Another chapter in the DC sports betting saga

Lawsuit Over Lottery Contract Threatens To Derail DC Sports Betting Plans

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A lawsuit filed last week has the potential to delay online sports betting in Washington, D.C. indefinitely.

Judge Joan Zeldon issued an immediate order for the city to cease payments to Intralot, the Greek company responsible for developing a sports betting app for the D.C. Lottery. The judge subsequently extended the two-week order until the parties return to court on October 18.

With the ball in the hands of the legal system, sports betting is now fully stalled in D.C.

Quick backstory on D.C. sports betting

When the District legalized sports betting late last year, it elected to go with a hybrid model of sorts.

Private establishments can apply for licenses to open sportsbooks, but the lottery granted itself a near-monopoly over online betting. Establishments with a retail license will also be allowed to develop apps, but bettors will only be able to access those apps from within the premises — or within two blocks if the licensee is a sports stadium or arena.

For anyone hoping to bet from home or on the go, then, the D.C. Lottery app will be the only option.

Such a framework was contentious from the start, and pushback came to a head when Intralot procured the $215 million contract without a bid.

Improper procurement

Local software developer Dylan Carragher filed the suit based on allegations that the D.C. Council violated the terms of the Home Rule Act in awarding the contract to Intralot without a competitive process. He and his lawyer, Donald Temple, want the Council to annul the contract and start anew,  with any interested party able to submit a bid to develop the app.

Washington D.C. is a unique jurisdiction, and the Home Rule Act is at the center of that special status.

The District falls under the control of Congress as the nation’s capital, but lawmakers in 1973 passed the Act to delegate some powers to the Council. This allows local lawmakers to conduct municipal politics in a fashion more similar to that of a normal city.

There are nonetheless more limitations on what the Council can do than there are on most local governments.

Carragher’s argument, in a nutshell, is that the Home Rule Act requires the Council to go through a full procurement process and solicit proposals for the app’s development before awarding the contract.

The Council feels that since Intralot had already bid on and received the contract to develop and maintain the D.C. Lottery app, it was within its rights to extend that existing contract to cover sports betting without starting the acquisition process anew.

Officials also cited the need for expedience as a key justification for sole-sourcing the contract — a purported need which evaporated as neighboring states failed to enact sports betting bills this year.

Resistance from D.C. Council

The decision to go with Intralot without a formal process was controversial from the beginning, long before Carragher’s lawsuit.

The vote to approve the change to the contract passed the Council’s vote by only a 7-5 margin, and only after Chairman Phil Mendelson warned councilmembers that rejection would likely mean a “years-long” delay and $17 million in lost revenue.

Mendelson subsequently described the basis of the lawsuit as “an esoteric reading of an arcane provision of the home Rule Act.” He has publicly said that he doesn’t think the judge’s ruling will stand.

The objections to Intralot getting the contract go far beyond a dispute over the letter of the Home Rule Act, however. It’s a deep and complicated rabbit hole, but central to it are a classic bit of corporate obfuscation and a man by the name of Emmanuel Bailey.

“Local company” not as advertised

Bailey is the CEO of a company called Veterans Services Corp. (VSC), to which Intralot is ostensibly subcontracting much of the development work. One of the provisions of its contract is that the bulk of the work be carried out locally, theoretically to foster jobs in the D.C. area.

Intralot’s offices are located in Greece, however, forcing it to subcontract with a local company like VSC. The problem is that VSC doesn’t have the capacity to do the work, because it doesn’t actually have any employees. It is, apparently, nothing more than a shell.

At the time the initial D.C. Lottery contract was awarded to Intralot, the “head office” of VSC consisted of two desks and one computer in the home of Bailey’s mother, Barbara. A 51% share of the company was previously transferred to her from the original owner, Bailey’s stepbrother Vernon, in order to relocate the company to Washington.

