ALJDEC

00A-31181-LOT · Arizona Lottery · 2000-11-17

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: October 17, 18 and 19. The record was kept open until October 30, 2000, to allow counsel to file proposed Findings of Facts and Conclusions of Law. APPEARANCES: The Arizona Lottery was represented by Assistant Attorney General LaDonna K. Ockinga. The Respondent, PowerPick, Inc., was represented by its attorney, Charles E. Buri, Esq. ADMINISTRATIVE LAW JUDGE: Brian Brendan Tully _____________________________________________________________________

Evidence and testimony were presented and, based upon the entire record, the following Findings of Fact, Conclusions of Law and Recommended Order are made:

FINDINGS OF FACT

1. The Respondent, PowerPick, Inc. (“PowerPick”), was organized by Andrew R. Amada and Judy L. Amada, who are its principals, in 1994. 2. PowerPick began doing business in 1995, operating a pooling service. It brought together Arizona Lottery players, who wished to share ownership in The Pick and Powerball tickets. 3. PowerPick made its pooling service available only to Arizona Lottery players having an Arizona address. 4. In December, 1996, PowerPick filed an application with the Arizona Lottery to become licensed as a Lottery retailer. PowerPick wanted to sell both scratcher and on-line (Powerball and The Pick) Arizona Lottery tickets. 5. In March 1997, Jody Spicola, who was then the Executive Director of the Arizona Lottery, denied PowerPick’s license application. 6. PowerPick appealed the license denial and requested an administrative hearing. The hearing was held on May 27, 1997, before The Honorable Richard N. Blair, the Administrative Law Judge appointed by the Arizona Office of Administrative Hearings, an independent agency. 7. At the hearing, Ed Kiyler testified on behalf of the Arizona Lottery. In support of the denial of PowerPick’s license application, Mr. Kiyler stated that he was concerned whether lottery pooling was a legal business in Arizona. 8. Mr. Amada also testified at that hearing. He described the business of PowerPick in detail and a copy of PowerPick’s Player’s Handbook was placed in evidence. 9. Mr. Amada testified that, prior to engaging in business, PowerPick discussed the nature of its lottery pooling service with representatives of the Arizona Lottery, the Arizona Attorney General’s Office, and the Maricopa County Attorney’s Office, and that no one had any objection. 10. On June 11, 1997, Judge Blair issued a Recommended Decision. He found, among other things, that there was no evidence that PowerPick’s business activity was a violation of Arizona law or an improper business activity. 11. Judge Blair recommended that Arizona Lottery issue a Lottery retailer’s license to PowerPick. 12. On June 11, 1997, the Recommended Decision of Judge Blair was transmitted by the Office of Administrative Hearings to the Arizona Lottery. 13. On July 17, 1997, an undated Decision by Executive Director was issued by Director Spicola. Director Spicola again denied PowerPick’s application for a license to sell lottery tickets. 14. PowerPick filed a Complaint for Judicial Review of Arizona Lottery’s final administrative decision with the Superior Court of Arizona on August 5, 1997. 15. During the pendency of the judicial review Geoffrey Gonsher replaced Mr. Spicola as the Lottery’s Executive Director. Director Gonsher rejected a proposed settlement agreement. 16. Pursuant to a Stipulation between the parties, PowerPick’s Complaint for Review of Administrative Decision was ultimately dismissed, and Director Gonsher licensed PowerPick to sell Lottery tickets. 17. During the course of the administrative review action, the United States Postal Service filed an administrative complaint against PowerPick. It contended that PowerPick was conducting an illegal lottery and that its mail should be detained. 18. Following a hearing before a Postal Service Administrative Law Judge, PowerPick was deemed to be conducting a lottery, and the Postal Service was ordered to detain PowerPick’s incoming mail. 19. PowerPick appealed that administrative ruling, and the Postal Service then sought a preliminary injunction in the United States District Court directing the detention of PowerPick’s incoming mail pending conclusion of the appeal. 20. The injunction was granted by the United States District Court. PowerPick appealed that ruling to the Ninth Circuit Court of Appeals. 21. In January, 2000, the Court of Appeals unanimously ruled that PowerPick does not conduct a lottery and that the preliminary injunction should be vacated. 22. Based upon the Court of Appeals’ opinion, PowerPick’s mail service was restored, and the Postal Service dismissed its action against PowerPick. 23. On or about April 2000, Director Gonsher charged PowerPick with violating the Arizona Lottery’s rules and state law. 24. PowerPick responded to Director Gonsher’s concerns in a letter dated May 3, 2000, by explaining that it was not violating the Arizona Lottery’s rules and state law. 25. In a subsequent letter dated May 18, 2000, PowerPick offered to move its lottery pooling service to a separate company to assuage Director Gonsher’s concerns. 26. On May 25, 2000, PowerPick divested itself of the pooling services, and it was taken over by PowerPick Player’s Club of Arizona, Inc. (“PowerPick Player’s Club”). 27. The shareholders of PowerPick and PowerPick Player’s Club of Arizona, Inc., are Andrew Amada and Judy Amada. Andrew Amada is the president of both corporations. 28. By letter dated June 5, 2000, Director Gonsher gave notice that the Arizona Lottery was revoking PowerPick’s retailer license and that PowerPick had the right to request an administrative hearing by filing a notice of appeal. 29. The deadline to file a notice of appeal was extended by letter dated June 27, 2000, to allow the Arizona Lottery additional time to review PowerPick’s divestiture of the pooling service. 30. By letters dated August 2, 2000, and August 11, 2000, PowerPick filed a timely appeal. 31. On September 12, 2000, Director Gonsher issued a Notice of Hearing setting forth the following grounds for revocation of PowerPick’s retailer license:

