Part 4 of a 10 Part Editorial ...
(Opinions by Dawn Nettles, Publisher, The Lotto Report)

Continued from Part 3 ...
Evaluating The Official "Contentious" Report

(Texas Lottery - Internal Audit - 2012 - Prize Payment Account Review)

Texas Lottery
Where Is The Missing Money?
Was this the PERFECT Crime?
Was it embezzlement? Fraud? Theft?
Or sheer incompetence?


brought to you by
The Lotto Report

Series Began: August 1, 2013
Part 1: Posted August 1, 2013
Part 2: Posted August 4, 2013
Part 3: Posted August 7, 2013
Part 4: Posted August 13, 2013 - Below
Part 5: August 20, 2013
Part 6: Oct 22, 2013
Part 7: Posted March 13, 2014
Part 8: Posted April 6, 2014
Part 9: Posted ??, 2014
Part 10: Posted ??, 2014



An introduction to the main characters of this
editorial was shown in Part 2. If you've forgotten,
click here for a refresher to see who's who.

Texas Lottery Commissioners
Chairman Mary Ann Williamson (Resigned 8/16/13)
Commissioner (Chairman) Winston Krause
Commissioner Veronica Edwards
Commissioner Jodie Baggett (Appointed Sept 2013)
Commissioner Katie Stavinoha (Appointed Sept 2013)


- Part 4 -
Evaluating A Contentious Report

The State Auditor, who received a Complaint
against the Texas Lottery in Nov 2010, decided
to let the Texas Lottery investigate itself.
This was their way of handling the Complaint.

The official findings - with regards to the Complaint -
and submitted by the Texas Lottery's Internal Auditor
are - in part - remarkably true. It exposes dereliction
of duty - inexcusable faults and failures by
Texas Lottery executive management ...
YET ... the report is inconclusive,
deceiving, & alluding as well.
I will show you all of this
in my series ...

You are in for an interesting ride on this one!


Just in case you forgot ... the Complaint's
allegations included but paraphrased ...

• Management failed to protect State assets
• The prize payment account lacked supervision
• Implied management may be embezzling money
• Implied management was not doing their jobs responsibly
• The Texas Lottery lost/wrote off $600,000 when they changed accounts
• Fraudulent activity continued to occur as management stalled
in opening a new account
• Management personnel - policy breakers - kept their
jobs and received promotions and merit raises

- Important -
While the Complaint did NOT say anything DIRECTLY
about management's failure to reconcile the account, one can
easily conclude that it was the intent of the Author to expose this
fact as failing to reconcile a checking account is a MAJOR issue.

(NOTE: I did not list all allegations that were
actually contained in the Complaint. They will
be covered as we progress through the story


... In Part 4 ...
The Audit Report Confirms As Alleged

• Fraudulent activity did occur
• State assets were not protected
• Management fails in their job commitments
• Fraudulent activity continued to occur as
management claims "teams" and "resources"
were actively reconciling the account.
• Internal Auditor declares nothing is conclusive.
She cannot determine how much money was
lost to either fraud and or perhaps embezzlement and
if adequate controls are/were in place to protect the state.


But remember - in Part 2, I showed you that the
"purpose" stated in the Report was NOT specific to the
Complaint. The report failed to give a complete and
accurate reflection of the contents of the Complaint
which leads readers to believe the report
appears to be just a typical ole' annual audit
- therefore - you have to have firsthand
knowledge that the Complaint instigated
the Report and these are the findings.

No where in the report does it ever say or confirm
DIRECTLY that the allegations contained in the
Complaint were valid and true even though that's
what all this is about and is was certainly confirmed.





Complaint Allegations Confirmed Again
Mgmt failed to protect State assets and poor
decision making by management revealed.

(Page 9 - 2012 Prize Payout Account Review Report

This one partial paragraph is loaded
with interesting information.

