Lottery Ticket Supplier Warned to Fire Subcontractor or Lose $32 Million

Times Staff Writer

State officials Thursday warned the California Lottery's ticket supplier to fire a printing subcontractor that was found guilty of fraud or lose the $32 million remaining in its contract.

Lottery Director Mark Michalko said he learned late Wednesday of a court ruling that the subcontractor--Dittler Bros. Inc. of Atlanta--had overcharged Scientific Games Inc. of Norcross, Ga., approximately $1.1 million for metal foil used on the surface of the "scratch-off" tickets in the lottery's instant games.

Saying that continued use of Dittler-printed tickets would conflict with state law requiring the California Lottery Commission to "ensure the integrity, security, honesty and fairness" of the games, Michalko and the commission gave Scientific Games until June 20 to replace Dittler with another subcontractor.

Lottery officials said that if Scientific Games cannot find a replacement for Dittler--its only printing subcontractor--the remainder of the ticket deal would be rebid.

Scientific Games, which wrote the initiative that created the lottery and bankrolled the campaign that saw it voted into law in November, 1984, won an initial contract in 1985--worth an estimated $40 million or more--to provide the first year's tickets for the lottery. Last month, the company won a six-month extension of the contract, worth about another $16 million to $20 million.

Lottery officials said there are enough tickets already on hand in California to last for several more months. John R. Koza, chairman of Scientific Games, said Thursday that the tickets yet to be printed under the remainder of the extended contract are worth about $32 million.

The officials said Michalko received a letter from Koza on Wednesday evening informing him that an arbitrator appointed by a court in Fulton County, Ga., had awarded Scientific Games $1.1 million in compensatory damages and $3.3 million in punitive damages because of overbilling by Dittler. The officials said it is not clear whether California may be due some refund because of the overbilling.

During some earlier legal skirmishing between the two firms, a Fulton County judge ruled last year that Scientific Games had to continue using Dittler to print its tickets instead of switching production to a new, $6-million printing facility that Scientific Games had secretly constructed in Gilroy.

Koza said Thursday that he now hopes to win the Georgia court's permission to open the California plant, which he said is ready to go.

"I think it would be an unfair result if the victim of the fraud ended up being penalized for it," Koza said.

Dittler, a wholly owned subsidiary of Southam Inc. of Toronto, Canada, has been the sole printer for Scientific Games under a long-term contract. Executives of the firm could not be reached for comment Thursday.

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