Fantasy Sports Parimutuel Gambling Performance Audit 09P-02
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Fantasy Sports Parimutuel Gambling Performance Audit 09P-02

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A RepoRtto theMontAnALegisLAtuRepeRfoRMAnce AuditFantasy Sports Parimutuel GamblingBoard of Horse Racing Montana State LotterysepteMbeR 2009LegisLAtive Auditdivision09P-02Performance AuditsLegislative AuditPerformance audits conducted by the Legislative Audit Division Committeeare designed to assess state government operations. From the audit work, a determination is made as to whether agencies and Representatives programs are accomplishing their purposes, and whether they Dee Brown can do so with greater efficiency and economy.Betsy HandsScott MendenhallWe conducted this performance audit in accordance with Carolyn Pease-LopezWayne 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 that the evidence obtained provides a reasonable basis for John Brenden our findings and conclusions based on our audit objectives.Taylor BrownMike Cooney Members of the performance audit staff hold degrees in disci-Cliff Larsen plines appropriate to the audit process. Areas of expertise include Mitch Tropilabusiness and public administration, journalism, accounting, economics, sociology, finance, political science, english, anthropology, computer science, education, international Audit Staff relations/security, and ...

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A RepoRt
to the
MontAnA
LegisLAtuRe
peRfoRMAnce Audit
Fantasy Sports
Parimutuel Gambling
Board of Horse Racing
Montana State Lottery
septeMbeR 2009
LegisLAtive Audit
division
09P-02Performance Audits
Legislative Audit
Performance audits conducted by the Legislative Audit Division Committee
are designed to assess state government operations. From the
audit work, a determination is made as to whether agencies and Representatives programs are accomplishing their purposes, and whether they Dee Brown can do so with greater efficiency and economy.Betsy Hands
Scott Mendenhall
We conducted this performance audit in accordance with Carolyn Pease-Lopez
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 that the 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 plines appropriate to the audit process. Areas of expertise include Mitch Tropila
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 Performance audits are performed at the request of the Legislative
Kori Minckler Audit Committee which is a bicameral and bipartisan standing
committee of the Montana Legislature. The committee consists Financial-Compliance of six members of the Senate and six members of the House of
Jay Phillips Representatives.
Fraud Hotline
Help eliminate fraud,
waste, and abuse in Direct comments or inquiries to:
state government. Legislative Audit Division
Call the Fraud Room 160, State Capitol
Hotline at: P.O. Box 201705
Helena, MT 59620-1705(Statewide)
(406) 444-31221-800-222-4446
Reports can be found in electronic format at:(in Helena)
444-4446 http://leg.mt.gov/auditLEGISLATIVE AUDIT DIVISION