Bailey is a well-connected local figure, serving as a board member of the D.C. Chamber of Commerce and the Greater Washington Urban League. He was critical to Intralot securing the contract, and his mother’s status as a District homeowner allowed Bailey — a Maryland resident — to tout VSC as a “local” business.

The work would still have to be done, however, and done “by” VSC in some sense of the word.

Bailey (through VSC) and Intralot therefore created another company, DC09, named for the city and the year of its creation. A $12 million loan from Intralot funded the new startup.

Although VSC holds a 51% voting share in DC09, agreements between Intralot and “other shareholders” (like VSC) give it “the ability to direct the business decisions of the subsidiary.”

Open secrets and weary cynicism

None of this seems all that much in keeping with the supposed goal of “stimulating local business,” but neither has it been a well-kept secret. The Washington-Post has led the local reporting on these and other related issues for a decade, joined more recently by District Dig.

City inspectors involved in the 2009 bid concluded that VSC did not qualify as a local business, but a manager subsequently overruled the decision. Similar concerns appeared in 2013 when it sought recertification in that regard.

When Bailey and Intralot tried to take a similar approach in Maryland in 2016, the evaluation committee noted VSC’s lack of capital, experience, or “coherent and consistent explanation of the role it will play in the operation of the gaming system.”

Indeed, the prevailing attitude in Washington towards Intralot seems to be one of weary cynicism.

In urging his councilmembers to vote in favor of the sports betting contract, Chairman Mendelson warned that going through the standard procurement process would only make things worse. “I can assure you there will be more contractors and more allegations of favoritism towards cronies,” he said. “If you’re uncomfortable now, [you] will be far more uncomfortable then.”

Not everyone is resigned to the inevitability of pork-barrel politics, however.

Two members of the Council, Robert C. White (D-At Large) and Elissa Silverman (I-At Large) asked city agencies to look into VSC. With Judge Zeldon’s decision to put an immediate halt to Intralot payments pending further hearings, the courts are so far sympathetic to the dissenters.

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Delays are the only certainty

Unfortunately for sports bettors in the District, Mendelson is right about one thing. The most tangible impact of these developments is likely to be a long delay in the arrival of online sports betting.

The hope, initially, was to get an Intralot sports betting platform to market for NFL season. That did not happen, of course, and officials are now targeting the first of the year for launch.

This temporary stoppage will create a delay, however, even if the contract stands.

If the courts do invalidate the Intralot contract and insist on a proper procurement process, it will take months for companies to prepare their bids and the Council to make its decision. And that’s before the actual work of development can even begin.

That also doesn’t include the time wasted on the legal battle itself — three months between the Intralot award and the filing of the lawsuit, plus however long this takes to fight in court. Depending on how things go, that could mean D.C. sports betting ends up on-site only for a year or more.

If the courts uncover greater improprieties or pull the original contract gets into the fight, there’s no real upper boundary on the mess that could result.

The private option for sports betting

There is, of course, one way that the D.C. Council could fix this. But it’s one it won’t relish.

The group could open the online sports betting market to private entities, as the likes of DraftKings and FanDuel have urged. Though the licensing process can still take some time, approving operators with existing platforms would be faster than contracting development and testing of a new product.

Opening the market to private companies, however, would limit that the District to collecting taxes on sports betting rather than milking revenue from a government monopoly.

Furthermore, numerous companies other than VSC are also wedging themselves into contracts as a result of the Intralot deal. It’s possible that some of these have their own connections within the D.C. machinery that will work to keep the existing deal in place.

This has already been a story with plenty of wrinkles — only the biggest of which we’ve covered here — and one that will surely have a few more before it’s all ironed out. D.C. residents may want to look into which bars and restaurants in their neighborhoods will open sportsbooks in the meantime, as District-wide mobile sports betting may be a long time coming.

- Alex is a journalist from Dartmouth, Nova Scotia, Canada. Now site runner for Online Poker Report, he has been writing about poker and the online gambling industry in various capacities since 2014.
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