"unauthorized activity/transactions" - They use this phase
to describe FRAUD. In my opinion, it's deceiving language.
They are purposely keeping the language low key. By using
"unauthorized transactions" - well - it makes the report
look like a plain ole typical BORING report that no one
would want to read because it lacks interesting words.
(Unlike my writings - huh?? Did you know they
have NO 4 letter words in their reports? <grin>

"Lacking adequate, timely reconciliation's" - as
discussed before, clearly this is a very tactful way
of saying management failed to do their jobs.

"vulnerable to unauthorized transactions"
Discreetly written but means ... by leaving the acct open
from 2006 to 2012, the State was at risk of FRAUDULENT
activity and could lose money - which, by the way, actually
did happen. Poor, poor decision making dating
back to 2006 by executive management ...

When I said, "2012" - it was NOT a mistake. They did
FOOLISHLY leave the legacy account open through
2012 and the State did pay $25K per year in bank fees.
Mr. Grief is quite generous with State money.
(Later I'll show you how the TLC reports
their bank fees - very interesting to say the least

"during the "period" before the new Positive Pay bank
account was implemented
" Politely stated, thi
s means the
State was at risk. "Period" in reality, is defined as a minimum of
4 years ago. But who on earth would know what these
things mean by reading that damn report?

Please notice the last sentence says "regular
performance of the reconciliation has improved
which means that beginning in Sept 2010, they were
FINALLY doing their jobs. (FYI - this sentence
was referencing the new account which
wasn't opened until Aug 31, 2010

Are we supposed to be impressed that they are NOW
doing the job they were supposed to be doing all along?
I'd say it's a little late for a pat on the shoulder or
to imply that everything is OK.

What was NOT written in the final report but was
alluded to ... was the simple little fact that by all rights
the account should have been closed back in 2006.

Do understand - in hindsight - they all know it NOW but
it was not specifically
stated in the final report. After all, IF the
words, "account should have been closed in 2006," had
been stated anywhere in the Report - then it would have
been a clear indication that management screwed up.

And Lord knows, the Texas Lottery Executive folks would
NEVER permit this to be said in one of their "final" reports,
after all, they are notorious for being in the denial mode.

Remember when I said they "ignored" warnings and advice ...
I'll actually show you more later but here's this one for now)

I sure hope you noticed that this letter was dated Oct 2008.

Pay extra special attention to the part that says,
"In the past, we have advised you ..." and
"as we offered previously" .... and
"once again, we have enclosed a Fraud checklist.

I think the you get my point and the bank's point too ...


Did you know that if your checking account was subject to
fraudulent activity then your bank would most likely advise you to
close your account immediately? If you refuse, then the bank will have
you sign a disclaimer and they will not cover any of your future losses.

Pay special attention to the last sentence in the paragraph below -
it seems as though the Texas Lottery has to abide by the
same rules that we plain folks have to follow. For them, this
would be a difficult task to follow because they are accustomed
to making the rules and they generally don't care who likes them.
Anyway, read on ....


- Excerpt -
Letter from bank to Texas Lottery dated Oct 30, 2008


Imagine that! The Texas Lottery still didn't add this feature to their account
and they had fraudulent activity after the date of this letter. Oh well, what the hell.
They have lots of money to waste - after all - we're talking about the lottery
who robs from the poor folks by giving them games of chance with
odds guaranteeing to make losers out of those who play. What a deal.





Records show ...
the Texas Lottery did plan to open a new
account to protect the STATE on Nov 1, 2009.
The timing, of course, was totally unacceptable to
implicate that management finally did something right,
but - none the less - it was at least "considered" ...

BUT ... golly gee, look at this ...
the following emails shows they DID plan to open a new
account but OBVIOUSLY they FAILED to follow through
with the plan. Imagine that! What excuse can they possibly
have for dropping the ball this time? (Let me tell you a
little secret, I really know the answer to this but it
wasn't in the report so I can't tell you why the
delay - it would be hearsay ...
<huge grin>)

WOW, Mr. Navarro says he would like to start using
a new account by Nov 1, 2009. Gee, what happened -
why was it delayed another 10 months? Would no one sign the
signature cards, did Mr. Navarro lose the forms and cards, did he
just forget ... WHY the delay? Hey man, the STATE'S lost
enough already. C'mon ... it was your job to protect the money.


