Madison - St. Clair Record

Saturday, September 21, 2019

Former manager of Illinois Lottery faces class action in St. Clair County; Northstar allegedly discontinued games to maximize earnings

By Ann Maher | Feb 8, 2017

The first private company to run Illinois Lottery is being sued in St. Clair County for allegedy not paying out all - and in some cases any - grand prizes to ticket purchasers.

Chicago-based Northstar Lottery Group, whose 10-year contract with the state was not due to expire until 2021, was fired by the Rauner administration in 2015 after a report showed that Illinois Lottery lost money in 2014. A termination agreement canceled its contract at the end of last year.

Northstar not only was the first private company to manage the state's lottery system, it was also the first private company in the nation to manage a state lottery system, the suit says.

The proposed class action was filed Feb. 6 by attorneys Robert Sprague of Belleville, attorneys at TorHoerman Law and Brandt Law in Edwardsville and Timothy Hoerman in Westmont

It includes retailer and purchaser groups of plaintiffs. Raqqa Food Mart in Fairview Heights, also known as Fairview Lounge, will seek to represent retailers' interests; Michael Cairo and Jason Van Lente of Cook County and John Bean of St. Clair County will represent purchasers.

"Purchasers were induced to purchase tickets for these games and retailers were induced to perform work to sell those tickets," the complaint states. "But before all (or sometimes any) grand prizes were awarded, Northstart discontinued games."

The suit claims Northstar's scheme allowed it to lock in profits for itself and eliminate risk of paying out winnings to ticket buyers as well as bonuses and commissions to retailers.

It further claims the company committed fraud on consumers by misrepresenting the actual odds of winning and reaped unjust profits from retailers by interfering with retailers' contracts and their expectations of commissions and bonuses.

According to the complaint, Northstar was paid operating expenses and incentive compensation.

In 2013 and 2014, the company was awarded $130 million per year for operating expenses, paid out on a regular monthly basis.

For incentive compensation, the company would get a percentage of net income based on exceeding certain thresholds. At the highest level, it would receive 30 percent of net income exceeding $754 million.

Net income includes all revenue derived from the lottery, less paid prizes, commissions to retailers and operating expenses.

"To maximize Net Income, Northstar had an incentive to maximize the Lottery's revenues and minimize its payouts of prizes (to purchasers) and commissions (to retailers)," the suit says.

Plaintiffs claim that in order to win the contract with the state, Northstar had an incentive to make a relatively low bid for operating expenses as that would also benefit the state.

The company also was subject to having its compensation adjusted downward in case of net income shortfall.

Northstar is alleged to have also had an incentive to make a relatively high bid on net income targets, because it would incentivize the state to pick the bidder who had a greater likelihood of not reaching net income goals.

The suit says that net income shortfalls did inn fact occur for fiscal years 2012, 2013 and 2014.

"In light of its motivation to bid low for Operating Expenses, but high for Net Income Targets, Northstar had a strong financial motivation to cover its risk on both of these fronts by increasing the Net Income of the Lottery," the suit states.

Northstar sought to increase income and revenue while it reduced prize payouts and commissions and bonuses to retailers, the suit says. It also successfully boosted ticket sales by hundreds of millions in its first three years as private manager.

The suit describes instances in which special games were created, but before all or any grand prizes were claimed, the games were discontinued.

In 2012, "Birthday Surprise" was one of the games in which Northstar ordered a print of 10 million tickets - more than three and a half times the nunumber of tickets the state would normally sell for $5 games, the suit claims.

The game offered a $150,000 immediate pay out along with a $150,000 prize on the winner's birthday for 20 years.

According to the compalint, the first Birthday Surprise grand prize was awarded in March 2013, but the same month the company planned to discontinue it despite internally calling it a popular game. The suit says that the game ended with only 64 perent of its tickets sold and a second grand prize never awarded.

For the six years preceding Northstar's management of the Lottery, Illinois awarded 87.5 percent of the grand prizes that its big prize games were designed to pay out, but under Northstar management, the award rate dropped to 59.6 percent, the complaint states.

"An award rate decrease of this magnitude is not explainable as happenstance or attributable to a lack of interest in the Lottery - indeed, ticket sales were up under Northstar," the complaint states. "Rather, it reflects Northstar's implementation of a practice of discontinuing games early when the profitability of the game was statistically maximized.

"Because Northstar knew with a reasonable degree of certainty how many tickets had been sold for a game at any given time, how many prizes (and grand prizes) had been claimed for the game, and what the commensurate profitabillity of the remaining unsold tickets was, Northstar was in a position to, and did, discontinue games before winning tickets could be sold."

St. Clair County Circuit Court case number 17-L-51

Want to get notified whenever we write about Illinois Department of the Lottery ?

Sign-up Next time we write about Illinois Department of the Lottery, we'll email you a link to the story. You may edit your settings or unsubscribe at any time.

Organizations in this Story

Illinois Department of the Lottery