Part 7 of a 10 Part Editorial ...
(Opinions by Dawn Nettles, Publisher, The Lotto Report)


Let's Compare ... The Missing Money Report(s) ...

Dec 2011 Draft Report
.vs.
Nov 2012 Final Report

A Brief Summary
of what you've already read in earlier parts of this story ...

In Part 1, it was explained that this story was about a complaint that had been filed with
the State Auditor in Nov 2010. In part, the Complaint alleged that $600K was lost, fraud
occurred, perhaps there had been embezzlement and there was unfair treatment of staff.
It did not reveal that a checking acct had NOT been reconciled for 4 years, but as it turns
out, this was the key factor. I concluded that most of the allegations had been proven
true and that you were going to see it for yourself.

With reference to future parts of this series, I said, "I will show
you exactly what I meant when I said ... carefully worded reports
& testimony, failure to comply with statutes, poor management decisions,
failure to perform required duties, fraud, embezzlement - whatever
it is that I've said, I will support in this series."

In Part 2, you read the actual Complaint and saw that the TLC was allowed to
investigate itself. You saw that it took TWO (2) years for the Texas Lottery
to finally complete their report with reference to a 2010 Complaint
and the findings were both remarkably true yet deceiving.
(The Final Report was released in Nov 2012.)

You saw that the TLC, in Dec 2011, told the State Auditor that
they would have a final report completed and to them in Jan 2012.
Later the TLC changed the date to Aug 2012 but it was not released
until Nov 2012. You saw where some issues were omitted from
their report and finally, you saw that the TLC failed to make
the Final Report public - in other words, they did not post
it on their website for all to read. I had to complain to the
Legislature and they in turn, made the TLC post the report.

In Part 3 & Part 4, we began evaluating the contentious report in great
detail. You saw that the official findings - with regards to the Complaint
and submitted by the Texas Lottery's Internal Auditor were - in part -
remarkably true. Clearly it exposed dereliction of duty - inexcusable
faults and failures by Texas Lottery executive management ... AND at
the same time ... the report was inconclusive, deceiving, and alluding.

Excerpts were shown and explained. You saw absolute proof that
TLC staff failed to catch fraudulent transactions and the State lost
money. You read that they never could determine exactly how
much money was lost. The Director of the Office of the Controller,
Kathy Pyka, "claimed" she had "teams" working to reconcile the
account during the SAME time period that fraudulent transactions were
occurring right under their noses - yet those transactions were NOT
caught until 19 months later. (It's hard to believe they were
working on the account but failed to catch the fraud ... huh?)

Then it was explained why I alleged that deceptive language
was used in the Final Report ... One example I showed you was
an excerpt from the Final Report that said, "during the period
before the new Positive Pay bank account was implemented."

Explaining why this statement was deceptive, I said, "Politely
stated, this 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?"

Another example - "unauthorized activity/transactions" -
was used to describe FRAUD. It was my opinion, it's
deceptive language - a cover up so to speak. They didn't
call it what is was - they were trying to trick the readers.

In Part 5, I disputed Management's claims and showed how
management failed to comply with statutes. I displayed proof
and explained why one could not believe some of the findings.

On Sunday, Oct 13, 2013, the Austin American Statesman
ran a huge front page story about the fraudulent activity that
the Texas Lottery failed to catch. It was an awesome story
and one that I feel all of you should read after you finish
reading Part 7. <grin> This news story confirmed all
that I had reported to you. Click here to read.

In Part 6, I explained, in depth, what the Texas Lottery was supposed to do
with Un-cashed Prize checks. Then you saw that they kept one for themselves.
Keeping that prize money was a clear violation of the law. (In Part 1, you read
that "un-cashed prize checks" would be covered extensively later in the story.
Well, Part 6 is where it was covered)

Additionally, I questioned the validity of the findings in the
Final Report that referenced monies turned over by the TLC
to the Comptroller of Texas as Unclaimed Property. I asked -
how can they identify un-cashed checks if they hadn't reconciled
their bank account? I still wonder how much money from
un-cashed checks was used to reduce the differences
from what the bank said was in their acct to how
much the lottery thought they had in the acct. This
fact has NEVER been determined.

----------------------------

Now I want you to understand ... all of the above pertains
to the "Final" Report released Nov 2012. But in reality,
the Report was actually completed in Dec 2011 by
Catherine Melvin, the Ex-Director of Internal Audit.
Executive Staff and Legal received her report then took
ONE year to edit it, approve it ... then they released a
revised version of her original report AND her findings.

Part 7 - I know you are all expecting me to cover the merit
raises but I've come to realize that the merit raises and special
treatment to some employees should come AFTER I show you the
WHOLE, REAL truth. And the fact is, you really haven't read it yet.

