High-risk business

Camelot shareholder Gtech faces fresh allegations over its activities in the US. It has previously been the subject of grand jury investigations in four states and had one of its senior executives imprisoned. David Benady reports on the brains

In the same week that Camelot bosses were being carpeted by Tony Blair for awarding themselves huge pay rises, another lottery boss quietly stepped down.

Guy Snowden, chief executive and co-chairman of Gtech, the brains behind the UK National Lottery and behind 70 per cent of the world’s other lotteries, has resigned as chief executive. Gtech is one of the five consortium members that makes up Camelot, and it provides the systems which enable the UK National Lottery to function. Snowden has been replaced by 51-year-old Gtech president William O’Connor, who was hired in 1994 from telecommunications and networking company Ascom Timeplex. But Snow- den remains a non-executive director at Camelot, in which Gtech owns a 22.5 per cent stake.

The reasons behind his resignation are unclear, but it comes at a difficult time for Gtech in the US. Over the past few years Gtech has been under grand jury investigation in four US states, although the company has never been prosecuted or found guilty of any wrongdoing.

But according to the Atlanta Journal and Constitution newspaper, law enforcement officers from eight states, seven with Gtech contracts, met in April “to compare notes on investigations involving Gtech Corporation”.

And as Marketing Week revealed last week, Gtech is being forced to rebid for its contract to run the second-largest state lottery in the US – The Texas State Lottery – with annual sales of $1.8bn (1.1bn). Gtech has the licence to run the lottery until 2002, but the pitch has been called following a welter of allegations against Gtech concerning the methods it uses to win and hold on to lottery contracts in US states. A spokesman for the Texas Lottery Commission (TLC) says the repitch was called because of the “totality of the circumstances” surrounding Gtech.

The TLC has been ordered to hand over documents to a federal grand jury, which is understood to be investigating its operation.

The state’s police force, the Texas Rangers, spent two weeks searching the TLC offices at the end of last year. It followed the imprisonment of a senior Gtech executive, J David Smith, for his involvement in a “kickback” scheme in New Jersey.

But these allegations may not be all they seem. Gtech is locked in a bitter struggle with arch-rival Automated Wagering International (AWI) to win US state lottery licences. Gtech holds 75 per cent of the US licences. The PR war of words between the two has hit rock bottom, with allegations – and law suits – regularly traded.

For example, AWI won the contract for the Florida lottery 18 months ago and as a result Gtech is suing the Florida lottery evaluators for hiring its rival on unfair grounds. Gtech has accused the evaluators of favouring AWI as the incumbent, improperly scoring Gtech on technical grounds and “misleading” Gtech in the way pricing proposals would be evaluated.

So all allegations against either company must be handled with care, with close attention paid to where they emanate from.

Nevertheless, the federal grand jury investigation is looking into the relationship between the TLC’s directors and Gtech lobbyists. Smith, who was Gtech national sales manager before his imprisonment, is a central figure in the allegations surrounding the company. One allegation refers to a case in Texas where he hired the boyfriend of the then TLC director Nora Linares as a consultant.

Linares was fired by TLC, though she insists she was unaware of the connection to her boyfriend, was cleared of any wrongdoing and is suing TLC for wrongful dismissal. There is a further investigation into Smith’s connections with the Kentucky state lottery. And there have also been allegations from the California lottery director Maryanne Gilliard that Gtech used strong-arm tactics to pres surise local lottery officials.

There is also the looming court room drama to come in the UK with Richard Branson suing Snowden for calling him a liar over Branson’s claims on a Panorama television programme that Snowden tried to bribe him to withdraw his non-profit bid to run the lottery in 1994. Snowden is also counter-suing Branson, but the case is not due to be heard for at least six months.

No Gtech spokesperson was available to comment on specific allegations, but a company statement says: “There has never been an accusation or a finding of wrongdoing against Gtech in any jurisdiction where it conducts its business. Government agencies have consistently found the company fully compliant with the highest standards of commerce. The verdict returned at the J David Smith trial indicated that a crime had been committed but that Gtech was the victim of that crime.”

However, there is evidently some unease in Texas about “the totality of circumstances surrounding Gtech,” and this has led to the repitch in Texas five years early. As one US lottery observer comments: “Gtech has been accused of a lot of things, but as with Teflon, everything bounces off. The Gtech strategy in bidding for lottery contracts is to come in and campaign at a local level.”

This may be standard practice in the US, but Gtech seems to have taken it to an extreme. The former head of AWI, W Humbert Plummer, is reported to have told a journalist: “We’d go to dinner with the lottery director and find out that Gtech had hired a yacht and taken out the whole damn legislature.”