a) For those winners whose share of the prize is $50.00 or less, the player’s PowerPick account is automatically credited with the share of the prize, instead of using one of the three methods of payment authorized by A.A.C. R19-3-205(B) and 206(B). b) PowerPick sells Arizona Lottery tickets to itself in violation of A.A.C. R19-3-203(A)(12). c) PowerPick pays prizes to itself on winning Arizona Lottery tickets in violation of A.A.C. R19-3-203(A)(12). d) PowerPick runs unlawful wagering pools called the “SuperPool” and “MegaPool” in violation of A.R.S. § 13-3305, as made applicable by A.A.C. R19-3-203(A)(10). e) PowerPick promotes unregulated gambling in violation of A.R.S. § 13-3303, as made applicable by A.A.C. R19-3- 203(A)(10). f) PowerPick conducts sales partially off premises by the use of telephonic sales in violation of A.R.S. § 5-512(E).

32. The original notice of hearing was subsequently amended to provide for the following corrections:

a) A.A.C. R19-203(A)(10) providing that “Facts are discovered which, if known at the time the retailer’s license was issued or renewed, would be grounds to deny licensure” was moved to A.A.C. R19-203(A)(11). b) A.A.C. R19-203(A)(12) providing that “The retailer or an officer or employee of the retailer sells a ticket or pays a prize to oneself” was moved to A.A.C. R19-203(A)(13).