Do understand, much of the Final Report was remarkably true. The
Texas Lottery was found Guilty, Guilty, Guilty. But some of the
language was misleading and/or deceptive and some of the findings
were not reported - I assert, they were purposely omitted.

In Part 7, I'm going to shock the hell out of you by showing you
the report that was actually completed on time - Dec 2011. All of you
need to understand, I am NOT supposed to have this document because
they prefer to call the initial report a DRAFT document. Imagine, it took
Executive Staff ONE (1) year to approve and release a report that was
actually completed a year earlier by their OWN Internal Audit Division
- of course - Executive staff wanted/needed some major changes
before releasing it. It could after all, get somebody in trouble. <grin>
Whoa ....

All in all, I received 4 copies of this one report to which
I have completely destroyed all evidence that could indicate
where they came from or how I received each copy.

Draft Report vs Final Report

I'm going to show you what was in the 2011 Draft Report
then I'm going to show you how it appeared in the
2012 Final Report. I will briefly describe the differences.

It is important for you to know at this point that
Ms. Catherine Melvin, who was the Internal Auditor
for many years, resigned unexpectedly July 12, 2013.

It is my personal theory that Ms. Melvin was most
likely forced out because she was not a "team" player.
She probably refused to alter the Final Report to
the degree that management wanted it changed.
At the time she resigned, staff knew that I was
investigating the findings of the Final Report and
they knew I would not hold anything back.

After Ms. Melvin resigned and after Part 1 of this story
was posted, Chair Mary Ann Williamson resigned as well.
You do need to know that Ms. Williamson did submit an
application in Aug 2013 to be moved to another agency.
She did in fact move to the Texas Water Development
Board in September 2013 but resigned in Jan 2014. On
March 11, 2014, Governor Perry re-appointed Ms.
Williamson back to the Texas Lottery Commission.

------------------.

My methodology in presenting the DRAFT report
I will show an excerpt from the draft and then show you
how it appeared in the Final Report. Below each, I
will explain what was different - in most cases.

Links to both reports - Draft and Final -
can be found at the bottom of this page.

------------------------

Now let's look at the incredible changes ...
DRAFT vs the Final Report

Excerpt - Draft Version


Excerpt - Final Report

Please Note
They deleted the facts regarding the contents of the Complaint
The final report did not cover the contents in its entirety.

Specifically ...

1) The account was supposed to be changed in 2009 but was
not changed until 2010. ("changed" means open a new
acct and close the current one)
2) They had to open a new acct [changed] due to fraud
3) Alleged that management was not fiscally responsible and
4) Someone may be embezzling money.

Hmmm ... Imagine deleting these juicy details from
the Final Report. I swear, I thought investigative
reports were to specify all allegations - not just one!

--------------------------------------------------

Excerpt - DRAFT Report



Excerpt - Final Report - Bottom of page 4 then top of page 5

Extremely Damaging Revelations Found Here
Hmmm... I sure hope you saw where they deleted the part that said
the OC [Office of the Controller] "asserted" that at one point they
had several vacant positions and during that time they had to
prioritize their workload resulting in reconciliations being
placed lower on the list of priorities.

My God ... In this day and time, I absolutely can not
believe she said that ... "placed lower on the list of
priorities?" What's more important than protecting state
assets by at least balancing the checkbook monthly?

Notice too staff's admissions that the position responsible for the
reconciliations was filled in FY08 and at one time reconciliations were
one year behind. But this tidbit was not included in the Final Report.

Rather, the final report states that Ms Kathy Pyka claims
"teams" were working on the account beginning in Feb 2006.

Notice how the paragraph in the DRAFT uses the
word "fraudulent" 3 times - where as the Final Report
does not include that word at all. [in this paragraph]

WOW, WOW, WOW .... Talk about covering up ...
Kinda reminds me of Watergate. <grin>

Now, just for the heck of it, let's look at the
2nd paragraph in this same section ...

_____________________________________

2nd Paragraph to The Above Excerpt

Excerpt - DRAFT Report



Excerpt Final Report - 2nd paragraph of page 5



Notice the sentence in the DRAFT that begins with "This has led ..."
(4th line) ... well, it was NOT included in the Final Report either. They
took it out - imagine that. Gee, I wonder why ... <a sarcastic remark>

Imagine, that poor new employee had to "address the backlog while still
responsible for performing the current reconciliation" Gawd - where in the HELL
are those "teams" that were working on this account beginning in 2006?

OK, OK - let me confess what I really know. That "position" was filled by
the same employee (Michael Guidry) who had quit his job in 2006 2005 but came back
two years later (Sept 07). I just wonder if he found everything just like he left it? <grin>

-------------------------------------------

Management Response Then Evidence to the Contrary
The following statement was written by
Kathy Pyka in response to Ms. Melvins findings.

