U.S. lottery rigged, then payout used for offshore tax scam

First, surreptitious software was installed to produce predictable numbers in U.S. state lottery draws. Then the windfall from one of the rigged lotteries was used to get more money through an offshore tax scam.

Software used to rig outcome in Wisconsin, Colorado, Kansas and Oklahoma

Eddie Tipton, the cybersecurity expert and brainpower behind a lottery-rigging scandal that netted $2 million US in illegal winnings from five state lotteries pleaded guilty June 29 to a felony charge of ongoing criminal conduct in Des Moines, Iowa. (Rodney White/The Des Moines Register/Associated Press)

After Robert Rhodes collected a Wisconsin Lottery jackpot that had been rigged by his friend, he used the windfall for an investment scheme that produced another wave of undeserved government money, court records show.

Rhodes, an accomplice in a scandal that has shaken U.S. state lotteries, recently explained under oath how he used the $783,000 payout to receive an additional $180,000 in bogus tax refunds. The Texas businessman sent his lottery winnings offshore to buy a phoney insurance policy for a personal corporation that never did any business — except receive the lottery prize. He then claimed the policy as a tax-deductible "business expense."

The upshot: Rhodes received roughly $150,000 from the U.S. government and $36,200 from Wisconsin in tax refunds on the lottery payout.

To get that payout, Rhodes' friend, Eddie Tipton, former security director for the Multi-State Lottery Association, resorted to rigging the Dec. 29, 2007, Megabucks lottery. The draw was advertised at $2 million.

Tipton, 54, admitted in court that he also provided cohorts with the winning numbers for jackpots in Colorado in 2005, Kansas in December of 2010 and Oklahoma in 2011.

Software produced predictable numbers

Investigators say Tipton installed software that let the computers work as they should on all but three days of the year — May 27, Nov. 22 and Dec. 29 — when they would produce predictable numbers if the drawings occurred on Wednesdays or Saturdays after 8 p.m.

And they say he worked with Rhodes, his brother Tommy and other associates to buy winning tickets and claim prizes worth millions in multiple states. Tipton and his brother, a 53-year-old former Texas magistrate judge and a law enforcement officer, pleaded guilty last week in Iowa, where the lottery association is based.

Eddie Tipton, right, admitted to playing a central role in the rigging scheme after more than two years of adamant denials in the face of mounting evidence against him. (Rodney White/The Des Moines Register/Associated Press)

"I wrote software that included code that allowed me to understand or technically predict winning numbers, and I gave those numbers to other individuals who then won the lottery and shared the winnings with me," Tipton said when asked by Judge Brad McCall on June 29.

The Multi-State Lottery Association serves lotteries in 33 states and provides the computers used to randomly draw numbers in several games including Powerball, Mega Millions and Hot Lotto.

Offshore tax scam

Rhodes, 49, pleaded guilty and co-operated with investigators in exchange for probation. He disclosed the offshore scheme in a deposition under questioning from Tipton's lawyer, Dean Stowers, who called it money laundering and tax fraud.

"It's setting up a phoney expense for a business that wasn't a true business so that somebody could claim a deduction they weren't entitled to," Stowers said Wednesday. "It's just another layer of fraud that Robert Rhodes was involved with."

Rhodes, who did not return a message seeking comment on his testimony, employed Tipton at a Houston tech company in the 1990s and they became friends. Tipton supplied him with notecards listing dozens of potential winning combinations before the Wisconsin drawing, and Rhodes bought them, including the winning ticket.

Texas businessman Robert Rhodes, right, sits with his attorney, Joseph Cahill, as he enters a plea of guilty in a jackpot rigging scandal in Des Moines, Iowa. (Rodney White/The Des Moines Register/Associated Press)

With Tipton's encouragement, Rhodes formed a limited liability corporation, called Delta S Holdings, to claim the prize. Rhodes had previously visited the lottery association's office and both worried their ties would be discovered if Rhodes was listed as the winner. His LLC filed a lawsuit to obtain the prize after Wisconsin lottery officials said they couldn't pay the corporation without a court order.

Rhodes said he then turned to experts for tax planning advice on his windfall, buying a plan that "allowed me to get a tax refund."

Scammers get duped

But in an ironic twist, the company behind that insurance plan would later be accused of duping investors and, in Rhodes' words, "abscond" with a chunk of the loot.

Under the arrangement, Rhodes sent $450,000 to Bancroft Life & Casualty ICC Limited in St. Lucia to buy an "insurance policy" for Delta S Holdings. His tax returns claimed the purchase as a business expense, producing refunds when the governments determined they withheld too much of the prize.

Bancroft recruited tax-weary, wealthy individuals to invest in its insurance. Customers would buy expensive policies that their businesses didn't need but could write off. Bancroft would loan back up to 70 per cent of their premium payments. The customers could make insurance claims for broad categories of losses, such as a business downturn.

Rhodes received a $250,000 loan from Bancroft after buying his policy. He also received an insurance claim for $75,000 for "regulatory changes" that he said harmed Delta S Holdings, even though it never did any other business. Asked what regulations had changed, Rhodes testified, "I don't remember." He said its prospects in "real estate" and "consulting" never materialized.

Rhodes said Tipton wasn't told about the offshore deal until later and received none of the refunds.

He said the deal went sour in 2012, when Bancroft became insolvent and the company "absconded" with $150,000 his LLC had left.

"I started getting insurance account records that say all of the money that Delta S Holdings had put there through paying the premium was gone," he said. "Some expletives followed on my part, you know, what the hell happened to whatever money was there to pay insurance claims? Well, there is none. What the hell?"

Rhodes and Eddie Tipton recently pleaded guilty to rigging the 2007 lottery. They agreed to refund Wisconsin the $783,000 payout and an additional $18,100 apiece to cover the state tax refund.