Sibling issues at the Massachusetts State Lottery
A correction has been added to this story.
ONE OF THE KEYS to the success of the Massachusetts Lottery is its agents. There are more than 7,600 of them scattered across the state, doling out instant games tickets, Keno, pull tabs, and big money drawing tickets from behind counters in gas stations, convenience stores, supermarkets, pubs, and through vending machines. The agents generate $4.9 billion in annual sales, of which about $900 million goes to cities and towns in the form of local aid.
The agents themselves have a pretty sweet deal, the equivalent of hitting one of the Lottery’s million-dollar jackpots. The average Lottery agent earns $37,000 a year in commissions and bonuses from game sales — nearly the same amount a $1 million winner gets each year if he takes his winnings in the form of an annuity — and there is little heavy lifting. The sales terminals, signage, and tickets are all provided to the agent at no cost. All the agent has to do is man the terminal and make sales. Lottery customers often purchase other items while they’re picking up their tickets, sales that add to the agent’s bottom line.
All the Lottery demands in return is stringent compliance with several laws, rules, and regulations. Agents must have pristine credit backgrounds and no history of criminal activity. They can’t hold government jobs or be related to someone who has a government job. Most importantly, they have to comply with Lottery money-handling procedures. Agents have to maintain a separate bank account for all Lottery proceeds and allow the Lottery to remove the money at periodic intervals. Failure to have the Lottery’s money available triggers automatic compliance measures. Under Lottery regulations, three instances of noncompliance typically lead to revocation of the agent’s license and, in many instances, the revocation of any other Lottery licenses held by the agent.
Scott Sternburg obtained his first two Lottery licenses in 1995 and 1996, before his brother started working at the Lottery. But once Paul Sternburg joined the Lottery in 1997, first as a regional manager, then director of sales, and later executive director, Scott Sternburg landed and kept six more Lottery licenses, despite deteriorating personal finances and repeated failures to comply with Lottery money-handling procedures that would have normally led to automatic license revocations. The Lottery’s lawyers determined the ban on family members acting as agents didn’t apply to Scott Sternburg because he assigned each of his licenses to a separate corporation, even though he was the only officer listed for each company.
Steve Grossman, who oversaw the Lottery as state treasurer until he left office in January, says he was aware of Scott Sternburg’s financial problems as an agent, but felt Paul Sternburg and other Lottery officials showed him no favoritism. He also says Scott’s financial problems were not the trigger for Paul’s departure from the executive director’s post in March 2014.
Paul Sternburg vehemently denies intervening on his brother’s behalf or asking him to be treated any differently than other agents with financial problems. “I was unaware of any of that. I never had anything to do with anything that ever went on in my brother’s stations,” he says from Long Island, where he was on tour as manager for the J. Geils Band. “I don’t think anybody gave my brother preferential treatment….I know they did not treat my brother deferentially. If they did treat him differently, there’s probably a business reason for it.”
Scott Sternburg, reached by phone, initially told the caller he had the wrong number. But after admitting who he was, Sternburg said he didn’t have anything to say. “I’m not going to waste my money and have you call my lawyers,” he said. “I have more important things to worry about. Now that I have your number on my caller ID, I’ll make sure I don’t answer my phone if you call again.”
Scott Sternburg is, by all accounts, a smart and ambitious guy. He graduated from Boston College with a degree in marketing in 1977 and for the next 17 years worked his way up the ladder to vice president of the dairy division of Morris Alper Inc., a longtime food broker in Framingham that is no longer in business.
In June of 1995, Sternburg took over a Mobil gas station on Route 2 in Fitchburg and successfully applied to have the Lottery license issued in his name. One year later, he did the same thing with a Mobil station on Montvale Avenue in Stoneham. The businesses apparently did well enough that, in 2000, he and his wife moved from a condo in Milford to a home they purchased in a secluded neighborhood in Sudbury that is now valued at more than $1 million, according to the real estate website Zillow.
The business lives of the two brothers began to intersect in June 2002. The Lottery granted two agent licenses in Lexington and one in Newton to three separate corporations controlled by Scott Sternburg. The licenses were all at gas stations Scott leased, including high-traffic locations on Route 128 in Lexington and Newton. In 2006, corporations owned by Scott were granted two more Lottery licenses at gas stations with convenience stores in Boylston and Peabody, bringing his total at that time to seven.
