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Iowa Lottery investigation highlights difficult balance between security and profits

Jun 6, 2017, 2:48 pm

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Iowa LotteryIowa Lottery: Iowa Lottery investigation highlights difficult balance between security and profitsRating:

DES MOINES, Iowa — For more than a year while he worked at the Brick Street Market in Bondurant, Iowa, Matthew Hinrichs quietly stole lottery tickets, cashing in at least $28,000 in illegitimate prize money, prosecutors say.

When he was finally caught in 2016, Hinrichs pleaded guilty to two felony counts of fraud and was ordered to pay back those winnings, plus nearly $5,000 more.

Lottery officials say their "layers of security" allowed them to track Hinrichs' activity, providing data that was invaluable to prosecutors in obtaining the conviction.

But critics see the case far differently, saying Hinrichs' crime could have been spotted much sooner — or prevented altogether — if the Iowa Lottery had fixed weaknesses in its system that were spotted years earlier.

The Iowa Ombudsman in 2009 recommended a host of fixes to address those security weaknesses, including banning lottery retail employees from playing in the stores where they work.

But Iowa Lottery officials resisted that fix and others, saying some were impractical and would mire the system in unnecessary government bureaucracy.

In part because of their reticence, problems persist with the lottery system, a Des Moines Register investigation found, including retail clerks who steal winning tickets, lottery cheaters allowed to keep their winnings and people convicted of lottery crimes being permitted to sell tickets in Iowa because of insufficient background checks.

The investigation also found that lottery fraud is likely underreported in Iowa and many other states because of difficulty in tracking the crimes.

Critics contend there's another unstated reason the problems continue: Lottery officials and lawmakers have no desire to tinker with a lucrative gaming system that has funneled more than $1.7 billion into Iowa's state budget since it began in 1985 and that set record sales last year.

"Governments want the revenue from the lotteries, and lawmakers don't sincerely care about the problems," said the Rev. Carlos Jayne, an Iowa gambling opponent from the United Methodist Church.

Lottery officials dispute that profit is a primary motive behind their security decisions.

They note that the agency has adopted dozens of recommendations made in the Iowa ombudsman's review of Iowa Lottery investigative files, the first such review in the state lottery's history.

And they contend their security procedures are always evolving. While they don't always immediately catch people such as Hinrichs, they believe they have adopted the recommendations that are the most reasonable and practical.

"Are we a perfect organization? Nope. I would never make that claim," said Mary Neubauer, vice president of external relations with the Iowa Lottery. "But at the Iowa Lottery, we strive to learn from our experiences in an effort to achieve continuous improvement."

The 2009 alert

The ombudsman's unflattering report of the Iowa Lottery was the first to spotlight some of the gaming system's internal flaws.

(See New report criticizes Iowa Lottery security, Lottery Post, Apr. 22, 2009.)

The 2009 report identified 122 cases from 2005 to 2007 involving alleged gaming improprieties by retailers or their employees.

It also found that at least 33 of the cases were not prosecuted, even after an employer or lottery investigator determined that theft had occurred.

At least 10 cases identified by the ombudsman involved allegations of "pickout activity," situations where clerks cherry-pick winning tickets.

None of those cases received serious scrutiny, the ombudsman found.

The 218-page report concluded that Iowa's lottery enforcement largely depended on complaints from customers to trigger investigations, and those investigations were seldom thorough.

The Iowa Lottery's files showed at times "an indifference to get to the bottom of a given situation," it said.

Former Iowa Lottery interim director Ken Brickman wasn't impressed with the ombudsman's review.

"You've got a handful of cases that you say weren't properly handled, and we still haven't seen one where anybody got really rooked," the report quoted Brickman.

Yet the Iowa Lottery adopted at least 20 of the 60 fixes the ombudman's office recommended, including adding self-check devices at most retail locations and tracking whether winners of prizes of $600 or more are employees of lottery retailers.

Others it rejected outright, including:

  • Banning retail employees from playing lottery games in the stores where they work. Washington, D.C., has taken that step.
  • Requiring retail lottery clerks to return losing tickets and a receipt to players when they check tickets to prevent clerks from stealing winning tickets from unsuspecting customers. The Iowa Lottery recommends, but it doesn't require, clerks follow the return/receipt procedure.
  • Requiring criminal background checks of retail employees who handle lottery sales, which Iowa Lottery decided would be too cumbersome given the high turnover among retail employees.

Ombudsman Kristie Hirschman said while she believes the lottery took the report seriously, her staff is nonetheless "underwhelmed" by the lottery's response.

"If people don't realize they are being scammed, you're not going to have complaints," Hirschman said in explaining her staff's push for the Iowa Lottery to become more proactive.