OK, OK ... So ...
the new account - finally opened Aug 31, 2010 - did include
the Positive Pay feature. Below is the bottom half of the letter
from the bank (shown above) suggesting to add this feature.
The Texas Lottery received this BANK letter in 2008.

And, to think, this time it only took 2 years
- from 2008 to 2010 - to comply with the
bank's advice to protect the State.
<another sarcastic remark>




Let's add a little insult to injury ...

With a new account finally opened, the TX Lottery gets to wipe the slate
clean and start all over - so to speak. The action was neither timely
nor efficient - but finally - by all rights - they should be on the way to
peace of mind and maybe the States assets are finally protected
from all the fraudulent activity.

Now all we need to do is to figure out WHY they left the old
account open and WHY did it take them nearly 2 years
to suddenly be concerned about the costs of keeping
the old account open .....

"We don't wish to incur any more fees that [than] necessary."

What did you say? "more fees than necessary" .... Gimme a break, jeez ...

Notice the email is dated April 16, 2012 but the new account
was opened and/or in use Aug 31, 2010. And they are just now
caring about the expenses incurred by leaving an un-active
account open? Gee whiz ... what can I say and how can
I continue to be nice - my patience is really wearing thin ...

By the way, they continued to pay fees
through June 2012 on the old account.

The TX Lottery has absolutely no legitimate excuse for keeping
that old account open. For those of you who may not know this,
banks are not required nor will they generally honor checks that
are older than 6 months old - old checks are called "stale dated"
checks. If you have a check that is stale dated and the
bank won't honor it, all you have to do is ask for another
check from the person or entity that issued the check to you.

"Pencil Pushers" would be an appropriate name for what's next ...

About those bank fees ... I requested, through Open Records,
documents that would tell me the costs of the bank fees
for the old account and the new account.

Words cannot describe my feelings when I received documents
responsive to my request. This is because I saw how they reported
their expenses ... When businesses or government are looking to cut
expenses, I would think it would be imperative to know what
the expenses "really" were. Wouldn't you??? Well, that's not
how the Texas Lottery reports their bank fees. Look at this ...

(Bank fee's shown here are for the old "legacy" account - What a waste of money)

Folks, the IRS requires that you tell them how much money you've earned
in Interest each and every year. If you fail to include interest earned on your
tax return, I guarantee you will be audited by the IRS. I could be wrong
here, but I don't think the Texas Lottery has to do tax returns but they
are failing to report their true "expenses" and their true "interest earned"
by showing "interest earned NET of fees" such as they've done
in these documents. I call accountants/sales people who report
figures in this manner "pencil pushers." They are - once again -
distorting the "BOTTOM LINE." I really wonder how they
have reported their expenses in their Financials.

If you would like to see the bank fee documents
in their entirety ... here they are ... (pdf's)

Bank fees - Old CLOSED acct - FY 2011 & FY 2012, Click here

Bank fees (Old Acct) 2005, 2006, 2007, 2008, 2009, 2010
(New Acct) FY 2011 & 2012 - Click here






The report is critical - tactful - but still critical - about
the failure to open a new account sooner than they did.
Clearly the excerpt below is saying the state was at
risk. It's too bad she [Ms. Melvin] failed to say
when - in her expert opinion - the new account
"should" have been opened by the Texas Lottery.
(Page 11 - 2012 Prize Payout Account Review Report)

"During the time it took to implement" ...
means 4 very long RISKY years ...

This is another clear cut example of poor decision
making and lack of efficiency by management
that is both indicated and stated in the report.

You know what I wonder, how many lawyers
worked on editing Ms Melvin's final report?
How much input and influence did Gary Grief
and Kathy Pyka have in recommending language
changes and content? I know for sure they
made recommendations because there was a DRAFT
report produced in Dec 2011 but Texas Lottery stalled
it's release for a solid year. Why did Mr. Grief stall
Mrs. Melvin's report for a year? (You'll see more
on the DRAFT report later)

FYI - All EXPERTS say the Texas Lottery
should have opened a new account back in 2006.



