Computer find proved key to unraveling Iowa Lottery fraud

DES MOINES — Forget the Powerball jackpot. Iowa Lottery officials are celebrating a victory this week in winning their long shot gamble to unravel a 2010 Hot Lotto mystery that became the largest lottery fraud in U.S. history.

A seven-year whodunit that took lottery officials, law officers and prosecutors in five states through multiple twists and turns culminated Tuesday when Eddie Tipton, 54, of Norwalk, was led away in handcuffs to serve up to 25 years in prison after pleading guilty to a felony count of ongoing criminal conduct for his lead role in a scheme to rig lotteries.

As the former director of security for the Multistate Lottery Association, Tipton tampered with random number generators in computers he provided to several states by installing “malicious codes” that enabled him to predict winning numbers on certain dates under certain conditions. He shared those numbers with associates who cashed in on the inside information, but who saw the whole scheme unravel after investigators determined Tipton had bought a winning Hot Lotto ticket with a $16 million annuity jackpot that was never paid amid suspicions.

Iowa Lottery Chief Executive Officer Terry Rich said Wednesday that dogged determination and some major breaks along the way enabled prosecutors to solve the mystery that had large financial stakes but risked an even bigger prize — the integrity of Iowa’s state-run gambling enterprise and ultimately an $80 billion nationwide industry.

“If we mess this up or if people believe we don’t care that people can do this kind of thing, then they won’t play,” Rich said in an interview. “Nationally, that’s an $80 billion gamble.”

Tipton — who as a lottery employee was not supposed to play the games — wore a disguise to buy the winning ticket to a 2010 Hot Lotto jackpot. Someone else tried a year later to claim the prize under circumstances that convinced lottery officials not to pay and to suspect fraud.

Tipton’s co-workers recognized him through the disguise in a store video that authorities released in 2014. But Rich said an audio recording of Tipton during the transaction was more convincing in implicating the computer programmer and leading to co-conspirators in Texas.

The trio of Tipton, his brother, Tommy, and longtime friend, Robert Rhodes, have admitted guilt for their roles in rigged jackpots in Wisconsin, Colorado, Oklahoma and Kansas.

While those states paid out nearly $3 million in prizes later found to be fraudulent, only Iowa had enough suspicions to withhold payment.

The first indication that something nefarious was afoot, said Lottery official Mary Neubauer, came when she talked with a man from Canada who could identify the 15-digit number on the winning ticket but provided details that did not match with the video of the man purchasing the winning ticket at a Des Moines convenience store. When the man called the next day to say he had “fibbed” and changed his story, the focus began to shift to a criminal investigation.

Neubauer said she has dealt with more than 200 winners of lottery prizes of $1 million or more and “I’ve never seen people behave the way the folks did in this instance right off the bat, which just gives you that feeling in your gut that something’s not right here.

“It was just strange from the beginning and every time we thought it couldn’t get stranger, it did. And seven years later, here we are. I can’t believe it took seven years but I truly thank the investigators who stuck with it this whole time,” she added.

“It was white-collar crime. It was a crime involving computers and computer forensics,” Neubauer noted. “Eddie Tipton was going through and wiping computers as he figured out that people were starting to pick up the trail of what was going on. He was wiping equipment trying to destroy evidence, so the fact that we were even able to locate a computer that still had the code on it, to then do all the forensic investigation to find the code, it’s an amazing process that we actually got here.”

“Screwy” misstatements and suspicious attempts to cash in the 2010 Hot Lotto ticket hours before the December 2011 deadline by various players pulled into the saga were not the only clues something was amiss. Testimony at Tipton’s trial in Iowa by his brother that aroused the suspicions of a federal agent in Texas; social media posts and cellphone data by Tipton and business associate Rhodes; and a timeline of jackpot claims in other states enabled investigators to connect the dots that led to a larger fraud and guilty pleas by the co-conspirators.

“To me, the break and the opportunity was once we had the ability to find a machine that Eddie didn’t have the ability to wipe and destroy,” said Rob Porter, the Iowa Lottery’s legal counsel. That machine turned up in Wisconsin, he said, which gave authorities the “haystack” they could use to find the “needles.”

Rich said the Iowa Lottery spent “a little over $100,000” for things like witness travel, forensic professionals and other costs associated with the investigation — noting his enterprise probably covered that in less than two hours Wednesday during the buying frenzy before the $700 million Powerball drawing.

“It’s a small price to pay. Integrity is so much more valuable than any money we could spend,” said Rich.

“And it’s the right thing to do,” added Porter. “If there’s any question or concern that a draw is fair, that’s our job. You’ve got to figure it out; if there’s an issue, you have to fix it. It’s the right thing to do.”

Rich said lottery operations have tightened their security procedures and separation of duties in an effort to combat future fraud attempts.