33. Until it divested itself of the lottery pooling service, PowerPick’s business had two facets: the pooling service and lottery ticket sales. 34. PowerPick’s pooling and lottery ticket sales were confined to Arizona Lottery games. 35. PowerPick invited the general public to purchase participations in pools of 25 or 50 players and in turn purchased Arizona Powerball and The Pick Lottery tickets for each pool. 36. PowerPick sold this service on-premise, as well as through the United States mail and over the telephone. 37. The typical PowerPick player paid $22.00 to be a member for a 50 player pool in eight consecutive drawings. PowerPick then purchased 32 tickets for each of the drawings on behalf of the pool. In the event that one of the number combinations chosen for the pool won either of the lotteries, the prize money was divided proportionately among the pool members. 38. PowerPick assigned its participants to the various pools randomly. It picked the sets of numbers their pool would be playing in the lotteries. After the state lottery drawings, PowerPick checked the numbers for each pool. If a pool won a jackpot or similarly large prize, PowerPick would give the Lottery the participants’ names for distribution of the prize money. For smaller prizes, PowerPick would collect the winnings and divide them equally between the players. 39. For each pool of 50 players, PowerPick received $1,100.00 in fees from its participants. PowerPick spent $256.00 on tickets and used the rest to pay business expenses, advertising, bonus tickets and promotional items. 40. PowerPick gave out “special player awards” consisting of bonus Arizona scratcher tickets. Those awards were allotted to players depending on the frequency and volume of their plays. 41. The promotional items offered by PowerPick included the MegaPool and SuperPool Bonuses and Cash Awards. 42. The MegaPool Bonuses consisted of 100 Powerball tickets purchased by PowerPick for every Powerball drawing. Those tickets were owned by PowerPick, who shares any jackpot prize over $100,000.00 with participants. Any smaller prizes were kept by PowerPick. 43. The SuperPool Bonuses consisted of a 2% share that PowerPick purchased in every Personal Pool. PowerPick owned these shares, and it promised to divide its share of any Powerball jackpot prize with all participants. 44. The Cash Awards offered by PowerPick guaranteed a minimum cash return to all participants depending upon how often the participants played and the amount of money the participant spent on PowerPick’s pooling services. The award represented a partial rebate of money paid to PowerPick for its pooling services. 45. PowerPick purchased scratcher tickets from its inventory of scratcher tickets to use as special player awards. 46. PowerPick purchased through the licensed Lottery terminal on its premises Powerball tickets both as an agent for pooling participants and for its own self. 47. The Powerball and The Pick tickets in which PowerPick had an ownership interest included: a 2% interest in tickets used to make-up Personal Pools, which formed the SuperPool; any unsubscribed interest in tickets used to make-up Personal Pools; and a 100% interest in MegaPool tickets. 48. When tickets in which PowerPick had an ownership interest won, PowerPick received some of the prize money. 49. Tickets winning $599.00 or less were validated on the licensed Lottery terminal located on PowerPick’s premises. 50. The officers and employees of PowerPick were acting within their authorized employment when they operated the licensed Lottery terminal on PowerPick’s premises to validate and pay prizes for Lottery tickets which won. 51. Prior to the separation of the two corporations all tickets validated with a prize of $599.00 or less in which PowerPick had an ownership interest had the prize paid to PowerPick by an employee of PowerPick whose assigned job duty for PowerPick was to operate the licensed Lottery terminal while acting under the direction of an officer of the corporation. The employees were not operating the licensed Lottery terminal for their personal benefit. The prize paid to PowerPick was used in its business. 52. PowerPick has no way of fulfilling its duty to determine the age of a player when the player does not come directly on to PowerPick’s premises to conduct a transaction. 53. PowerPick and the Arizona Lottery have stipulated to the uncontested fact that PowerPick credits the winnings from pooling tickets to players’ accounts, and players may either request a check for the winnings in their account, use the winnings to purchase additional services and products from PowerPick, or let the winnings sit in their PowerPick account. . . . 54. PowerPick does not immediately pay the winning ticket to the player but reports it on a statement that is received by the player at the end of the draw selection period selected by the player. 55. If a player’s account is credited with a win and the player does not use the credit or request a check within one year from the date the player stops playing with PowerPick, then the player’s share of the winning ticket is forfeited to PowerPick. 56. The operations of PowerPick Player’s Club in operating the MegaPool and SuperPool are conducted in the same manner as PowerPick previously conducted those pools. 57. The pooling service purchases on-line tickets amounting to between 6,500 to 8,000 per week and approximately 4,200 scratcher tickets per month. The volume of purchases from PowerPick in the past and PowerPick Player’s Club presently establishes that PowerPick spends more than 15 minutes per hour on one customer.

