How the Texas Lottery Commission helped rich investors win a $95 million jackpot

Last spring, a small group of Texas lottery retailers received word that a single customer wanted to arrange a guaranteed lottery win. No player had matched all six numbers for months, so by mid-April the Lotto Texas jackpot had soared to $95 million. To acquire it, the customer was prepared to spend millions of dollars to buy up every, or nearly every, possible numeric combination in the draw — about 26 million tickets.

The operation should have been apparent to the Texas Lottery Commission, which closely monitors sales. Then-Executive Director Gary Grief later described buying in the days leading up to the April 22, 2023, draw as “through the roof.” Instead of the typical 1-2 million tickets Lotto Texas games sell, it sold more than 28 million.

Yet the agency did more than merely observe as one buyer effectively stacked the odds of securing the jackpot, records show. Behind the scenes, the lottery commission actively helped orchestrate a sure-thing win in a state-sponsored game of chance, seemingly ignoring its own rules in the process.

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Purchasing an entire lottery draw is not illegal in Texas — although some experts argue it should be as it is unfair to regular players, who don’t know they are at best competing for half the advertised jackpot. There also is no law preventing licensed retailers from selling tickets to someone aiming to accomplish that.

Indeed, compared to some other states, Texas’ hands-off regulation makes it easier for a big buyer to work the odds on such operations. But the lottery commission’s actions in last year’s $95 million game also raise questions about the rigor of its oversight, as well as its commitment to fairness and transparency over profits.

Unusual last-minute orders 

Records show the agency first helped the big buyer by jumping to fill several unusual last-minute requests for large orders of extra equipment.

To process millions of tickets in the 72 hours between Lotto draws, the retail outlets behind the operation needed to quickly and dramatically ramp up their operations. Lottery tickets must be purchased and printed on state-issued lottery terminals; most retailers have one or two of the machines.

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The outlet owned by an Austin-based company, Lottery.com, hadn’t sold any tickets for months, records show. But on April 19, 2023, the day buying for the April 22, 2023, Lotto draw began, the company submitted an urgent order to the lottery commission.

“Retailer has requested 10 additional terminals,” the request read, adding: “Will need lots of terminal paper. Install ASAP per CK” — referring to a lottery commission employee. The request was filled, records show.

The same day, a Waco retailer affiliated with Lottery.com, ALTx, filed another rush order. It, too, had sold virtually no tickets in recent months, according to state lottery sales data. Now, correspondence with the lottery commission stated, “Retailer has requested 5 additional terminals ASAP.” Records show the terminals were delivered.

In North Texas, meanwhile, a third retailer owned by a company called Lottery Now also sprang to life. At the beginning of the year, its store outside of Fort Worth had a single lottery terminal. As the big-jackpot game approached, however, it asked the Texas Lottery Commission to help it acquire another dozen ticket terminals, which records show was done.

A Texas Lottery Commission spokesman characterized the last-minute orders and the agency’s response as business as usual: “Retailer requests for additional lottery terminals for the specified period followed the agency’s standard process.”

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In its eagerness to help the retailers with their last-minute equipment requests to handle the big operation, the lottery commission also appears to have ignored its own rules.

Because the Austin-area outlet owned by Lottery.com had been idle for so long, it required the lottery commission to reactivate its state-issued retailer license before it could start processing tickets for the April 22, 2023, draw. 

“We are ready to resume operations,” a Lottery.com representative wrote at 9:42 a.m. April 19, 2023.  An agency contact replied seven minutes later: “Your status is now active.”

Yet state regulators appear not to have conducted due diligence. Texas law requires lottery retailers to conduct business other than ticket sales. They also must be open and accessible to the public when processing tickets.

Lottery.com’s Austin operations appear not to have met those requirements during the frantic April 22, 2023, operation. 

“The assertion that retailers did not follow the requirements that a retailer must conduct business other than processing lottery tickets and be open and accessible to the public has not been substantiated,” the lottery commission spokesman, Steve Helm, wrote in an email. He declined to say if the agency had investigated whether the rules were followed.

Lottery retailers also must maintain so-called sweep accounts, bank accounts accessible to the lottery commission so it can “sweep” them once a week to ensure it gets paid for sold tickets. Yet in its haste to reactivate Lottery.com’s license, the commission appears not to have noticed the company’s sweep account was closed. 

As a result, instead of simply collecting the money owed to it, the lottery commission had to invoice the company to wire it millions of dollars after the draw.

The lottery commission confirmed the sequence of events, but said it wasn’t a problem. 

“Lottery.com notified the Texas Lottery that its bank account on file was no longer valid and the retailer wired the amount owed for the April 16-22 invoice week to the Texas Lottery on April 25, 2023,” Helm wrote. “After the sweep on April 26, 2023, it was confirmed by the Texas Lottery that Lottery.com’s bank account was closed.”

More generally, there is a question of whether the Texas Lottery Commission should have risked conducting high-dollar government business with Lottery.com, a struggling company that had suffered a series of financial and regulatory setbacks.

The company had publicly admitted to violating state lottery laws. It effectively had shuttered its operations the previous July after declaring it didn’t have enough money to continue. A number of lawsuits show it hadn’t paid bills, including payroll.

At the time of the April 22, 2023, draw, NASDAQ was threatening to delist the company from the exchange. Due to a series of reportedly improper financial transactions, several former executives remain under investigation by federal regulators, according to publicly available filings.

The lottery commission said it was unaware of Lottery.com’s legal and financial problems. 

