Lotteries Fuel New Networks of Gambling

Driven by state lottery jackpots skyrocketing past the $100-million mark, a new breed of entrepreneur and con man has emerged across the country, creating ever-expanding gambling networks that are turning state lotteries into national numbers games.

They are commonly called out-of-state ticket brokers and for a fee--usually double the normal ticket price--they offer lottery players the opportunity to bet on booming games in almost any state.

The practice is considered illegal by most states, but, relying on computer networks, 900 telephone numbers and convenient interpretations of law, ticket brokers have proliferated, becoming gambling’s newest growth industry.

The brokers, most of whom see themselves as honest entrepreneurs serving a public need, have been the conduit for an increasing number of big lottery winners, including Melvin Oliver, a 50-year-old Pennsylvania maintenance man who won $12 million last week in the California State Lottery with a $2 ticket bought in Philadelphia.

But the brokers have also been involved in some of the most dubious episodes connected with the lottery.

Three weeks ago, a ticket purchased through a Chicago broker won $12 million of California’s record-breaking $119-million jackpot. The broker, however, apparently mailed copies of the same ticket to two men, who are now fighting over the prize in federal court.

Lottery and law enforcement officials say the spread of brokering agencies has brought new headaches over crime and consumer fraud--as well as worries about increased competition that has sent some lottery officials scrambling to find ways to compete.

Despite officialdom’s dim view of the operations, some gambling observers say the broadening sale of state lottery tickets around the country is inevitable.

They say the seemingly insatiable public demand for bigger jackpots and the drive of the American entrepreneurial spirit is pushing the modern lottery from being a state pastime to a national addiction.

“It’s already beginning to happen,” said gambling law expert Nelson Rose, professor at the Whittier College School of law. “This is free enterprise. It’s the American way.”

Rose, one of the few teachers of gambling law in the country, said ticket brokers have existed since New Hampshire launched the first modern state lottery in 1964. Entrepreneurs from New York City and Boston seized the opportunity to buy New Hampshire tickets and sell them at a profit to lottery-hungry gamblers out of state.

In the last half decade these small-time operators have evolved into large franchises that stretch over many states and offer a chance at virtually every big drawing in the country. There are scores of brokers around the country, with the biggest concentration on the East Coast.

Most broker operations are fairly simple. Players go to an outlet in their home state. They pay a fee, usually $2, and receive a receipt which shows their numbers. The numbers selected are sent via computers, phone lines, or other means to agents in the appropriate state. Those agents, sometimes carrying thousands of dollars in cash, buy the tickets.

In some operations the receipts are redeemed for the lottery ticket, which is shipped across country. In other operations, the player holds only the receipt and never sees the ticket, which stays in the state to avoid violating federal law.

For smaller prizes, winners use their receipts to claim their money. Multimillion-dollar prizes are claimed in person and payment arrangements, between the winner and the state, are no different than they are for local winners.

Ted Hall, the owner of the 6-month-old Key Lotto Services of New Jersey, said the proliferation of ticket brokers is a natural outgrowth of the number and size of modern lotteries.

A decade ago, there were just 14 state lotteries generating $2.4 billion in annual sales, according to the trade publication, Gambling and Wagering Business. Today, there are 36 lotteries with $20 billion in sales.

The brokers have no idea what share of the total they sell, although they are certain it is minuscule.

Even so, they say, a tiny portion of $20 billion is nothing to scoff at.

Hall said his fledgling company has sold more than 130,000 ticket in six months with just 37 terminals in Connecticut, New York and Pennsylvania. He is planning to add 200 more terminals in New York this year, which would make his firm one of the largest lottery ticket brokers in the country.

Key Lotto’s first big winner was Oliver, the Pennsylvania maintenance worker. The company flew him into Los Angeles Monday with much fanfare to tout the win. “My working days are over,” Oliver beamed just before he was chauffeured away to claim his $12-million prize.

State lottery and law enforcement officials warn that not everyone is as lucky as Oliver. Consider the case of Filiberto Garza Jr. of Santa Elena, Tex.