But as Scott’s Lottery business grew, he began having problems remitting game proceeds to the state on a timely basis. Under Lottery regulations, an agent is supposed to deposit Lottery sales proceeds in a separate account that is periodically swept by Lottery officials. The sweeps are designed to make sure the Lottery gets its money in a timely manner and avoid situations where debts mount. Agents are notified three or four days before a sweep occurs so they can make sure sufficient funds are in the account.
The first time an agent has a rejected sweep — an occasion when the agent has insufficient funds in the account to pay the Lottery — he or she has to pay up using a certified check. The second time, the agent not only has to pay by certified check but is also subject to sales and inventory restrictions. On the third violation, standard procedure is for the agent’s license to be revoked pending a three-strikes hearing where he is allowed to make the case for retaining his license. Few agents get another chance and, if they do, they are put on an extremely short leash. They must make payments more quickly and their supply of scratch tickets is rationed. Indeed, the norm is for an agent to lose other licenses he holds, even if those licenses are held by separate corporations and those corporations have no financial issues with the Lottery.
For instance, the Cohasset Mobil station did not have the required $4,700 available when the Lottery swept its account in September of last year. Because it was the station’s third missed sweep, officials shut down the Lottery terminal at the station and revoked the agent’s license. The officials also revoked the agent’s license for Ray’s Service Center in Hingham, which was timely with all its Lottery payments but shared the same corporate officer with the Cohasset Mobil station. The whole process took two months.
Similarly, the Buck Island Country Store in South Yarmouth missed a sweep of more than $19,000 in November 2013, its third violation. The Lottery shut down Buck Island’s operation and five days later suspended the agent’s license of another store in Hanover that shared a corporate officer, even though that location had never missed a payment.
“It is our goal to keep them as viable agents whenever possible,” Beth Bresnahan, the Lottery’s current executive director, wrote in one response to questions. “However, when the financial risk becomes too great, we must take swift and appropriate action to protect the Lottery/state’s assets.”
That same sense of urgency, however, was not apparent in dealing with Scott Sternburg’s licenses. Between 2007 and 2013, Lottery records indicate Scott had insufficient funds in his accounts 35 times, all but four of them during periods when his brother was working at the Lottery. The missed payments triggered six “three-strikes” hearings involving five locations owned by companies Scott controlled. At five of the three-strikes hearings, Scott’s license was suspended until he made good on his debts. The only time his license was revoked was in 2014, after his company that owned the location had filed for bankruptcy.
The saga of the Lottery license at his Lexington station on Route 128 illustrates his lenient treatment. Between May and December of 2007, he had insufficient funds in his account nine times for amounts ranging from $898 to more than $21,000. No three-strikes hearing was called until January of 2008, a month after Paul left to take a job as vice president of sales at the Connecticut lottery. His Lottery license at the Lexington stations was suspended until April, when three-strikes hearings on that license and licenses at three other locations were held. At the hearing, Scott’s licenses at the four locations were all placed on probation for a year, which allowed him to keep operating. None of the Lottery licenses at his other three locations were affected.
While Paul was working at the Connecticut lottery, Scott voluntarily gave up four of his licenses, two of them in 2008 and two others in 2009. Two of the licenses were relinquished after a year of probation. The other two were given up despite no apparent financial issues, although insufficient funds were in the account at one of the locations when it was shutting down. Scott had to pay the balance of what he owed the Lottery by certified check.
In January 2011, Paul returned to the Massachusetts Lottery, this time as executive director. He was appointed by Grossman, then the newly elected state treasurer, who belonged to the same synagogue as Paul. Grossman says he did not have a social relationship or friendship with Paul; he says he hired Paul based on recommendations and his resume.
Perhaps the most puzzling Lottery decision regarding Scott Sternburg came in June 2011, six months after his brother’s return to the agency. Scott was awarded a Lottery license at a second gas station in Fitchburg despite four previous three-strikes hearings, the involuntary dissolution of two of his corporations holding agent licenses, and a 2010 IRS lien against him and his wife for $153,000 that was still outstanding. Lottery officials offered no explanation for how someone with such a troubled financial history could land a license other than to say the license was granted to a new corporation independent of others owned by Scott Sternburg. (Correction: A reference in the original version of this story inadvertently said Paul Sternburg was awarded a Lottery license. It was Scott Sternburg.)
