Fantasy sports parimutuel gambling, Board of Horse Racing, Montana State Lottery : performance audit

2009·0.9 MB·English

by  Montana. Legislature. Legislative Audit Division

s
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L72FSPG
2009
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A
Report
TO THE
Montana
Legislature
Performance Audit
Fantasy Sports
Parimutuel Gambling
Board ofHorse Racing
Montana State Lottery
September 2009
Legislative Audit
Division
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MontanaStaleLibrary
3 0864 1005 8610 9
Performance Audits
Legislative Audit
Committee Performance audits conducted by the Legislative Audit Division
are designed to assess state government operations. From the
Representatives audit work, a determination is made as to whether agencies and
programs are accomplishing their purposes, and whether they
Dee Brown
Betsy Hands can do so with greater efficiency and economy.
Scott Mendenhall
We
Carolyn Pease-Lopez conducted this performance audit in accordance with
Wayne Stahl generally accepted government auditing standards. Those
Bill Wilson standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for
Senators our findings and conclusions based on our audit objectives. We
Greg Barkus believe thatthe evidence obtained provides a reasonable basis for
John Brenden our findings and conclusions based on our audit objectives.
Taylor Brown
Mike Cooney
Members of the performance audit staff hold degrees in disci-
Cliff Larsen
Mitch Tropila plinesappropriate to the auditprocess. Areas ofexpertise include
business and public administration, journalism, accounting,
economics, sociology, finance, political science, english,
anthropology, computer science, education, international
Audit Staff
relations/security, and chemistry.
Performance
Angus Maciver
PerformanceauditsareperformedattherequestoftheLegislative
KoRi Minckler
Audit Committee which is a bicameral and bipartisan standing
committee ofthe Montana Legislature. The committee consists
Financial-Compliance
of six members ofthe Senate and six members of the House of
Jay Phillips
Representatives.
Fraud Hotline
Help eliminate fraud,
waste, and abuse in Directcommentsor inquiriesto:
state government.
Legislative AuditDivision
Call the Fraud
Room 160, State Capitol
Hotline at: P.O. Box201705
MT
(Statewide) Helena, 59620-1705
1-800-222-4446 [phone]
(in Helena) Reports can be found in electronic format at:
444-4446 http://leg.mt.gov/audit
LEGISLATIVE AUDIT DIVISION
Tori Hunthausen, LegislativeAuditor Deputy Legislative Auditors
Monica Huyg, Legal Counsel James Gillett
Angie Grove
September 2009
The Legislative Audit Committee
ofthe Montana State Legislature:
This report provides the legislature information about the development and
administration of a new fantasy sports parimutuel gambling program by the Board
of Horse Racing and the Montana State Lottery. This report includes findings and
recommendations relating to the legal authority ofthe Montana State Lottery relative
to fantasy sports gambling, and opportunities for improving the process used by the
Board ofHorse Racing for selecting providers offantasy sports gambling games.
We wish to express our appreciation to Board of Horse Racing and Montana State
Lottery personnel, and staff in other executive branch agencies and offices for their
cooperation and assistance during the audit.
Respec itted,
/a_^
Tori Hunthausen, CPA
Legislative Auditor
Room 160• StateCapitol Building• PO Box201705 • Helena, MT• 59620-1705
Phone[phone] • FAX[phone]• [email protected]