Garza bought $60 worth of tickets for the April 17 drawing of the California lottery from the U.S. Lottery Group of Monticello, Ill. One of his tickets was a $12-million winner.

Problem was, when the company sent a photo copy of the ticket to Garza, it apparently sent a copy of the same ticket to another customer, Steven Colvin, a carpenter from Richmond, Va..

Colvin filed suit April 26 in U.S. District Court in Chicago, where a judge has temporarily blocked payment of the jackpot.

“I publicly announced that Garza is the winner,” company president Phil Gillespie said. “But it’s for the courts to decide.”

In addition to such glitches, lottery and law enforcement officials say there have been complaints about shady operators feeding off the public’s lust for mega-jackpots.

They talk of fly-by-night brokers who collect money and then disappear, or operators who hand out worthless receipts for tickets never purchased.

David Dembe, a New Jersey deputy attorney general, recalled one report of an out-of-state lottery company that amazingly succeeded in selling day-old tickets. “Of course, they kept the winners and gave away the losers,” he said.

Many brokers agree that some companies are less than honest and they believe the industry should be regulated and licensed by the states.

For many states, however, all such operations are viewed as illegal. In the past few years, prosecutors have moved against ticket brokers, using a variety of state and federal gambling laws.

Two years ago, prosecutors in San Diego County convicted three men for their involvement in selling Pennsylvania lottery tickets by facsimile machine--the only ticket-brokering case in the state so far.

Dembe said two companies have been stopped in his state, although he said smaller operations continue to flourish. “We’ve got it under control until the next innovative defense comes up,” Dembe said.

The problem for prosecutors is that state and federal gambling laws, some of which date back past the turn of the century, are often inadequate to deal with the modern phenomenon of ticket brokering.

For example, one of the main federal laws used against ticket brokers is an 1894 statute that prohibits the movement of any lottery materials across state lines.

Ticket brokers, however, have been able to devise ways around the law.

Key Lotto Services in New Jersey uses microcomputers to take ticket orders, print a receipt for the buyer and then transmit the order to agents across the country who buy the tickets. The tickets never leave the state where they are purchased and thus avoid the federal prohibition.

Virginia-based Lotto Express uses another popular strategy--one that relies on an exemption in federal law that allows licensed shipping firms to move lottery materials across state lines. The exemption was created so that lottery tickets printed in one state could be shipped to the state where the drawing would be held.

To take advantage of the exemption, Lotto Express simply applied for a common carrier license.

Company president David Kelley, whose New Jersey franchise was shut down by the state, said he believes the states’ pursuit of ticket brokers is motivated by jealousy.

“The states look on us as competition,” he said. “They have a monopoly. They don’t want private enterprise in the lottery business in any way, shape or form.”

To an extent, lottery officials agree.

Dembe, the New Jersey deputy attorney general, said the loss of revenue can have a serious impact on a state budget. “Every dollar spent in New Jersey on a California ticket, is a dollar not spent on a New Jersey ticket,” Dembe said.

In Connecticut, lottery officials are trying to get the state Legislature to ban out-of-state brokers because of the revenue loss.

But while state officials decry the proliferation of private ticket brokers they concede that there is a lucrative national market.

Chon Gutierrez, executive director of the California State Lottery, said the department is considering starting a subscription service that would allow out-of-staters to buy into the California lottery.

Four years ago, five states and the District of Columbia banded together to create a multistate lottery called, Lotto America. Today, the game has grown by nine more states, becoming the closest thing to a national lottery.

In perhaps the most futuristic plan to date, a consortium of 22 state lotteries has joined with the Walt Disney firm’s Buena Vista Television unit to launch a nationally syndicated lottery game show.

The design of the broadcast has not been determined, but the general outline involves selling lottery tickets to viewers around the country who would then tune in for the nightly drawings. Disney predicts a 1992 release for the show.

Times staff writer Bob Pool contributed to this story.