The Austin Chronicle

https://www.austinchronicle.com/news/2012-06-08/the-great-100-lottery-scam/

The Great $100 Lottery Scam

Texas Lottery pursues bearers of 'previously paid' but forgotten scratch-off tickets

By Jordan Smith, June 8, 2012, News

Zachariah ("Riah") and Carrie Kuenzi were driving home from trivia night at the HighBall on Jan. 25, heading south on Manchaca Road, when they were stopped by an Austin Police Department officer; Carrie was speeding. The officer issued a citation, and the couple were back on their way. Or so they thought. They hadn't traveled much farther when the same officer flashed his lights, again pulling the couple over. After stopping the car, Carrie stuck her head out the open window, protesting in jest that she couldn't possibly have been speeding already. Indeed, she wasn't speeding; the officer made his way to the passenger side of the car and extracted Riah, taking him to the back of the police cruiser. Riah was being arrested on an outstanding warrant, the officer told Carrie. Neither of the Kuenzis had any idea what was going on. Carrie says the officer told her, "That's all I know, ma'am," when she implored him to tell her what the warrant was for. He paused, then added a bit of detail: "Could it maybe have anything to do with the Lottery?" he asked.

Carrie was stunned; she knew exactly what was happening – although she couldn't believe it. The Texas Lottery Commission had charged her husband with "claiming a lottery prize by fraud," a class A misdemeanor, punishable by up to a year in jail. But that wasn't all. When the couple went to court for Riah's first appearance on the fraud charge, they were informed that there was a warrant out for Carrie's arrest as well, also for lottery fraud.

According to the TLC, in March 2011 the Kuenzis defrauded the Lottery by attempting to cash in a $100 Bonus Word Crossword instant scratch-off ticket that the TLC says had already been claimed and paid in September 2010. The Kuenzis firmly deny the charge; how the previously paid ticket made it back into their possession, neither can say, but they insist that it was their ticket and that they don't recall cashing it in back in 2010.

The TLC – and the county attorney's office, which is prosecuting the case – appears unpersuaded by the Kuenzis' protestations, despite the fact that, according to investigative documents obtained by the Chronicle, the couple has maintained their innocence and believe that a simple mistake of some sort led to their legal predicament. Moreover, it does not appear that the TLC investigation turned up any evidence to prove otherwise. To Dawn Nettles, a watchdog of the Texas Lottery who publishes the online Texas Lotto Report and has made something of a career of being a thorn in the Lottery Commission's side, the prosecution of the Kuenzis is out of the norm for the TLC. She says the agency typically aims its fraud enforcement guns in a different direction, more often going after people trying to claim winning Lotto tickets that were stolen from their real owners. Still, she's not entirely surprised, because she believes the TLC has become increasingly determined to ferret out and make an example of players believed to be "Dumpster divers" – people who look for scratch-off tickets tossed in the garbage outside Lottery retail locations, tickets that have been cashed and disposed of without being destroyed per TLC regulations or those that a player tossed, thinking, for whatever reason, that a ticket was a loser when it in fact was a winner. In essence, Nettles believes that the TLC is making an example of the Kuenzis in an effort to discourage people from looking for discarded winning scratch-off tickets. Whether that's the case and why the TLC would devote public resources to such a seemingly minor episode remain open questions.

Interrogating the Perps

The Kuenzis' current legal woes started with a mundane trip to a convenience store to have a stack of scratch-off tickets scanned and to collect on the winners. The couple routinely played several popular Texas Lottery scratch-off games, including Crossword. The object of Crossword is to scratch off a series of letters and match them to letters on the playing card to form words; the more words matched, the greater the payout. It is one of the state's more complicated scratch-off games, leaving plenty of room for operator error – missed letters can lead a player to think a winning ticket is actually a loser. The Kuenzis know that firsthand. "We were playing often and throwing away [what we thought were] losing tickets," Riah says. The couple changed their routine, however, after taking in for cash-out what they thought was a $4 winner only to discover that it was actually a $50 winner. "We realized that we were missing details, because if you miss a letter it can change the game." From then on, the couple saved all their tickets, even those they believed to be losers, in order to have them scanned by a Lottery retailer, typically at either the Barton Food Mart on Spyglass Drive or the 1st Food Mart on South First Street.

In early 2011, the couple took a stack of accumulated tickets to the Barton Food Mart. "We found a couple losers, and we found a couple winners, and we cashed those in," recalls Riah. "And then came the one with the problem." After scanning several tickets, the clerk informed the couple that they had a $100 winner on one Bonus Word Crossword. But there was a problem: because the top of the ticket was torn off, where one of the ticket's bar codes was located, the retailer would not be able to give them their winnings. In order to collect, the Kuenzis were told, they would have to take the ticket to the Claim Center at TLC headquarters on East Sixth Street.