Money and integrity

Iowa Lottery CEO Terry Rich said the evidence of the lottery's continued focus on fraud can be seen in the Register's review of records eight years later.

"All the examples you have were prosecuted and charged," Rich said. "So we're out there watching, and we're going to continue to be out there watching."

And he said the public's confidence in the Iowa Lottery has been demonstrated by continued play even after the high-profile Hot Lotto scam in which Eddie Tipton, a former employee of the Multi-State Lottery Association in Urbandale, Iowa, allegedly wrote software to select winning numbers worth $16.5 million.

(See Former lottery security employee guilty of rigging $14.3M drawing, Lottery Post, Jul. 20, 2015.)

In 2016, the year following Tipton's first conviction, the Iowa Lottery posted its best year in history. It marked the fifth consecutive year the Iowa Lottery's sales topped the $300 million mark.

Rich said, if anything, the Tipton scam has helped raise public awareness about the procedures and protections the Iowa Lottery uses to maintain player fairness in its games.

"The integrity of the lottery today, with all the (safeguards) we've described, is very solid," Rich said.

Problems difficult to track

But getting a true handle on the scope of lottery fraud is difficult.

In the last six years, the Iowa Lottery's security division has been contacted more than 3,600 times about possible improprieties, resulting in 164 people arrested, data collected by the Iowa Lottery and court records show.

But the arrest totals are believed to be incomplete. In Iowa, like other states, lottery crimes are sometimes prosecuted as nondescript thefts or charges that make tracking gaming cases difficult.

And Iowa Lottery investigators, who do not have the authority to make arrests, note that unless law enforcement personnel contact their agency, they may be unaware of criminal cases.

Lottery crime is not systematically tracked by the North American Association of State and Provincial Lotteries, a group based in Ohio that represents the industry. All told, 43 states have state lotteries.

The Des Moines Register was also told by officials in surrounding states — Missouri, Minnesota, Illinois, Wisconsin, South Dakota and Nebraska — that they do not track lottery crime cases in their states, as has been done in Iowa.

But, like Iowa, other states have been confronted with issues of lottery scams and fraud in recent years.

  • An ongoing lawsuit in Illinois alleges a scratch-off ticket distribution company manipulated the number of winning tickets available for purchase. (See Lawsuit alleges Illinois lottery contractor cheated players, vendors, Lottery Post, Mar. 13, 2017.)
  • The acting president of Connecticut's lottery resigned May 15 after telling lawmakers that his agency "put revenues over security issues" after it was discovered in 2015 that retailers could illegally access winning numbers on an instant game. (See Turmoil: Connecticut Lottery interim CEO quits, Lottery Post, May 15, 2017.)
  • Questionable employee wins and tax cheats made headlines in North Carolina last year. (See Some NC lottery players win so often, their good fortune defies logic, Lottery Post, Oct. 1, 2016.)
  • And a California gas station manager in 2015 pleaded to a fraud charge for keeping winning tickets for himself and selling the losers.
    National lottery representatives have resisted more stringent oversight.

"Those who claim that lotteries are not regulated are really complaining that the regulators have made decisions they don't agree with," the national association says on its website.

The national association responded to requests for an interview about security measures with a statement from president Rose Hudson, who said security measures are "proprietary and privileged."

"As a $73 billion industry, U.S. lotteries are highly regulated with multiple layers of oversight," Hudson said in a statement to the Register. "The lottery industry takes game integrity and security very seriously."

Iowa Lottery officials, while noting the rate of fraud is low, said they try to be proactive and transparent, which is why they track and release information about lottery crimes in Iowa.

As recently as May 19, the Iowa Lottery sent public alerts about attempted lottery fraud. The communications were intended to help protect players.

Fraudulent wins in Bondurant

It was a store manager — not the Iowa Lottery — who halted Hinrichs' yearlong lottery ticket thefts.

Hinrichs, when confronted by the manager, admitted his wrongdoing, court documents show.

The Iowa Lottery then launched an investigation, which included video footage of Hinrichs, 27, engaged in the crime.

Lottery officials say he lied on claim forms, indicating that he was not a retail lottery employee, and thereby avoided extra scrutiny on his wins.

The store had a policy prohibiting its workers from playing the lottery there, said Neubauer, the Iowa Lottery spokeswoman. The store had no unusual sale activities that would have alerted them to problems earlier, lottery officials said. They believe that's at least partly because Hinrichs' actions had been ongoing.

Hinrichs pleaded guilty to two felony counts of fraud. He was sentenced in March to two years of probation and fined $750. Restitution was ordered on the illegal wins.

He was also given deferred judgment, which means a conviction for the crime will never formally be entered on his records if he successfully completes probation.

Hinrichs did not return multiple requests for an interview. Jeff Wright, his attorney, said he was unable to speak about the case without his client's permission.

