad you're moving along. 0168 1 MR. ATKINS: Thank you, Mr. Chairman. 2 CHAIRMAN CLOWE: Thank you. 3 Is there anyone wishing, under item 4 number 19, to make public comment to the Commission at 5 this time? 6 Counselor, do you have an order? 7 MS. KIPLIN: No, I don't. And what we 8 will do is circulate that order to you all. And it 9 will be consistent with your vote today, and if not, 10 we'll hold it until the next Commission meeting. 11 CHAIRMAN CLOWE: We can sign it after 12 we return. 13 MS. KIPLIN: Sure. 14 CHAIRMAN CLOWE: Anything further to 15 come before this Commission at this time? Then, thank 16 you all very much. We're adjourned at 2:35 p.m. 17 18 19 20 21 22 23 24 25 0169 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, BRENDA J. WRIGHT, Certified Shorthand 7 Reporter for the State of Texas, do hereby certify 8 that the above-captioned matter came on for hearing 9 before the TEXAS LOTTERY COMMISSION as hereinafter set 10 out, that I did, in shorthand, report said 11 proceedings, and that the above and foregoing 12 typewritten pages contain a full, true, and correct 13 computer-aided transcription of my shorthand notes 14 taken on said occasion. 15 Witness my hand on this the 22ND day of 16 DECEMBER, 2005. 17 18 19 BRENDA J. WRIGHT, RPR, 20 Texas CSR No. 1780 Expiration Date: 12-31-06 21 WRIGHT WATSON & ASSOCIATES Registration No. 225 22 Expiration Date: 12-31-07 1801 N. Lamar Boulevard 23 Mezzanine Level Austin, Texas 78701 24 (512) 474-4363 25 JOB NO. 051215BJW