Excerpt - Final Report - page 13 - Response #2


Oh My ... what conflicting stories these are. I don't know
about you, but it isn't hard for me to decide who I believe.
If the account were being watched like Ms. Pyka claimed
it was, then it would have been impossible for fraudulent
transactions to have occurred without being caught until
19 months later. This is a simple reason of deduction -
especially when you consider the "evidence to
the contrary" that I'm showing next.

And about those "two senior accounting staff" and
"five different individuals" ... when I cover the salaries, I will
show you emails and organizational charts that indicates
there weren't that many qualified employees/staff.

Oh, and by the way, documents have shown the
Office of the Controller really was short
staffed as reported in the Draft report.

Evidence to the Contrary

Fraudulent transactions actually occurred in Feb 2007
as indicated by a March 2007 bank statement

Excerpt - Letter From Bank

Note: Bank Letter Says ...
"appeared on your March 2007 statement "

However, both the DRAFT and the Final Report
shows fraudulent transactions occurred 8 months later
Clearly NOT true ... Huh???

... BUT ...

Catherine Melvin - The Ex-Internal Auditor - obviously suspected
she was lacking data and was possibly concerned over an
apparent lack of reconciliation efforts by the Office of
the Controller as evidenced by her written word.

Excerpt - As seen in the final Report (page 11)

.... AND .....

Excerpt - As it appeared in the DRAFT report ...

Excerpt - As it appeared in the Final report
(they are the same except for the deletion of the word "fraudulent" <grin>)



As you see above, both reports said .... "lacking adequate, timely reconciliations"

---------

So I Wonder?
Response #2 was written by Kathy Pyka ... so would a
reasonable person consider this falsifying a report since ....

1) the Draft report said Ms Pyka admitted reconciliations were
placed lower on the priority list; and 2) quite obviously,
fraudulent transactions occurred as early as February 2007
but were not caught until Oct 2008. So how could anyone have
been working on the account? (BTW - I'm assuming it was
February since it was in their March 2007 statement)

If teams were working on the account beginning in
Feb 2006, as Kathy Pyka claims, then why did they
FAIL to catch these fraudulent transactions?

-------------------------------------

Kathy Pyka's Disturbing Testimony - Nov 8, 2012
I call this "scripted testimony" too.

- Copy and Paste From Commission Meeting Transcript -

KATHY PYKA Said: "What we did was, in February of 2006 is, I looked at the
reconciliation activities for this account. Based on the volume of activity that goes
through this account -- and just to give you a perspective, about 5,000 prize checks
are issued each month out of this account -- it was apparent to me that the best
way to handle this was to begin by reconciling the nominal activity for the month
-- look at revenue inflow, look at revenue outflow, look at expenditure inflow,
look at expenditure outflow and try to get our arms around reconciling that.

So while I had one team begin working on the nominal reconciliations in
February of 2006, we had another team trying to go backwards to reconcile
what hadn't been reconciled. I think you can probably gather it was not a
situation that anybody that's over a financial operation wants to encounter.
So I'm going to walk you through, I would say, key dates of this
reconciliation project, trying to just walk through what happened.

So I'm going to take you through, then, our Fiscal Year 2007
financial audit. Now, this is the financial audit on our audited
financials performed by an external financial auditor.

When they arrived to do the work on the Fiscal Year 2007 books,
which would include activities of September 2006 through August 2007,
we certainly disclosed the issues that we were going through with the
bank account reconciliation. And in that particular year's audited
financial report, the agency was cited with a significant deficiency
for the lack of current account reconciliation of
the prize payment account."

Excerpt - Letter Dated Dec 14, 2007 - Maxwell, Locke, Ritter - Independent Auditors

Now let's reason this out ...
If I'm reading all this correctly, not only does the
DRAFT report say the account was not being reconciled,
but so did Maxwell, Locke, Ritter in Dec 2007. So why
does Ms. Pyka - in 2012 - keep saying that she had "teams
of staff members" working on the account in Feb 2006
when four things indicate/prove otherwise ...

1) the Draft report
2) Maxwell, Locket, Ritter letter
3) Fraudulent transactions were NOT being caught
4) If 7 (seven) staff members were involved in the reconciliation
process, I wonder, who was doing their jobs? (See excerpt
under Management Response for the 7 staff members)

But equally as important ...
I'd like to know why Mr. Gary Grief did not follow up
on the warning from the outside auditors? Why didn't
the Commissioners follow up?

One would think that, under these circumstances, Mr. Grief
would have asked - at least weekly - if the account had been
balanced yet. After a reasonable amount of time, he should
have instructed Ms Pyka to immediately close this
account to protect state assets.