FRAUD was absolutely confirmed as
alleged in Complaint ... But
deceptive &
evasive language was used in report

(Page 9 - 2012 Prize Payout Account Review Report)


Grade for title - F

I just loved this heading - it proves how they purposely
distort the truth. It ABSOLUT
ELY should have been
titled "
Fraudulent Transactions" All one has to do is
read the paragraph to agree with me. (Shown next)

At any rate, they are giving a very vague
acknowledgment to fraudulent activity in
this heading but this verbiage leads you astray.


This is the paragraph found under "Unauthorized Transactions"
(Page 9 - 2012 Prize Payout Account Review Report)

(* BofA = Bank of America)

Let me summarize that great big paragraph
for you right quick ... It says ...

Fraud occurred between Oct 2007 through May 2009 and
monies WERE lost because the Texas Lottery did NOT
catch the fraud in time to report to the bank for a credit.

In rounded figures, Texas lost ...
<$16K> + <$2K> + <$29K> = <$48K>

And to think - this information was found under
a heading titled "Unauthorized Transactions!"

Have you any idea how many people the Texas Lottery
has gone after for committing fraudulent claims? Bunches of 'em..

BUT - when the shoe is on the other foot, and they are investigating
someone else rather than themselves, look how clear and
vivid the picture is painted ....


By the way, thought you'd want to know, this was
one of the cases referenced in the paragraph
under "unauthorized transactions."



Fraud as alleged in Complaint was definitely confirmed ...

But ... oh my gosh ... how could there
have possibly been ANY uncaught fraud? It
would be impossible for the state to lose
money to fraud because Ms. Kathy Pyka said ...

Excerpt from Oct 29, 2012 Interoffice Memo -
From Kathy Pyka to Catherine Melvin - Read #17

Page 13 - 2012 Prize Payout Account Review Report
(Management response)

- Excerpt -
Nov 8, 2012 Texas Lottery Commission Meeting


Kathy Pyka Testimony ..
"So while I had one team

begin working on the
nominal reconciliation's
in February of 2006,
we had another team
trying to go backwards
to reconcile what hadn't
been reconciled.



One can only conclude - given the fact that fraud was not caught
timely - either 1) Ms Pyka made these statements in happenstance
OR 2) Ms. Melvin's report, the banks, security, the District Attorney
in Houston and the State Auditors are wrong, wrong, wrong in
claiming there was ever any fraudulent activity. Couldn't have been ...
shoot - it was impossible ... because ... Ms Pyka said/claimed,
teams were TRYING to reconcile that account beginning in 2006.
(Another sarcastic remark - of course)

FYI - With reference to what I just said ... see
what the Texas Lottery received from the bank ...


- Excerpt's -
Oct 2008 Letter & Dec 2008 Letter
From Bank Denying Reimbursement

Oh my ... two letters denying claims ...

"items appeared on your March 2007 statement
and we received your claim on 10/24/08

"items in question appeared on your 10/20/07
statement and we received your claim on 10/22/08

Fraudulent checks CLEARED the bank while these
"resources" - "teams" were working on the account.
Ms. Pyka, who is/was directly responsible, obviously failed
to take meaningful steps to prevent a huge, un-recoverable
loss of revenue (at least $49,000) to the state.
(That is unless the crooks pay it back in restitution.)

GAWD, would somebody please tell me why they didn't close
that account in 2006? Could it be that they were purposely
ALLOWING someone to take money freely and this was their cover?

Was this the PERFECT CRIME?


Do NOT forget this date - Feb 2006.
It is an extremely significant factor in
another area of this story.


Another Allegation Confirmed - Management Seriously Lacks Proficiency
#13 (Page 10 - 2012 Prize Payout Account Review Report)

The Information in this Section is
Nothing Less Than Shocking

This is a HORRIBLE revelation. Imagine if you can - the
Internal Auditor began an investigation in Dec 2010. She
produced and submitted a report within a year - Dec 2011.