Getting into the ticket syndicate business

A recent Houston Chronicle investigation revealed a single buyer, or buyer group, purchased the $95 million Lotto Texas jackpot by buying every one of, or nearly all of, the game’s 25.8 million possible numerical combinations. Texas law permits winners of lottery jackpots over $1 million to remain personally anonymous. Two months after the draw, a New Jersey-based company called Rook TX collected a one-time payment prize of $57.8 million.

There is no public record showing who Rook TX’s representatives contacted in Texas to orchestrate the operation. But a Lottery.com executive said in a recent court filing the company wanted to position itself as a facilitator assisting wealthy investors in buying up mathematically attractive lottery draws.

“We also explored getting into the ticket syndicate business, which is where you work with a single buyer,” Chief Operating Officer Greg Potts said in a January deposition in a Florida lawsuit. “When the odds are in their favor to win the game, they will pool millions of dollars together and buy a bulk order of tickets.”

Although multistate games such as Powerball and Mega Millions can feature eye-popping jackpots exceeding $1 billion, the volume of players and the high cost of buying up an entire draw are prohibitive. So state lotteries such as Lotto Texas are a big investor’s most common target, Potts explained in the hearing.

Potts declined an interview request.

No one tracks how often sophisticated investor groups target lottery draws. Experts said opportunities to exploit numerical advantages are uncommon. But a handful of such events have become publicly known.

In February 1992, a buying group targeted the Virginia lottery, which because of the few numbers used in its draws made it relatively inexpensive — about $7 million — to buy up all combinations. At the time, the state also allowed players to select numbers and print their own tickets at home. A subsequent investigation into the operation found no wrongdoing.

In 2005, a small number of math-minded Massachusetts lottery players discovered a lucrative opening in a “roll-down” game they exploited for years. When the jackpot for CashWinFall reached $2 million, the money cascaded to lower-tier prize winners, making bulk ticket purchases near-certain winners. Until the game was shut down in 2012, in-the-know groups collected millions of dollars in wins.

An investigation determined no laws were broken. But the 25-page report concluded the large amount of money at stake for all sides had caused rules to be bent.

Retailers earned commissions on sales, so they were willing to help the big buyers, even if it meant skirting some regulations. A small number of outlets effectively became partners with the buying groups; in some cases sales agents joined the syndicates. Some processed tickets before being paid or without the buyer present, or during extended hours closed to the public — all rule violations.

Massachusetts Lottery regulators knew of the infractions but, the investigation found, looked the other way. None of the retailers was suspended until the scheme became public. Warned the agency was giving off a perception it favored the large buying groups, one official responded in an email: “How do I become a member of the club when I retire?”  

“The record is clear that the Lottery had been aware of but had not disapproved of these vendors’ actions for many years as the money had come rolling in,” the investigation concluded

'A perception of fairness'

In response to both operations, Virginia and Massachusetts changed their rules to thwart high-volume buying in an attempt to reassure everyday lottery enthusiasts they were competing on a level field. 

"We might remember Thomas Jefferson's view of a lottery,” said Ken Thorson, Virginia’s lottery director at the time. “That it is an opportunity for the common man to spend a small sum for the possibility of a higher prize."

The state’s rule granting extra terminals to a retailer only if previous sales justified it, for example, would thwart a Rook TX-like investor operation from using pop-up ticket processors as it did in Texas.

In the wake of the CashWinFall revelations, Massachusetts also “took steps to prevent any group from being able to cover all combinations, to make it fair for the regular player,” recalled William Egan, former general counsel for the state’s lottery. 

“The fact is these groups were figuring out how to benefit from the lottery at the expense of the regular player,” Egan, now a lottery consultant, added. For that same reason, he said, he would have advised the Texas lottery not to participate in Rook TX’s big win by delivering all the extra terminals.

“It’s a perception of fairness,” he said.

According to an in-depth audit of the Texas Lottery Commission’s operations released last month, the agency has a track record of favoring profits over robust regulation. 

“Having found a way to be successful at its most visible function, raising revenue, the agency has been unwilling or unable to adapt to a changing environment or fully embrace some of its regulatory responsibilities,” the Sunset Advisory Commission concluded. The organization reviews state agency operations and gives lawmakers recommendations for improvement.

The Sunset auditors noted two oversight lapses in particular that could have had a direct impact on the April 22, 2023, Lotto Texas draw purchased by Rook TX.

Although it has been on the books for decades, the Texas Lottery Commission has never clarified the rule prohibiting retailers from being in the business of only selling lottery tickets, the audit found. It also concluded lottery officials had abdicated responsibility for how to manage the growing presence of online companies getting into the lottery business. 

All four of the retailers that Rook TX purchased its millions of tickets from are affiliated with online companies. Relative newcomers to the lottery business, the companies allow buyers to purchase tickets from their homes using an app rather than going to a store. They then dispatch couriers to pick up the tickets. (The lottery commission has said tickets for the April 22, 2023, draw were purchased in-person.)

Their operations are controversial because they facilitate gambling and stand to earn millions off the state-sponsored games. Among the country’s largest state lotteries, California bans them (as do Virginia and Wisconsin), New York requires them to be licensed and regulated (as does New Jersey) and Florida has not let them conduct business there. 

Texas, the fourth-largest lottery, has simply averted its gaze, even as online sales have grown to nearly 10% of all draw game revenue, the Sunset report said. The Texas Lottery Commission has never asked for an opinion from the attorney general as to their legality — as several states have done — or contemplated new rules to address their business model.

Lottery commission officials didn’t alert legislators to their presence until recently, the report noted, even as retailers affiliated with the companies have become some of the state’s top ticket-sellers.