Neubauer said the lottery's safeguards are strong and continually being evaluated.

"As a society, we may never be able to stop people from trying to commit crime," Neubauer said, "but we need to have strong procedures in place to prevent them when they do."

USA Today, Lottery Post Staff

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8 comments. Last comment 3 years ago by Stack47.
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Avatar
Simpsonville
United States
Member #163184
January 22, 2015
2258 Posts
Offline

Goes to show if you are asleep @ the wheel such as the Iowa lottery, the mice will take advantage.  In other words, when the cat is away, the mice will play.

    eddessaknight's avatar - nw paladin.jpg
    LAS VEGAS
    United States
    Member #47728
    November 22, 2006
    7166 Posts
    Offline

    Goes to show if you are asleep @ the wheel such as the Iowa lottery, the mice will take advantage.  In other words, when the cat is away, the mice will play.

    I Agree! Well said Bleudog

    "ONE SHOULD ALWAYS PLAY FAIRLY WHEN ONE HAS THE WINNING CARDS"
    ~Oscar Wilde

     

    Stay Alert & Stay Tuned

    Eddessa_Knight with Fair Game Light Sun Smiley

      music*'s avatar - DiscoBallGlowing
      USN United States Navy
      Fresno, California
      United States
      Member #157851
      August 2, 2014
      3959 Posts
      Offline

       Do not trust any retailer. They may have an ulterior motive when they are being polite and helpful. You can always reward them after you win.

       Vote with your dollars.US Flag

       "We are all in this together!" 

        lejardin's avatar - Lottery-014.jpg

        United States
        Member #118605
        November 4, 2011
        1429 Posts
        Offline

         Do not trust any retailer. They may have an ulterior motive when they are being polite and helpful. You can always reward them after you win.

         Vote with your dollars.US Flag

        That was not a very good report card.  I think the comment that they don't want to stop the cheaters/lottery because they want the money it provides the state.  As always follow the money.  This lack of followup is what let Iowan Tipton steal millions with number manipulation almost right under their nose.

        Music you got one right, never trust any retailer.  As for rewarding them?  Not in this life. Their reward was in selling the winning ticket.  Let the retailer take care of their employee(s) if they are so inclined and I bet they are not.

          Avatar

          United States
          Member #106919
          February 27, 2011
          556 Posts
          Offline

          That was not a very good report card.  I think the comment that they don't want to stop the cheaters/lottery because they want the money it provides the state.  As always follow the money.  This lack of followup is what let Iowan Tipton steal millions with number manipulation almost right under their nose.

          Music you got one right, never trust any retailer.  As for rewarding them?  Not in this life. Their reward was in selling the winning ticket.  Let the retailer take care of their employee(s) if they are so inclined and I bet they are not.

          My sentiments on the retailer, but employees may be a different matter.  As you stated, lejardin, I bet the retailers do not take care of their work force.  As for the lack of follow up, sometimes it is not "lack"...

          Image result for greed photos library on congress

          Library of Congress

            I'm feeling a $312,000,000.00 jackpot win coming my way!

            KY Floyd's avatar - lysol avatar.jpg
            NY
            United States
            Member #23834
            October 16, 2005
            4262 Posts
            Offline

            It seems ironic that the lottery that was allegedly cheated by Tipton's  manipulation of an RNG drawing claims that profit isn't a factor in their security decisions.  Since they've publicly claimed that it's possible to do that the only rational conclusion when they don't switch to ball drawings is that they're willing to trade security for profit or they think that ball drawings are just as susceptible to manipulation. I think it's fairly easy to make an RNG much harder to tamper with, but I'm not seeing any significant risk in a well run ball drawing.

              duckman's avatar - ducklogodrake64x64
              Jacksonville Florida
              United States
              Member #23017
              October 6, 2005
              1085 Posts
              Offline

              If the employee was stealing the store's tickets and if the retailer had proper accounting procedures in place, the retailer would have noticed the irregularities with the employee clerk a long time ago. Don't they do ticket counts and cash counts at the end of each shift and reconcile lottery purchase/sales reports?

                Avatar
                Kentucky
                United States
                Member #32651
                February 14, 2006
                8965 Posts
                Offline

                 Do not trust any retailer. They may have an ulterior motive when they are being polite and helpful. You can always reward them after you win.

                 Vote with your dollars.US Flag

                I've given up on expecting gas station/convenient store clerks to accurately run play slips, replay tickets, and/or cash winning tickets so I try to only play at places where I know the clerks are experienced and trustworthy. The occasional players are more likely to be cheated by the same clerks and stores I avoid, but other than the stings lottery security run, there isn't much they can do to prevent fraud.

                Some people wrongly assume lottery play is a big part of a retailer's business and while 5% adds up, it doesn't pay the bills.