Table of Contents
Figures andTables ii
Appointed and Administrative Officials iii
ReportSummary S-1
CHAPTER - INTRODUCTION
I 1
Introduction 1
The Parimutuel System ofGambling and FantasySports 1
The Montana State Lottery 1
Background
1
Implementation ofHB616 and the Role ofthe Montana State Lottery 2
Financial Data for Fantasy Sports Parimutuel Gambling 2
Audit Scope 3
Implications ofRecent Federal Court Decisions 3
Audit Objectives 3
Audit Methodologies 4
Report Organization 4
CHAPTER -IMPLEMENTATION OF FANTASYSPORTS PARIMUTUELGAMBLING
I 5
Introduction 5
Board Rule-Making Procedures 5
Basis forAdministrative Rules Is Unclear 6
Implementation ofBoard Rules for Fantasy Sports Parimutuel Gambling 6
Agreement With Lottery Circumvents Rule-Based Procedures 7
Problems ExistWith Board LicensingFunctions for FantasySports 8
Application ofthe Montana ProcurementAct to FantasySports Parimutuel Gambling..8
LackofOpen Procurement Process Benefitted Lotteryand Contractor 9
Licensing Function Is Inappropriate for Fantasy Sports Parimutuel Gambling 10
Statute Should Be Revised to Provide for Contracted Services 11
CHAPTERIII-LEGALAUTHORITYFORLOTTERY'S INVOLVEMENT IN FANTASYSPORTS 13
Introduction 13
Legal Challenges to Lottery Involvement 13
Interpretation ofStatutes Relating to Fantasy Sports Parimutuel Gambling 13
Involving the LotteryWas Expedient, But does not Complywith Stature 14
AGENCYRESPONSES A-1
Board ofHorse Racing and Montana State Lottery A-3
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Montana Legislative Audit Division
Figures AND Tables
Tables
Table 1 FantasySports Retailers' Lottery Products Sales Revenue. 10
Ul
Appointed and Administrative Officials
Board ofHorse Racing Ryan Sherman, Executive Secretary
Sherry Meador, Contracted Legal Counsel
Al Carruthers, Chairman
Ray Tracy, Vice Chairman
Susan Austin, Board Member
John Ostlund, Board Member
Susan Egbert, Board Member
Mike Tatsey, Board Member
Carol Lambert, Board Member
MontanaState Lottery George Parisot, Director
John Tarr, Security Director
Jeri Duran, Sales and Marketing Director
Paul Gilbert, Information Technology Director
Elaine Taylor, Financial Services Director
Montana Lottery Commission Robert Crippen, Chairman
CraigAnderson, Commission Member
Thomas M. Keegan, Commission Member
Beth O'Halloran, Commission Member
Wilbur Rehmann, Commission Member
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Digitized by the Internet Archive
in 2011 with funding from
IVIontana State Library
http://www.archive.org/details/fantasysportspar2009mont
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Report Summary
Fantasy Sports Parimutucl Gambling
The involvement ofthe Montana State Lottery in the Board of Horse Racing's
fantasy sports parimutucl gambling program does not comply with statute;
further legislative action is necessary to ensure this new form of gambling is
administered in an equitable and transparent manner.
Audit Findings
In response to a requestfrom the EconomicAffairs Interim Committee, the Legislative
Auditor prioritized a performance audit of the Board of Horse Racing (the board)
and its implementation offantasy sports parimutucl gambling. House Bill (HB) 616,
passed during the 2007 legislative session, provided for fantasy sports gambling to be
administered by the board. HB616 authorized extension ofthe board's authority over
parimutucl gambling to fantasy sports leagues. In June 2008 the board entered into
an inter-agency agreement with the Montana State Lottery (the Lottery) to provide
fantasysports parimutucl gambling. The Lottery introducedtwoweekly fantasysports
games based on professional football and auto racing. The games are offered by the
Lottery through approximately 200 retail locations.
Our audit objectives addressed the board's
Fantasy Sports Gambling
Statutory Revenue Distribution implementation of fantasy sports gambling
We
via administrative rule. also addressed
Player'sPrize Pool $134,206 concerns over the legality of involving the
BoardofHorse Racing $29,018 Lottery. We found the board lacks full legal
authorityforadoptingfantasysports gambling
MontanaStateLottery $10,882
rules under the Montana Administrative
Retailers $7,254 Procedure Act. The rules that were adopted
Total $181,360 did provide a good basis for implementing
the new program, but the board's
Source: Complied bythe Legislative
AuditDivisionfrom Montana inter-agency agreement with the Lottery
State Lottery records.
essentially negated these efforts. The board
behaved like it was procuring services under
contract, as opposed to granting licensure, but none of the procedures associated
with the Montana Procurement Act were applied. The board's actions were a hybrid
oflicensing and contracting procedures, but ultimately satisfied the requirements of
neither. Had the board followed the Procurement Act, several problems could have
been avoided. Theseproblemsrelateto theabilityofothermarketentrantsto participate
on an equitable basis, and the benefits that ultimately accrued to the Lottery and its
main game contractor.
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Challenges to the legality ofinvolving the Lottery in fantasy sports gambling focused
on the agency's legal authority to offer gambling games that are different from
conventional lottery-type products. The Montana State Lottery Act established the
Lottery and outlined its legal authority. HB616 did not refer to the Lottery or make
any changes in the Lottery Act. Although HB616 did not identify a specific means
of implementing fantasy sports gambling, the involvement of the Lottery does not
comply with statute. The board, the Lottery and the Governor's Office have stated
that involving the Lottery offered an expedient and effective means ofimplementing
the legislation. Although the board and the Lottery obtained legal analysis, they did
not seek a resolution of the issues through the Attorney General's office or through
legislation during the 2009 legislative session. Either course would have offered an
opportunity to clarify legal interpretations regarding the Lottery's scope ofauthority.
Audit Recommendations
In relation to the board's process for licensing fantasy sports gambling providers,
we recommend legislation be enacted to provide the board authority to contract for
services, rather than license provision offantasy sports gambling. Revising statute to
provide the board with authority to contract for services would ensure greater trans-
parency in the process and greater confidence in the results. In relation to the Lottery's
legal authorityto offer fantasysports gambling, activities thatare outside ofan agency's
legal authority and are not in compliance with statute should cease. We recommend
the Board ofHorse Racing and theMontana StateLottery terminate their inter-agency
agreement on fantasysports parimutuel gamblingwith immediate effect.