It wasn't until March 22, 2011, that the couple finally got around to doing so. "It was an inconvenience, so we didn't do it for a while," says Riah. The couple was asked to complete claim information on the reverse of the ticket as well as an additional form detailing information about where they believed they'd purchased the ticket and how long it had been in their possession. They were told that before the Lottery could pay out the winnings, the torn portion of the ticket would need reconstruction. The couple left, with the understanding that the Lottery would contact them when the reconstruction was complete.

That's not how things played out. Instead, when the couple was called back to Lottery HQ in mid-April, they were taken, individually, into a room with TLC investigator Steven Bilbo, who informed each of them that the ticket had previously been paid and that the TLC believed they were trying to commit fraud by presenting the ticket for a second payout. When Carrie left the room with Bilbo, she was crying, Riah recalls. "She said, 'They think we're committing fraud!'" Indeed, with Riah alone in the room, Bilbo tried to turn the screws. The couple had been married less than two years, so it's likely that Riah didn't know his wife that well, Riah remembers Bilbo telling him. "He wanted me to throw Carrie under the bus," he recalls. Bilbo told Riah that "I should just tell him how [Carrie's] committing fraud, and it would be all on her and I could go home." Riah wasn't having it: If the ticket had been cashed, then so be it. How they ended up with the ticket, the couple didn't know, but it was clearly just an "honest and innocent mistake." Riah recalls Bilbo finally relenting and telling him "not to worry about it and it didn't seem like anything."

The couple left, but continued for at least the next week, without success, to contact Bilbo to make sure things had been resolved; they never heard back, they say. Carrie's mother also got involved, calling the TLC and talking to Bilbo's supervisor. Carrie says her mother got the impression that the couple should just forget about the whole incident. Eventually, they did – at least until late January, when Riah was arrested and taken to jail on an outstanding warrant Bilbo filed back in September 2011, one of two he filed that month, charging each of the Kuenzis with defrauding the Lottery, even though they never did collect the $100.

The Evidence ... Preserved

Commission spokeswoman Kelly Cripe said she cannot comment specifically on the Kuenzis' case but said that the TLC takes seriously its job of detecting and charging Lottery fraudsters, who come in all shapes and sizes. There are those who rob convenience stores and steal rolls of tickets, those who try to pass off winning Lotto tickets as their own (sometimes by trying to remove the winner's signature from the ticket and signing their own name instead) and others who try to alter losing tickets to look like they're actually winners. According to TLC records, from 2005 to late February 2012, TLC investigators conducted 1,191 fraud investigations. Of those, just 285 were submitted for prosecution; 101 ended in a conviction.

That statewide record suggests either that there either isn't much fraud happening or else not much is being detected in an operation that in fiscal year 2011 alone saw sales of Lottery tickets top $3.8 billion. Indeed, this year, through the week ending May 19, players bought roughly $2.2 billion worth of scratch-off tickets and another $126 million in Lotto Texas tickets, with total sales coming in at roughly $3.1 billion – an increase of 9.2% over last year. In other words, games of chance are big business in Texas, which makes the allegations against the Kuenzis seem even more ridiculous – akin to counterfeiters trying to game the system by fabricating $1 bills.

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Beyond that, says Nettles – whose watchdogging of the TLC goes back nearly to its inception in the early Nineties – the problem with the Kuenzis' case is that, per TLC regulations, the couple should never have had the ticket in their possession after it was paid out the first time. According to TLC rules and regulations, winning tickets are supposed to be retained by the retailer and destroyed – preferably, she says, by tearing the ticket completely in half, though the TLC's guide for retailers notes that "removing the corner of the ticket" with the barcode on it "is usually sufficient." Either way, winning tickets are meant to be destroyed, disposed of, and never returned to the player.

Thus, looking at the situation with the Kuenzis, Nettles thinks it would be more logical to ask why the couple had the ticket at all. She also suggests that if the TLC is actually concerned about attempted fraud using previously paid scratch-off tickets, the agency should pursue retailers who fail to properly deface or dispose of winning tickets – perhaps not via legal action, but at least with educational training to ensure compliance with Commission regulations.

In the Kuenzis' case, it doesn't appear that happened. According to a TLC investigative report on the couple's case, Bilbo made a trip to the Barton Food Mart, where the ticket was originally paid out back in September, to inquire about ticket disposal procedures. According to the store manager, "winning tickets are never returned to the customers," reads the report. Instead, the manager told Bilbo that he and his employees tear the tickets into four pieces and then deposit them into a cardboard box behind the store counter. Those tickets are then bagged and placed into a Dumpster housed in a "gated cinderblock enclosure." Moreover, the manager told Bilbo that he'd never had any issues with customers or others trying to get into the Dumpsters to dive for previously paid tickets.

It seems Bilbo believed the retailer, thereby leaving a key question unanswered: If the store's process had been followed back in September 2010, how did the ticket end up back with the Kuenzis? Apparently, the benefit of the doubt Bilbo extended to the retailer was not similarly extended to the Kuenzis.