Additionally, the Internal Auditor told the
State Auditor that they would have the report
Jan 1, 2012. Her word, reliability, was at stake.
Not Mr. Grief's word or Ms. Pyka's word, but
Ms. Melvin's word was on the line.

But six (6) months later, Ms Pyka admitted
that she failed to identify and she failed to give
the Internal Auditor an additional 29 fraudulent
transactions that were just found.

Then after that, Ms. Pyka realized another
mistake had been made in the last disclosure
so she revised the disclosure again. And these are
the people who run a $3 billion gambling operation!

I do hope you saw where this section started with,
"Subsequent to the completion of our fieldwork ..."
this means Ms Melvin was finished with her investigation.

On another note ... here's the chart spelling out the FRAUDULENT activity ...

Notice the last column showing an A, B & C in the
table. The "B" means the transactions were disclosed after
all the work was completed. Can you imagine the frustration
of the Auditors who were doing all this work and then hearing ...
"hey, we found more that we didn't identify initially, you
know, when we first assured you that we found it all.

Of course, I wouldn't be me if I didn't comment
about the Title of this chart. Clearly they were
FRAUDULENT transactions as evidenced by
the Security Report shown earlier. Let's not
continue to distort the truth. OK?

Do you understand that this means, by
reason of deduction, they (the Texas Lottery)
were still in the dark until at least June 2012?
Obviously, they had no idea how much money
was really missing or where it went.

As you can see - in the end, the Internal Auditor
threw up her hands and simply stated that she
could not determine anything. At least this is
my interpretation of ....


- Excerpt -
3rd paragraph under
"Subsequent Disclosure"
(Shown above)

The internal auditor wrote:
"The occurrence of this
type of management disclosure
6 months after the conclusion of audit
fieldwork (and after the delivery
of a draft audit report) begets
the question of whether adequate and
effective controls exist to ensure
tracking, reporting, and monitoring
of unauthorized
[fraudulent] transactions.
Consequently, we cannot determine
whether all unauthorized
transactions have been identified and
provided to Internal Audit, and accordingly,
cannot make any representations as to
the completeness of the listing of
unauthorized [
fraudulent] transactions
for the period under audit
(Sept 2006 through December 2010)

Folks - in plane ole English ... this means
they have no idea how much money was
lost to either fraud and or perhaps embezzlement.

The Commissioners, on the other hand,
have taken NO action against Texas Lottery
Executive staff EXCEPT to coldly accept
Ms. Melvin's resignation in July 2013.
(See excerpt from meeting below)

No emotion or concern has been
expressed by the Commissioners
regarding the failure to reconcile that
checking account. So much for their
fiduciary duty to the state - huh?
(In my humble opinion, of course)

Excerpt from
July 11, 2013 Commission Meeting
RE: Ms. Melvin's resignation ...


CHAIRMAN WILLIAMSON: The Texas Lottery Commission is out of Executive Session. The time is 11:40 a.m., and there is an action as a result of the Executive Session.


COMM. KRAUSE: I make a motion that we accept the resignation of Catherine Melvin effective August the 1st and authorize the Chairman to handle all transitional matters relating to the internal audit position.

COMM. EDWARDS: I second.

CHAIRMAN WILLIAMSON: Is there -- well, you second. All right. All in favor?

(Those voting in favor so responded)

CHAIRMAN WILLIAMSON: The motion passes three-zero. And good luck in the future, Cathy.

MS. MELVIN: Thank you very much, Commissioners.

- Editors Note -

I have seen many folks come and go
and I can assure you, this is worse than cold.
Ms Melvin had been the Internal Auditor for a
great many years including years prior
to the current Commissioners.

It is also noteworthy that during the
Nov 2012 Commission meeting when
Ms. Melvin spoke, it was my
observation that Chairman Williamson
NEVER looked at Ms. Melvin. I found
this of great interest. It's too bad
they don't video these meetings. Body
language is a powerful tool.


