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Tuesday, April 10, 2012

Lottery director: 'If this gets out, we're all going to lose our jobs'

Posted By on Tue, Apr 10, 2012 at 9:53 PM

Bishop Woosley image
Last September, after Arkansas Lottery Auditor Michael Hyde discovered that then-Lottery Director Ernie Passailaigue had altered the terms of a contract with the lottery's largest vendor, he explained his findings to Lottery Commissioner Bruce Engstrom, a certified public accountant, at the Arkansas Lottery offices. Once Engstrom reviewed Hyde's preliminary findings and saw how favorable the new terms were to the vendor, Scientific Games (SGI) — estimated by Hyde to cost the lottery more than $21 million over the seven-year term of the contract — he and Hyde went through the findings with Lottery Director Bishop Woosley, at the time lottery legal counsel and formerly the procurement director. According to Engstrom, when Hyde began discussing investigating whether another vendor should've won the contract based on its bid, Woosley said, "If this gets out, we're all going to lose our jobs."

Days later Hyde and Woosley met with Passailaigue and his lieutenant David Barden, who pointed to Tel-Sell, a sales and customer support operation run by Scientific Games for the Lottery that includes four staffers, as a service the lottery received in exchange for the new contract terms. Neither Passailaigue nor Barden offered any other explanation for the altered terms, according to notes from the meeting and Engstrom. The day after that meeting Passailaigue tendered his resignation. Barden followed shortly after.

After the lottery hired communications director Julie Baldridge as interim director, Engstrom said he pushed for consideration of the issue to be delayed until the lottery hired a permanent director.

On Wednesday afternoon, the Lottery Commission will meet to again consider the validity of that contract with Scientific Games. It's also expected to go into an executive session to evaluate Hyde and Woosley. Hyde will likely present a final version of his audit of the lottery's contract with SGI. A copy of the audit was sent to commissioners last week.

WEDNESDAY MORNING EDITORIAL FROM MAX:

Michael Hyde presents strong evidence that contract amendments approved by Ernie Passailaigue with lottery vendors didn't comply with the law. Bishop Woosley, now the man in charge and the lottery's former legal counsel, was on the staff then and working for Ernie P. He disagrees. Investigations are underway on whether a taxpayer lawsuit might be in order to settle this difference of opinion.

A matter on which there is no dispute is that the South Carolina Swindle puts millions of extra dollars in the pockets of lottery vendors by taking them away from gamblers and college students' scholarships. The deal stinks. It is far worse than industry standards. If it wasn't such a stinker, Scientific Games wouldn't be offering $2 million in chump change to make the controversy go away. (It isn't the only big vendor favored by contracts better than those typically awarded.)

If the Lottery Commission today tries to, effectively, backdate approval of this rotten deal and, in the bargain, punishes an internal auditor for vigorously vetting the integrity of the lottery operation, it will have forever lost what public credibility it ever had. The University of Arkansas and Jeff Long set a high standard yesterday. Will the Lottery Commission do so well today?

Nothing substantive has changed in Hyde's narrative, which we've previously reported: In 2009, nearly a week after the Lottery Commission agreed to a contract with SGI to provide the lottery with scratch-off tickets, former Arkansas Lottery Director Ernie Passailaigue altered the terms of the contract without approval from the Arkansas Lottery Commission or the Arkansas Lottery Commission Legislative Oversight Committee. From when the lottery began in September 2009 until Feb. 29, 2012, the difference between the original terms and the terms to which Passailaigue agreed have cost the lottery approximately $7.5 million. The altered terms also made SGI the exclusive ticket provider, a deal that "appears to greatly benefit Scientific Games," according to the audit.

Hyde recommends that Lottery management "seek legal guidance as to the validity of the contract pricing." If the terms are found not to be binding, he recommends recovering the additional cost incurred by the lottery and ensuring that the original terms are upheld throughout the rest of the life of the contract.

SGI has offered the lottery a $2 million credit as an incentive for the state to keep contracting with SGI and "not in the performance of any obligation or as an admission of any kind of liability." The commission is expected to consider whether to accept the proposed settlement tomorrow.

Woosley contended at the last commission meeting that the commission "acquiesced" to the altered terms by not contesting them in a commission meeting. He also said that the commission's procurement rules gave Passailaigue the authority to change the contract.

At the last commission meeting, Scientific Games vice president and legal counsel Phil Bauer read a prepared statement, citing the more than $176 million dollars it helped the lottery generate. "We take our reputation for high integrity very seriously, and compliance with all applicable laws, rules and regulations in our business operations is of the highest priority to Scientific Games," he said. And later, "While we understand the role of the internal auditor and welcome and support transparency in government, we cannot continue to stand by as our reputation suffers damages by these repeated and unjustified attacks." He asked the commission to reaffirm its commitment to Scientific Games.

Bruce Engstrom image
  • Bruce Engstrom

Commissioner Engstrom said that he is opposed to taking action at tomorrow's meeting. "The issues are too important to sweep it under the rug at this time," he said.

Asked about the contract dispute on the March 30 edition of "Arkansans Ask: Governor Mike Beebe," the governor said he'd asked his in-house counsel to look into it and that settling the dispute may take an attorney general's opinion.

"It doesn't take any legal analysis to see that what he did was wrong," Beebe said of Passailaigue. "It was wrong for him to do that. That in and of itself would've have amounted to a firing offense. Does that render the contract as changed illegal? I don't know the answer."

Pressed by host Steve Barnes as to his sense of the deal, Beebe said, "My initial sense is that if it was wrong to do it, then it's illegal."

Engstrom said to his knowledge, the commission has not sought outside counsel.

Asked about the timing of the performance review of Hyde, Engstrom said, "I think it’s extremely inappropriate. Too coincidental. I could see how a reasonable person might draw the conclusion that there’s some type of coercive action going on with respect to that."

Despite repeated calls today, the Times was unable to reach Lottery management for comment.

There's a legal angle worth watching. Will the attorney general's office ever be asked to weigh in? Attorney General Dustin McDaniel is an old friend, from law school days, of Bishop Woosley.

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