Follow the Money

The bottom line in the Kuenzis' case, says Nettles, is that they "should never have had that ticket; it should have been destroyed." The fact that it wasn't is "clear indication that the store clerks aren't doing their jobs and aren't adhering to what they're supposed to do." Nettles says she believes the Lottery wastes investigative resources going after folks like the Kuenzis when instead it should do a better job of policing retailers. The agency's recent targeting of Dumpster divers, she suggests, is less about wanting to stop "fraud" and more about trying to protect the Lottery's unclaimed prize fund, a portion of which is sucked back into the state's general revenue.

This year, from Jan. 1 to April 30, more than $24 million in unclaimed prize money was transferred to state coffers. While the largest portion of Lottery money, generated by ticket sales, goes to the Foundation School Fund ($963 million in 2011, for example), millions are also returned to the general fund – roughly $43.3 million last year. That money, Nettles argues, is not insignificant for a state facing large budget shortfalls, and it's enough to give the state motivation to crack down on individuals looking for discarded winning tickets.

TLC Executive Director Gary Grief strongly disagrees with Nettles' theory. "We are not evaluated in any way ... by the amount of unclaimed prize money that goes back to the state," he says. "The Legislature does not care and does not grade us" on that. What lawmakers do care about, he says, is the amount of money the Lottery earns in sales for the school fund – and sales, he says, are directly tied to the "winning experiences" that players have. While he can't discuss the case specifics, he says he is "confident that once all of the facts come out about the [Kuenzis'] case, all of the [controversy] will quickly be put to bed."

The question of why the Kuenzis and not the retailer have become the focus of this particular case – and why the agency believes a $100 ticket is worth prosecuting – remains unanswered. The Chron­icle sought information from the TLC regarding the number of tickets scanned by retailers and at Lottery claims centers that, like the Kuenzis', come back as "previously paid by you" (a given retailer) or else "previously paid by other" (another retailer or claims center). We asked for records covering the last seven years, the same period of time for which we received information on fraud investigations, prosecutions, and case dispositions. The TLC replied that those records are not readily available and would need serious staff time to produce, at a cost to the Chronicle of $92,000.

Despite its records limitations, the TLC was eventually able to provide a snapshot of tickets scanned as previously paid by "you" or "other" for a single week, from Sept. 25 through Oct. 1, 2011. During that week, 136 tickets were scanned as "previously paid by other" and 1,641 were scanned as "previously paid by you." In other words, 1,777 tickets across the state made it back into players' hands after being paid out. That's a tiny fraction of the 3,314,681 tickets "validated" that same week by retailers and claims centers. In an email, spokeswoman Cripe wrote that it is important to have that total number, in order to put the number of already paid tickets making it back into the world into some context.

But does the TLC actually use the counts of previously paid tickets in order to regularly re-educate retailers about proper defacing and disposal of tickets? That's unclear. In an email, Cripe wrote only that if the TLC gets a "complaint regarding the payment of a claim, [will they] review previously paid transaction data as part of the investigation. Whether a claim is for $100 or $100 million, ensuring that players with legitimate claims are paid, and holding those without legitimate claims accountable, is fundamental to the integrity and security of our games."

For the Kuenzis, the fun of playing Texas' scratch-off games has turned bitter – not surprising when they're each facing the possibility of up to a year in jail for a fraud they insist never took place. Of course, under the law, it may be that the fraud technically occurred when the pair signed the back of the ticket and filled out a "Lottery Winner Claim Form" when asked to at the claims center, as a prerequisite to receiving the $100 Crossword winnings. Indeed, according to the government code, an "attempt to claim, without regard to whether the attempt is successful" is enough to warrant a fraud charge.

According to Nettles, that's a catch-22 utilized by the TLC, a problem she points out in a 16-page letter she wrote to the Sunset Commission, which this year is reviewing the TLC among a list of other agencies that go through the process every 12 years. Before the TLC will let a player know that a ticket appears to be previously paid, they require the player to fill out the form, thus "entrapping" players into fraud even when the attempt to claim is merely an honest mistake, prompted by a retailer's failure to follow TLC regulations. "[T]he innocent player thinks he has not collected on the ticket so he completes the paperwork as instructed by staff," reads Nettles' letter to the Sunset Commission. "Then staff sees that the ticket has already been paid and tells the player. Months or years later the player learns that there's an indictment against him for making a fraudulent claim."

The Kuenzis are currently slated to have their cases heard, by separate juries, on July 9. Although they've been offered a deal, to plead down to a class C misdemeanor – punishable by fine only – they're reluctant to plead guilty to a crime both say never happened. The experience has cost them dearly. After he was charged, Riah lost his job and with it his health insurance, which covered Carrie's prescriptions for rheumatoid arthritis that the couple can't otherwise afford. (Abbott Laboratories, the medicine's manufacturer, has since agreed to supply Carrie with a year's worth of the drug at a sharply reduced price.) Carrie is definitely nervous about what could happen and says she doesn't see any alternative to fighting the case before a jury. "When [Bilbo] asked me to tell the truth, he called me a liar, and now they want me to lie in order to get the plea deal," she says. "It's something I just can't do."

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