Texas Lottery Commissioners
Chairman Mary Ann Williamson (Resigned 8/16/13)
Commissioner Winston Krause
Commissioner Veronica Edwards


Ms. Melvin wasn't the one who failed to do her job.
So just WHY did Ms. Melvin resign?




Draft Report Completed Dec 2011
(Page 21 - Internal Audit Nov 12, 2012 Report -

- FYI -
They call the first report submitted a DRAFT.
They do this so no one can obtain copies until it's
been edited to meet the approval of whatever it is
that they want the public to know. Then the report
becomes a FINAL report.

Serious & Important Questions?

It took TWO years for the Texas Lottery to respond to
a complaint that was filed with the State Auditor yet in
reality, a report was really complete within a year.

Why was Grief, Pyka, and/or the Commissioners allowed six
(6) months to "review" Ms. Melvin's investigative but completed report?

Was Ms. Melvin bullied or intimidated in any way to change her findings?

Were significant changes made between the DRAFT and the final report?

How much did it cost the State to produce this report?

What - if any - facts is the Texas Lottery staff covering up?

Who - if anyone - is being protected by this report and why?

Why are the Commissioners, The Governor and our State
Legislators allowing Grief and Pyka to keep their jobs?
It appears there is just cause to cease employment.
(In my humble opinion- that is)

How can they turn their heads to this incident
KNOWING Grief and Pyka grossly failed to do their jobs?
(As has been evidenced thus far with more to come)

Why did Ms. Melvin "really" resign her position with the TX Lottery?




"Indicative of Fraud" - Once Again, Allegations Supported
(Page 22 - 2012 Prize Payout Account Review Report)


I feel relatively certain that those of you who are reading this
are intelligent folks. Therefore, I will say nothing pertaining
to the disclaimer - I think it speaks for itself.




- Document Disclaimer -
Documents to support my findings were obtained
in various ways. Most came from open records
requests from various State agencies and some were
obtained from unknown, anonymous sources by way
of US mail, fax, personal delivery to my home -
(some left on my front porch and some placed
in my personal home mailbox.

In a number of instances, the Texas Lottery
refused to provide documents to me and asked
for AG opinions so that I could not obtain the
information. It goes without saying that the AG
ruled in favor of the Texas Lottery in keeping
the documents from becoming public.

I have destroyed ALL evidence to protect those
who provided information anonymously. I can not
tell you which document came from where as I have
thousands of pages in separate files for each topic that I
plan to cover in this story. I have no doubts that the
documents I received anonymously were authentic
as I have received many of them from
the Texas Lottery as well.


- Coming in Part 5 -
In part, it exposes and in some cases, disputes
Executive management's claims and excuses for
failing to perform their jobs. I am re-arranging the order
as I originally told you we would cover the Nov 8, 2012
Commission meeting testimony in Part 5. I feel it is
imperative that you see some other things first.
You should find Part 5 amusing to say the least.


Texas Lottery Commissioners
Chair J Winston Krause (Appointed March 2009)
Jodie Baggett (Appointed Sept 2013)
Katie Stavinoha (Appointed Sept 2013)
John W Townes (Appointed Dec 2013)
Mary Ann Williamson (Resigned 8/16/13 - Re-appointed 3/11/14)

Commissioner Veronica Edwards (Resigned 2/13/14 - Effective 3/31/14)


Series Began: August 1, 2013
Part 1: Posted August 1, 2013
Part 2: Posted August 4, 2013
Part 3: Posted August 7, 2013
Part 4: Posted August 13, 2013 - Below
Part 5: August 20, 2013
Part 6: Oct 22, 2013
Part 7: Posted March 13, 2014
Part 8: Posted April 6, 2014
Part 9: Posted ??, 2014
Part 10: Posted ??, 2014





Texas Lotto Report
(All About the Texas Lottery)

Dawn Nettles
P. O. Box 495033
Garland, Texas 75049-5033
(972) 686-0660
(972) 681-1048 (Fax)

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