CONCLUSIONS OF LAW

1. A.R.S. § 5-506(2) authorizes the Executive Director of the Arizona Lottery to license retailers that will best serve the public convenience and promote the sale of Lottery tickets. 2. A.R.S. § 5-506(8) authorizes the Lottery’s Executive Director to suspend or revoke the license of a Lottery retailer, subject to appeal to the Lottery Commission, for violations of state statutes and rules applicable Lottery operations. 3. PowerPick violated the provisions of A.A.C. R19-3-205(B) and 206(B) by not paying prize winners when its procedure was to credit a winning player’s account and forfeiting any winnings if the player did not use the prize money or request a check within one year from the time the player stopped playing the PowerPick pools. While those rules contain permissive language as to the forms of payment, it is determined that the clear intent of those rules is that all lottery players are to be paid winnings and that no winnings should be forfeited. 4. PowerPick violated the provisions of A.A.C. R19-3-203(A)(13) when as a licensed Lottery retailer it sold Lottery tickets to itself. A corporation cannot act, except through its officers and employees. When a corporate officer or employee of PowerPick purchases a lottery ticket from PowerPick’s license Lottery terminal for the use of PowerPick, either presently or in the past, it sells a Lottery ticket to itself. Only if an officer or employee of PowerPick sold a Lottery ticket to another employee for his or her personal use would it not be selling a ticket to itself. 5. The officers of PowerPick are charged with understanding corporate law sufficiently to operate within the requirements of the law. The actions of PowerPick in selling to itself are governed by corporate law and not necessarily by the regulations in the administrative code. Therefore, no interpretation of the regulations is necessary to determined if PowerPick was selling to itself. 6. PowerPick violated the provisions of A.A.C. R19-203(A)(13) when it paid a prize to itself. 7. PowerPick violated the provisions of A.A.C. R19-203(A)(1) by violating A.A.C. R19-3-206(A)(3) when it guaranteed a sufficient number of cash awards or wins to return to the player at least 7% to 10% of the amount the player paid to the pooling service. 8. There is insufficient evidence of record to conclude that PowerPick violated the provisions of A.A.C. R19-3-203(A)(11) when it developed and operated the MegaPool and SuperPool. 9. PowerPick violated the provisions of A.A.C. R19-3-203(A)(1) when if violated A.R.S. § 5-512(E) by partially conducting sales off premise by the purchaser initiating the sale by telephone off premises and by the purchaser receiving confirmation of the Lottery ticket numbers off premise through the United States Mail. 10. The evidence of record is adequate to establish that under the new two corporation system PowerPick will then be violating the provisions of A.A.C. R19-3-206(A)(3). 11. The pooling service of PowerPick is not regulated by either statute, rule or order. All actions of PowerPick as a licensee that violate a statute, rule or order controlling its license subject that license to revocation whether it is part of the pooling service or not. A business that holds a license from a government agency must abide by the statutes, rules and orders that govern that license. The business may not on its own designate that actions governed by the license are moved into another division or section of the business and decree that therefore the activities can no longer be controlled by the statutes, rules and orders that govern those actions under its license. 12. PowerPick knowingly violated the regulations that controlled its Lottery retailer’s license from the time it was licensed until PowerPick separated its operations into two separate corporations.

RECOMMENDED ORDER

In view of the foregoing, it is recommended that PowerPick’s Lottery retailer’s license be revoked. Done this day, November 20, 2000

______________________________________ Brian Brendan Tully Administrative Law Judge

Original transmitted by mail this ____ day of ____________, 2000, to:

Arizona Lottery Geoffrey Gonsher, Executive Director ATTN: Loraine Wade 4740 East University Drive Phoenix, AZ 85034

By ___________________________ -----------------------

Office of Administrative Hearings 1400 West Washington, Suite 101 Phoenix, Arizona 85007 (602) 542-9826