Tori Hunthausen, Legislative Auditor Deputy Legislative Auditors
Monica Huyg, Legal Counsel James Gillett
Angie Grove
September 2009
The Legislative Audit Committee
of the 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 of the Montana State Lottery relative
to fantasy sports gambling, and opportunities for improving the process used by the
Board of Horse Racing for selecting providers of fantasy 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.
Respectfully submitted,
/s/ Tori Hunthausen
Tori Hunthausen, CPA
Legislative Auditor
Room 160 • State Capitol Building • PO Box 201705 • Helena, MT • 59620-1705
Phone (406) 444-3122 • FAX (406) 444-9784 • E-Mail lad@mt.gov
Table of Contents
Figures and Tables .....................................................................................................................ii
Appointed and Administrative Officials ..................................................................................iii
Report Summary ...................................................................................................................S-1
Chapter I – Introdu Ct Ion ���������������������������������������������������������������������������������������������������������������1
Introduction ..............................................................................................................................1
The Parimutuel System of Gambling and Fantasy Sports .................................................1
The Montana State Lottery ...............................................................................................1
Background ...............................................................................................................................1
Implementation of HB616 and the Role of the Montana State Lottery ............................2
Financial Data for Fantasy Sports Parimutuel Gambling .................................................2
Audit Scope ...............................................................................................................................3
Implications of Recent Federal Court Decisions ...............................................................3
Audit Objectives ........................................................................................................................3
Audit Methodologies .........................................................................................................4
Report Organization .................................................................................................................4
Chapter II – Implementat Ion of f antasy s ports par Imutuel Gambl In G ���������������5
Introduction ..............................................................................................................................5
Board Rule-Making Procedures ................................................................................................5
Basis for Administrative Rules Is Unclear .........................................................................6
Implementation of Board Rules for Fantasy Sports Parimutuel Gambling ...............................6
Agreement With Lottery Circumvents Rule-Based Procedures ........................................7
Problems Exist With Board Licensing Functions for Fantasy Sports ........................................8
Application of the Montana Procurement Act to Fantasy Sports Parimutuel Gambling ..8
Lack of Open Procurement Process Benefitted Lottery and Contractor ...........................9
Licensing Function Is Inappropriate for Fantasy Sports Parimutuel Gambling ..............10
Statute Should Be Revised to Provide for Contracted Services........................................11
Chapter III – l e Gal a uthor Ity for l ottery’s Involvement In f antasy s ports 13
Introduction ............................................................................................................................13
Legal Challenges to Lottery Involvement ................................................................................13
Interpretation of Statutes Relating to Fantasy Sports Parimutuel Gambling ..........................13
Involving the Lottery Was Expedient, But does not Comply with Statute..............................14
aG en Cy r esponses ����������������������������������������������������������������������������������������������������������������������������� a -1
Board of Horse Racing and Montana State Lottery .............................................................A-3
09P-02 Montana Legislative Audit Division
Figures and Tables
Tables
Table 1 Fantasy Sports Retailers’ Lottery Products Sales Revenue .................................................... 10
Appointed and Administrative Officials
board of h orse r acng 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
montana s tate l ottery George Parisot, Director
John Tarr, Security Director
Jeri Duran, Sales and Marketing Director
Paul Gilbert, Information Technology Director
Elaine Taylor, Financial Services Director
montana l ottery Commsson Robert Crippen, Chairman
Craig Anderson, Commission Member
Thomas M. Keegan, Commission Member
Beth O’Halloran, Commission Member
Wilbur Rehmann, Commission Member
09P-02s -1
Report Summary
f antasy sports p armutuel Gamblng
The nvolvement of the montana s tate l ottery n the board of h orse r acng’s
fantasy sports parmutuel gamblng program does not comply wth statute;
further legslatve acton s necessary to ensure ths new form of gamblng s
admnstered n an equtable and transparent manner�
a udt f ndngs
In response to a request from the Economic Affairs Interim Committee, the Legislative
Auditor prioritized a performance audit of the Board of Horse Racing (the board)
and its implementation of fantasy sports parimutuel 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 of the board’s authority over
parimutuel 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
fantasy sports parimutuel gambling. The Lottery introduced two weekly fantasy sports
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
implementation of fantasy sports gambling Statutory Revenue Distribution
via administrative rule. We also addressed
Player’s Prize Pool $134,206 concerns over the legality of involving the
Lottery. We found the board lacks full legal Board of Horse Racing $29,018
authority for adopting fantasy sports gambling
Montana State Lottery $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: CompliedbytheLegislative
AuditDivisionfromMontana inter-agency agreement with the Lottery
StateLotteryrecords. 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
of licensing and contracting procedures, but ultimately satisfied the requirements of
neither. Had the board followed the Procurement Act, several problems could have
been avoided. These problems relate to the ability of other market entrants to participate
on an equitable basis, and the benefits that ultimately accrued to the Lottery and its
main game contractor.
09P-02s -2 Montana Legislative Audit Division
Challenges to the legality of involving 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 of implementing
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 of authority.
a udt r ecommendatons
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 of fantasy 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 authority to offer fantasy sports gambling, activities that are outside of an agency’s
legal authority and are not in compliance with statute should cease. We recommend
the Board of Horse Racing and the Montana State Lottery terminate their inter-agency
agreement on fantasy sports parimutuel gambling with immediate effect.