For that matter, why would Kathy Pyka need Mr. Grief
to tell her to close the acct. In her position, she should
know these things. The "failed action" by all parties
leads me to speculate that things weren't all
above board. Hmmmm ....

And, why didn't Internal Audit begin an investigation when
they learned from this letter the acct had not been reconciled?

---------------------------------------------------------------

Let's "Confirm" The Validity of the Draft Report
By using logic and reading between the lines ....


Excerpt - DRAFT Report - Page 17


Excerpt - Final Report - Page 21



Yes, these two paragraphs are almost identical. One is in the Draft and one is in the
Final Report. What my point is ... this clearly shows that Internal Audit interviewed
responsible management and staff prior to the draft being completed thus it SUPPORTS
the statements in the DRAFT of what management said at the time regarding the lack
of reconciliation efforts. Now when the final report was done, everything changed.
You know, now they claim they had "teams" working on the account in Feb 2006.

What a bunch of BALONEY.

-----------------------------------------------------------------

Excerpt - Draft Report

Excerpt - Final Report - page 9

Excerpt - Draft Report - Table of Contents - "Fraud"

Excerpt - Final Report - Table of Contents "Unauthorized Transactions"

Fraudulent vs Unauthorized Transactions
The word "fraudulent" was replaced by the words "unauthorized
transactions." How often to you see Prosecutors or news agencies
use the word "unauthorized transactions" rather than "fraud?"
Frankly, I've only seen Prosecutors say ... "unauthorized use of a
vehicle" but never on stolen money. I can assure you, the
Texas Lottery changed the verbiage in hopes that readers
may not pick up on the severity of the issue.

----------------------------------------

What would these folks think IF they read the
Draft Report compared to what they read in
the Report furnished to them by the Texas Lottery?

Excerpt - Shows who received the final report


Does anybody care that the TLC foolishly
& through sheer negligence lost money?

Oh don't you worry - I have absolute faith that the
Texas Lottery will somehow counter what I've posted here.
It seems to me that they always get away with questionable
acts. I only wonder how long this will continue.

I often wonder if this might be why we've
had such a turnover in Lottery Commissioners?

---------------------------------

Internal Audit Division Was Murdered!

After Ms. Melvin resigned, her staff was all moved to the BINGO
Division and the Texas Lottery has now hired an outside audit firm.
Isn't this something ... Internal Audit has been there as long as I've been
around. I just wonder if the outside firm will allow the Texas Lottery
to revise their reports in the same manner they did this one.

--------------------------

Pertaining to the Office of the Controllers Mgmt Staff
To think ... as of a few months ago, no staff member has been
officially reprimanded. With the exception of Mr. Ben Navarro
who resigned via a text message in June 2012, the management staff
remains the same. And, just imagine too, they all got salary increases!
(Noteworthy - even though Mr. Navarro resigned, documents
reveal he's still in close contact with the Office of the Controller
management staff .... I'll cover this in Part 9 of this series)

Even the Executive Director was not reprimanded -
rather he got a raise too. Boy ... what a deal!

This is your tax dollars at work.

--------------------------------------

In Concluding Part 7

Stated simply, it is my opinion that the Texas Lottery has bent
over backwards to try to cover up the fact that management
failed to protect State assets. They did not complete a
required monthly task of reconciling their bank acct. In
the end, they wrote off $600K - this means they reduced the
balance that they thought they had in their checking account.

But ... the truth is ... no one really knows what
the actual loss was because the differences between
what the bank said was in the TLC acct vs what the TLC
thought they had in their acct was about $2.8 $1.89 million
less. Somehow, Ms Pyka managed to reduce that
figure to the $600K figure.
(Strike thru was typo/error - changed 3/19/14)

To date, $50,000 has been identified as lost
to fraudulent transactions ... Where's the rest of it????

Bottom line and sadly, BOTH reports concluded ...

"Based on the results of our review,
Internal Audit, could not determine whether
the Prize Payment account is accurate
and fairly presented, confirm the
amount of the discrepancy noted in
the reconciliation, or determine
the reason for the variance in
the Prize Payment account."

("variance" means shortage)

Again I ask, was this the perfect crime?

------------------------------------

As promised, here's copies of the
DRAFT & the Final Report

The very document that the Texas Lottery filed for an
AG Opinion to keep from me or maybe I should say "us."

Two Separate Reports Both Titled ...
"TX Lottery Prize Payment Account Review"

- Dec 2011 Draft Report - click here, pdf
and
- Nov 2012 Final Report - click here, pdf

---------------------------------------------

- About Part 8 -
Here I will question whether J. Winston Krause
is the right man to Chair our State Lottery. You will
be the Judge and Jury - I will be the messenger!

------------------------