- The Washington Times - Tuesday, July 20, 2010

D.C. Attorney General Peter J. Nickles called Tuesday for a formal investigation into how a firm with questionable credentials and limited experience took a majority share in the city’s $38 million lottery contract.

Citing recent reports in The Washington Times, Mr. Nickles pointed to contracting irregularities, including the addition of local firm Veterans Services Corp. (VSC) to the lottery pact after the city awarded it to Greek gambling giant Intralot.

“Most troubling is that, since May of this year, articles have appeared in The Washington Times about the lottery contract, and one of the latest of them raises questions about the background and capability of VSC to operate the contract,” Mr. Nickles wrote to D.C. Inspector General Charles J. Willoughby. The letter was co-signed by D.C. Chief Procurement Officer David P. Gragan.

In the three-page letter, Mr. Nickles did not name city officials responsible for awarding, vetting or approving the contract as intended targets of the probe but encouraged Mr. Willoughby to assign the case a high priority and to pursue any “additional questions that merit investigation.”

Mr. Nickles indirectly attacked D.C. Council Chairman Vincent C. Gray, saying that the council “failed to hold a hearing on any of the proposal packages” submitted by Mayor Adrian M. Fenty after a previous contract award to Intralot. Mr. Gray and others thought a local firm that partnered with Intralot was too close to Mr. Fenty. VSC, Intralot’s eventual local partner, is headed by a man with ties to several council members, including Mr. Gray.

Mr. Fenty during a debate last week with Mr. Gray invoked the council chairman’s involvement in the lottery pact while deflecting charges of cronyism leveled at him by Mr. Gray, a mayoral candidate.

On Tuesday, the mayor was measured in his remarks about the investigation:

“According to the attorney general, there are serious concerns regarding the substitute of contractors while the lottery contract award was at the Council. A.G. Nickles has asked the inspector general to investigate any possible impropriety,” he said.

Chief Financial Officer (CFO) Natwar M. Gandhi awarded the $38 million dollar contract to Intralot on Oct. 5, after a year of jockeying among would-be vendors as a result of Mr. Gray’s refusal to schedule a vote on the first Intralot award.

Mr. Fenty approved that award on Oct. 19, but council members signaled to Intralot that it needed a local partner to gain their approval.

On Nov. 23, VSC and Intralot formed a joint venture to operate the D.C. Lottery.

In December, shortly before the D.C. Council voted 9-1 to approve the award, Mr. Gray told his colleagues he was “mightily impressed, especially by the folks who represented VSC” at a Nov. 24 hearing that previewed the Intralot-VSC partnership.

Mr. Nickles’ letter indicates he was less impressed with the partnership.

One of his main concerns, he wrote, was that less than a month after the chief financial officer awarded the contract to Intralot — “literally on the eve of the Council hearing” — Intralot formed a joint venture with VSC called DC09 LLC.

And then after the council approved Intralot, he added, Intralot subcontracted the lottery operation to the joint venture.

Mr. Nickles said that under the unusual arrangement VSC holds a 51 percent equity share in the lottery and serves as operations manager.

“VSC was unknown to the contracting officer when the lottery proposals were being evaluated, unknown to the Mayor when he submitted the contract package to the Council, and the details of its agreement with Intralot were unknown to the Council when it considered and then approved the contract,” he wrote.

The Times in recent weeks has published reports that show VSC boasted on its corporate website of general contracting experience from federal jobs it did not perform for government clients who had never heard of it, and that president and CEO Emmanuel S. Bailey has a messy employment history and has been involved with troubled businesses and lawsuits.

Although a number of council members have ties to Mr. Bailey, the most influential is Mr. Gray, who worked with Mr. Bailey’s mother, Barbara, a principal with VSC, during the 1990s at the D.C. Department of Human Services (DHS).

In October 2008, Mr. Gray met with Mr. Bailey and Intralot’s lobbyist, Kevin P. Chavous, and discussed the lottery — even as a previous award to Intralot and a different partner was pending before the council.

Mr. Bailey recalled that he left the meeting with “a good feeling.” Documents obtained by The Times show that he told people he could count on Mr. Gray’s support, and he said he offered his assistance to Intralot’s then-partner, W2Tech.

After Mr. Bailey’s October 2008 meeting with Mr. Gray and Mr. Chavous, the council tabled Intralot’s then-pending award without further discussion.

Once the contract was re-bid, in early 2009, Mr. Bailey set up VSC as a corporation based in his mother’s house in Southeast Washington. He hired a former Florida lottery official and applied for VSC to become a certified business entity in D.C.

Mr. Nickles first objected in a letter to Mr. Gandhi on June 25 that the VSC-Intralot partnership agreement was not formally submitted to the council or the CFO for approval, and that no further vetting of Mr. Bailey, VSC or DC09 occurred.

He has been particularly critical that the lack of vetting is in contrast to the first lottery contract award, which resulted in deep scrutiny of Intralot’s first partner, and the vetting of a separate local firm that was disqualified during the second procurement.

In his letter Tuesday, Mr. Nickles asked Mr. Willoughby to determine whether the council should have returned the lottery contract to Mr. Gandhi’s office “when the Council became aware that Intralot was adding major players to the team,” and whether Mr. Gandhi’s office should conduct further inquiry into “VSC’s capability to serve as the Operations Manager for the contract.”

Mr. Nickles told The Times he called for the investigation rather than conducting it himself to head off accusations that his political allegiance to Mr. Fenty could influence the probe and to ensure subpoena power is available to investigators.

The Office of Inspector General is the city’s main agency that investigates allegations of misconduct by D.C. government employees and contractors. The inspector general has the authority to refer evidence of criminal violations to the U.S. Department of Justice.

• Jeffrey Anderson can be reached at jmanderson@washingtontimes.com.

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