Texas businessman, Robert Rhodes, admitted to rigging the Megabucks lottery in Wisconsin to receive $783,000; an amount that he used to collect another $180,000 in fraudulent tax refunds. Under oath, Rhodes confessed to the (almost) successful investment scheme after an accomplice supplied him with the winning lottery numbers using a simple software hack. This scandal has created a wave of ill-disguised fascination with national and state lotteries and how they can potentially be duped.

Rhodes conceded in court that his friend, Eddie Tipton, who used to be a security director for the Multi-State Lottery Association, had given him the winning numbers for the Wisconsin lottery on Dec. 29, 2007. It was revealed that Tipton, 54, had also provided other friends with winning numbers for jackpots in Colorado in 2005, Kansas in 2010, and Oklahoma in 2011. The system was brilliant in its simplicity. Tipton merely installed a basic software that allowed the computers in the lottery draw to work as they should except for three days of the year; May 27, November 22, and December 29. During these days, they would produce predictable numbers when the drawings happened either on a Wednesday or Saturday after 8 p.m. Tipton worked with his younger brother, who was a former Texas magistrate judge and law enforcement officer, to generate winning lottery numbers and claim prizes in multiple states.

Tipton spoke of his crime to Judge Brad McCall: “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.”

Rhodes, 49, took Tipton’s fraud even further. After winning the Megabucks lottery, Rhodes set up his own limited liability company, which he called Delta S Holdings, to collect the prize. Rhodes and Tipton were both wary that their fraud would be discovered if Rhodes was listed as the winner. After all, Rhodes had previously visited the lottery association’s office. Rhodes used his LLC to file a lawsuit to claim the winnings after lottery officials in Wisconsin said they could not give a corporation a lottery prize without a court order. Rhodes then spoke with several tax planning experts to buy a plan that would allow him to receive a tax refund.

This went simpler than expected. Delta bought several insurance policies from Bancroft Life & Casualty ICC Limited and then claimed the purchase as a business expense. This allowed Rhodes to receive undeserved tax refunds from the government. Bancroft was the ideal selection — its clientele were wealthy individuals who would pay for expensive policies they didn’t need but which they used to receive lucrative returns. Supposedly, Bancroft would loan up to 70 percent of their payments to various assets such as real estate and construction.

Rhodes collected a $250,000 loan from Bancroft after sending $450,000. However, he began to become suspicious of Bancroft after receiving an insurance claim for $75,000 for “regulatory changes” which Rhodes said “never materialized.” Rhodes said his relationship with Bancroft reached a sour point in 2012, when the insurance company dissolved and “absconded” with $150,000 from Rhodes’ LLC. (Related: The Illinois lottery just imploded, declaring it can no longer pay large winnings.)

“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. 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?” he said.

Tipton was not told about Rhodes’ tax fraud until Bancroft was found to be cheating its multiple clients of funds as well. Still, both Rhodes and Tipton pleaded guilty to rigging the 2007 lottery and will refund the state of Wisconsin the payout along with an additional $18,100 each to cover the state tax refund.

Sources include:

CBC.ca

Pittsburgh.CBSLocal.com