Underlying much of the criticism of Gtech is a feeling in the US that its size, and that of rival AWI, could be detrimental to the running of state lotteries. One US lottery observer says: “There is a big issue over the lack of competition in the awarding of lottery contracts – it is simply a battle between two giants. A broader issue is the running of the contract process, which allows no-one else to come in. There is a feeling that maybe lotteries are losing out because when small companies develop new technology, lottery organisers can’t look at it.”

Whatever the rights and wrongs of Gtech’s lobbying techniques, there is no doubt that this company is the supreme operator of lotteries. It now has a stake in six of the top ten lotteries in the world, having started working in Brazil earlier this year. The plaudits on its efficiency ring in from around the world – a spokeswoman for the Irish national lottery says: “Gtech is a highly professional organisation and provides an extremely good service.”

Gtech was set up in 1981 by Snowden and mathematician Victor Markowicz under the original name of Gaming Technology with a loan of $1,500. In the intervening 18 years it has grown into a company with revenues of nearly $744m (460m) and over 4,000 staff. In the year to the end of February 1996 both Snowden and Markowicz received payments of $2.7m (1.6m) making even Camelot chief executive’s Tim Holley’s 590,000 seem small beer. The two co-chairmen own 3.6 per cent each in Gtech.

The company was formed when US state lotteries were still young – they have only been in operation in their present form since the early Sixties. Gtech now operates 27 out of the 37 US state lotteries. It has also spread its tentacles across the globe, and operates lotteries in 43 foreign countries – installing, operating and maintaining online systems in countries ranging from Brazil to Spain, the UK, Mexico, Ireland and Chile.

It has been a top performer on Wall Street, although analysts have placed a question mark over its future development. With Gtech already taking a 70 per cent market share, the international lottery market is all but saturated. Every major country and state which wants a lottery has got one. Egypt and South Africa are two possible markets, though the emerging nations of India and China may become the world’s largest lotteries by a long chalk in the future.

Gtech is looking beyond lotteries for its future development. The company is organised into four divisions – the Lottery Group (state lottery business), Gaming Group (non-lottery gaming such as electronic gambling machines), International Group (international lottery business) and Government Services Group (automation and delivery of government benefits and services).

It is in this latter division that Gtech is looking for growth, as it is a virtually untapped market. In 1995 the company expanded its state government services with hunting and fishing licences in Texas. It has also started the automated delivery of welfare cheques in Texas, and is thought to have made approaches to run similar schemes in the UK.

However, while National Heritage Secretary Chris Smith was threatening to take Camelot’s National Lottery licence away, and Camelot was promising to come up with alternative ideas to create a not-for-profit operator at their meeting last Monday, Gtech seemed to be in a no-lose position. Whoever takes over the running of the Lottery – and the Government insists it will be on a non-profit making basis – will still have to deal with Gtech, which runs the systems, provides and maintains the machines.

Gtech is taking 3m worth of dividends from Camelot this year, but it is also charging the Lottery operator fees for running the systems. Camelot uses five per cent of its 5bn sales to pay for costs, and Gtech is thought to take about 50 per cent of this, some 100m. Given the efficiency for which the company is famed, one can presume that it keeps a good portion of this in profit.

The huge cost of replacing the Lottery terminals means that whoever operates it will still have to pay Gtech to run the systems – just as it will have to pay Racal for running the phone connections, De La Rue for printing the tickets and Cadbury Schweppes for use of its retail sales force. These companies make up the consortium that is Camelot.

The UK Lottery – the world’s largest, at least until the Japanese lottery launched last year is established, and seen by Gtech as the jewel in its crown – could account for as much as 15 per cent of Gtech’s turnover. Whatever the final deliberations of the Government about who should run the UK Lottery, Gtech seems assured of its place in it.

The UK watchdog Oflot says it has no concerns about Gtech’s operations in the US. When it granted Camelot the licence in 1994, Oflot’s director general Peter Davis spent most of the press conference dismissing concerns about Gtech, which then faced investigations in the US and Australia. He made it clear that Gtech and its executives, like all the other consortium members, had been the subject of inquiries by everybody from the Inland Revenue Service to the FBI before awarding the UK licence.

Equally it showed little interest when Marketing Week revealed Gtech’s role in introducing Camelot to one of its suppliers, the controversial phonecard company CardCall (MW January 10).

Most observers believe Gtech’s future is in supplying systems for electronic welfare benefit pay ments. That is why J David Smith’s imprisonment and the continuing allegations surrounding its operations in the US could prove damaging to its future business in government contracts.

Bids for the Texas contract have to be in this month. If Gtech loses its grip on an operation believed to be worth 15 per cent of its turnover, over 100m, it could open the way to further investigations. This could further damage its image, and impair its march into other areas of operations, retarding its ambition to control the world’s few remaining untapped lottery markets.

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