“The application submitted in 2011 met the licensing requirements,” Christian Teja, director of communications for the Lottery, wrote in an email response. “The applicant passed a credit check, CORI check, and owed no money to the Lottery.”
About a month after receiving the new Fitchburg license, Scott terminated the very first license he had received in 1995 for another Fitchburg gas station and mini-mart, leaving him with licenses for the new Fitchburg location and his two locations on Route 128.
In November 2013, his two corporations owning the gas stations on Route 128, in Lexington and Newton, filed for bankruptcy. At the same time, Scott shut down the Fitchburg station he had acquired just two years earlier, a move that resulted in a suit by Hess Corp., his fuel supplier, for breach of contract.
The Lottery managed to obtain the $16,000 it was owed under the Fitchburg license, though there were insufficient funds in the account when the officials initially went to withdraw it. The Lottery recovered only $15,000 of the $65,000 owed by the two companies that filed for bankruptcy. The licenses at all three locations were terminated, but not until March 2014 in the case of the Fitchburg license, and April 2014 for the two Route 128 licenses. Paul Sternburg resigned from his position as executive director of the Lottery in February 2014.
As he was leaving, Paul Sternburg filed a conflict of interest disclosure with the State Ethics Commission, informing that office he would be acting as a consultant with the state of Michigan in a position paid for by one of that state’s vendors, GTECH Corporation of Rhode Island, which is also a major supplier of equipment and tickets to the Massachusetts Lottery.
As luck would have it, Paul also tried his hand at a Lottery game, which he had been prohibited from doing while he was working at the agency. On March 10, 2014, less than a month after his resignation, he walked into the Lottery’s Boston office in the basement of Ashburton Place and cashed a $1,000 winning $10 ticket he had purchased at a Stop & Shop in Watertown.
When the Legislature first debated the creation of a state-run lottery in 1971, there was concern about ensuring the operations would be above reproach and free of scandal. Several provisions were inserted in the legislation to protect against favoritism. One provision barred any individual from holding more than one agent’s license. Another measure stated that “no federal employee and no state, county, or municipal employee, or member of the immediate family… shall sell or be issued a license to sell lottery tickets.”
The laws were designed to prevent licenses from being concentrated in the hands of a few and to prevent people from using government connections to land agent licenses. Both provisions were fairly extreme. For example, it’s hard to see how the public would benefit by prohibiting the brother of a park ranger in Alaska from owning a Lottery agent’s license in Massachusetts.
David Bartley, who was the House speaker in 1971, says the language was “standard boilerplate” inserted into most bills at the time but was especially central to assuring the public that the Lottery would be a clean operation. “You don’t want them saying you created the organization so only connected people could make money off it,” says Bartley, now 79.
Lottery officials say Scott Sternburg avoided the reach of both provisions by setting up separate corporations for each of his businesses that held lottery licenses. Each corporation had Scott Sternburg as its only officer, but each corporation was a separate legal entity. As a result, the corporations satisfied the letter of the law since no individual owned more than one license and the license holder, a corporation, was not related to anyone working at the Lottery.
“These decisions to operate in that manner existed long before Paul ever worked here,” says Bresnahan, referring to her former boss at the Lottery. She says about 1 percent of people granted licenses through corporations ¬— which account for more than 87 percent of the Lottery’s agents — have an immediate family member who is a public employee, though not necessarily a Lottery employee.
The Lottery license application has contained questions about public employees and their relatives from the beginning. But since 2006, every owner, partner, member, manager or officer of a business applying for a Lottery agent’s license has had to sign a separate form stating whether they have an immediate family member working for the government. The Lottery couldn’t locate Scott Sternburg’s records from 2002 to 2006, when his brother rose from regional manager to director of sales. But on the forms filed in connection with license applications in 2006 and 2007, Scott Sternburg checked “no” when asked whether he had an immediate family member working as a public employee. At the time, Paul Sternburg was director of sales at the Lottery.
