Gtech Warns of Security Breach for Scratch-Off Lottery Tickets

Gtech Holdings, the world's dominant operator of national and state lotteries, issued warnings Wednesday about a possible breach of its computerized system for paying scratch-off tickets in Taiwan, according to the Wall Street Journal.

Company spokesman Robert Vincent referred to the problem as "an operational and technical issue that is currently being diagnosed." Meanwhile, the Taiwan government issued a complete recall of hundreds of thousands of scratch-off tickets in distribution.

An unnamed source told the Journal the Taiwan government suspects someone has decoded the algorithm on some scratch ticket bar-codes, which could make it possible to identify winning tickets without scratching them. At a ticket seller's location, a Gtech scanner reads a bar code on each ticket and transmits the code to a centralized computers system that authorizes a payout. The breach means a crooked distributor who knows the proper codes could pick out winning tickets, buy them, and cash them himself.

The warning comes at bad time for the gambling industry, which has been shaken by a developing scandal involving the Breeders' Cup Pick Six. Scientific Games, the parent company of Autotote Systems, fired a software engineer last week for his alleged involvement in manipulating the numbers on a pick six ticket after the first four legs of the Breeders' Cup raced involved had been run.

The problem in Taiwan could have serious consequences for the scratch-off lottery ticket business, which is huge internationally. For the fiscal year ended June 30, 2001, the most recent year available, government lotteries sold $27.5 billion of scratch tickets worldwide, accounting for 21% of $125.6 billion in total lottery sales, said David Gale, executive director of the North American Association of State and Provincial Lotteries, a trade group based in Cleveland. Income from lotteries is an important funding source for many governments, especially at a time when tax revenue is declining with the economy.

The problem also deals Gtech its second serious blow in two years. In 2000, Gtech's chairman was forced to resign after the British government learned he helped cover up a computer problem at the United Kingdom lottery that caused the underpayment of some winners.

Gtech, which is a one-third owner of Turfway Park in Northern Kentucky, is best known for operating about two-thirds of the world's online lotteries, which account for the bulk of lottery revenue worldwide. It doesn't make the scratch tickets but operates computerized management systems to track and authorize payments for 94% of U.S. scratch-lottery systems and 71% of those worldwide.

Gtech stock had taken a beating by mid-day Wednesday, with the stock dropping $3 per share, a decline of 11.5%, on heavy trading. By 1 p.m., more than 1.2 million shares were traded compared with the company's average daily volume of 722,136.