“We can’t speak on behalf of Scott Sternburg and if he may have misinterpreted what constitutes an immediate family member (though there is a reference to the statute should there be any questions),” Lottery spokesman Teja wrote in an email. “However, there has never been any question as to whether or not Scott Sternburg and Paul Sternburg were immediate family members during the licensing process.”
Scott Sternburg also checked “no” on the forms between 2008 and 2010, when Paul Sternburg was working for the Connecticut lottery. Lottery officials say they can’t find the form for Scott Sternburg’s agent application in 2011, when Paul Sternburg was the agency’s executive director.
In November 2011, 11 months after he was named executive director and six months after his brother was awarded his eighth agent’s license, Paul Sternburg filed a letter with Grossman disclosing a potential conflict of interest regarding his brother and recusing himself from any dealings with his brother’s corporations. At the time of the recusal, Scott Sternburg had divested himself of all but his last three licenses.
“It has been my practice, and it will continue to be my practice, to make no inquiries and take no positions or actions regarding [Scott Sternburg’s] business with the Lottery,” he wrote. “If any issue regarding any of these three named agents comes to my attention, I will direct such issue to the Lottery’s General Counsel, William J. Egan Jr., who will assume all responsibility for resolving the issue in accord with the policies and procedures of the Lottery.”
Paul Sternburg says his brother’s use of a corporation to obtain Lottery sales licenses is a practice that a stream of the agency’s general counsels have upheld. He says he and his brother followed the letter of the law.
“It’s not an approach I invented,” he says. “It’s a practice that has been going on since day 1 of the Lottery.”
INTERPRETING THE LAW
Gregory Sullivan, the former state inspector general who now works as research director at the Pioneer Institute, a Boston public policy organization, says the Lottery’s oversight of Scott Sternburg’s licenses and the corporate shell game it allows to bypass nepotism rules undermine the scandal-free reputation of the agency.
“It’s an absurdity to suggest you can get around this immediate-family rule by establishing a corporation,” he says. “It would make the law meaningless. It’s a transparent, outrageous abuse of a law that was established to prevent brothers and sisters of state employees from getting Lottery licenses. They’re very valuable.”
Sullivan says he is also troubled by the Lottery’s loose oversight of Scott Sternburg’s financial problems, particularly for failing to crack down on him for failing to pay the agency the money it was owed in a timely fashion. When he was inspector general, Sullivan says his office issued a report on the Lottery that focused on the importance of regularly sweeping money from an agent’s account. He says the sweeping process not only allows the state to get the money into its own account to earn interest, it also minimizes losses by not letting any agent build up arrears.
“It’s really a critical safeguard. That’s the backbone of the anti-fraud system, designed precisely to prevent this from happening,” he says. “What compounds it and makes it 10 times worse is the Lottery did not sweep and close down the accounts of the brother. Those two safeguards were just ignored and not implemented. The purpose is to minimize the losses for the Lottery and that didn’t happen. This should be investigated.”
Yet former treasurer Grossman and officials at the Lottery insist proper procedures were followed.
Egan, the Lottery legal counsel to whom Paul Sternburg assigned oversight of his brother’s licenses in November 2011, says it’s well established at the Lottery that corporations are not individuals under the law. “The process largely works fine,” says Egan. “This part of the statute’s been there since the beginning.”
Grossman says none of the Lottery problems associated with Scott Sternburg could be laid at Paul Sternburg’s feet because of the letter Paul filed disclosing his conflict of interest as executive director and recusing himself from any dealings with his brother’s corporations.
“I was aware that Scott had serious financial issues,” Grossman says. “I was satisfied that Paul had no involvement in any aspect of his brother’s relationship with the Lottery. [Paul Sternburg] created a very clear firewall. We were well aware of his [financial issues] before Paul resigned.”
Paul Sternburg says the Lottery treated his brother like any other agent, shutting him off when he failed to pay and turning him back on when the debts were satisfied. He says there were other businesses that likely had similar issues but, when pressed, like Lottery officials, he was unable to name any. He defends his brother’s performance as a lottery agent and said everyone made out.“Everything he owed them, he paid back,” he says. “The state right now is only out the bankruptcy money. He may have had (missed sweeps) for a couple thousand dollars but they made millions and millions off my brother.”
Illustration by Polly Becker