VICTORIA

REPORT ON MATTERS ARISING FROMTHE OFFICE OF GAMBLING REGULATION

INVESTIGATION OFINTERNATIONAL GAMING TECHNOLOGY

REPORTof

THE OMBUDSMAN

June 2002

Ordered to be printedVictorian Government Printer

No.161 Session 1999/2002

CONTENTS

1.0 INTRODUCTION 1

1.1 A brief outline of the subject matter of this investigation 1

2.0 LISTING ON THE ROLL OF MANUFACTURERS –COMPLIANCE WITHIN THE GAMING INDUSTRY 3

3.0 LEGISLATIVE & REGULATORY FRAMEWORK 4

3.1 The Victorian Casino and Gaming Authority 43.2 The Director of Gaming and Betting 63.3 Delegations from the VCGA to the Director 73.4 The Office of Gambling Regulation 73.5 Recovery of reasonable costs of an investigation 8

4.0 BACKGROUND TO THE INVESTIGATION OF IGT BY THE DIRECTOR 10

4.1 Low value invoicing 10

5.0 THE IGT COMPLIANCE COMMITTEE REPORT 10

6.0 KEY ENTITIES IN THE INVESTIGATION 11

6.1 VCGA and the Office of Gambling Regulation 116.2 International Gaming Technology Pty Ltd 11

7.0 ACTION BY THE OGR UPON RECEIPT OF THE IGT REPORT 11

7.1 Engagement of FBIS by OGR 117.2 Legal advice from Ms Betty King QC 127.3 Overseas Travel 14

8.0 THE ROLE OF LEGAL ADVISERS TO THE INVESTIGATION 15

9.0 COST OF DIRECTOR’S INVESTIGATION 16

10.0 DETAILS OF PAYMENT OF MONIES BY IGT TO OGR 16

11.0 THE EVIDENCE 17

12.0 THE IGT VERSION 17

12.1 Evidence of Ms Sarah Beth Brown & Mr Richard Nathan 1712.1.1 The meeting in Reno on 15 November 2000 1712.1.2 The meeting in Reno on 16 November 2000 2012.1.3 Subsequent developments toward resolution 2212.1.4 Possible defamation proceedings against investigators 2612.2 Evidence of Mr John Stawyskyj 2812.3 Evidence of Mr Frank Costigan QC 29

13.0 THE OGR VERSION 31

13.1 Evidence of Mr Bill Lahey 3113.2 Evidence of Mr Max Priestley 3413.3 Evidence of Mr Claudio Minisini 3513.4 Evidence of Mr Robert Taylor 3613.5 Evidence of Mr Ian Hill QC 41

14.0 EVIDENCE OF MR BRIAN FORREST – CHAIRMAN OF THE VCGA 46

15.0 DISCUSSION /EVALUATION 49

15.1 Operational planning and management of the OGR investigation 4915.2 Settlement as a result of claimed systemic / structural problems 5015.3 The Director of Gaming and Betting 5115.4 Payment of contribution to costs of the investigation 5515.5 Independence of legal advisers 58

16.0 CONCLUSIONS 59

17.0 RESPONSES TO MY DRAFT REPORT 60

OMBUDSMAN OWN MOTION INVESTIGATION PART IIIA SECTION 14(1) (I) OMBUDSMAN ACT 1973

OMBUDSMAN INVESTIGATION

"To investigate and report on the alleged unreasonable action of the Victorian

Casino and Gaming Authority in negotiating and accepting payment of

$US200,000 from International Game Technology towards the cost of an

investigation conducted by the VCGA into actions of International Game

Technology".

1.0 INTRODUCTION

This report concerns an investigation I have conducted, on my own motion pursuant to Section 14 (1)(i) of the Ombudsman Act 1973, concerning an inquiry conducted in the period 2000-2001 by theDirector of Gaming and Betting into certain activities of an American company, International GameTechnology. In particular, this report examines the issue of the payment of $US200,000 by InternationalGame Technology to the Victorian Office of Gaming Regulation ("the OGR"), which is the organisationheaded by the Director of and Gaming and Betting, as a contribution to offset the cost of the investigation.

The Director of Gaming and Betting ("the Director") is a statutory office created under the Gaming andBetting Act 1994. International Game Technology ("IGT") is the largest manufacturer of computer gamingproducts and the largest operator of proprietary gaming systems in the world. IGT’s Australian subsidiary, IGT (Australia) Pty Ltd, is currently listed on the Roll of Recognised Manufacturers andSuppliers of Gaming Machines and Restricted Components ("the Roll") which is maintained by theVictorian Casino and Gaming Authority ("the VCGA") in accordance with the Gaming Machine ControlAct 1991. More will be said later about the complex relationships between the various regulatory bodiesinvolved in the investigation which is the subject of my inquiry.

1.1 A brief outline of the subject matter of this investigation

Before moving on to examine the legislative framework under which the Director’s investigationoccurred and the relevant facts and circumstances surrounding the investigation, it will be necessary toprovide in the briefest possible form a general outline of the events which are the subject of my investigation.

• In 1992 – 1993, IGT Europe b.v., a subsidiary of IGT, was engaged in a fraudulent practice known as"low value invoicing" in relation to the supply of gaming machines to Turkey. Low value invoicinginvolves false invoicing by the seller of machines at a price which is lower than the true price in orderto avoid customs duties. IGT’s involvement in this practice was significant. False invoices from IGTunderstated the value of machines provided to customers in Turkey over this period by US$1.2 million.

• When IGT itself became aware that this was occurring, IGT failed to investigate adequately.

• In 1998, as a result of inquiries by regulators in the US, IGT conducted an internal inquiry. The resultwas a July 1998 report which was circulated to many gaming industry regulators in various jurisdictionsthroughout the world. The report acknowledged IGT’s failure in 1993 to address the issue adequately.

• In Victoria, the Director of Gaming and Betting formed the view that IGT’s internal investigation wasinadequate and that there remained some question regarding the probity of IGT.

• The Director decided to exercise his power to investigate "associates" of persons listed on theVictorian Roll and contracted the services of an investigator to look into his concerns about the IGTinternal inquiry.

• The Director’s investigation can broadly be divided into two parts. The first part involved travel toEurope and the US by the contracted investigator and two members of the staff of the OGR. This partof the investigation concluded that there was some basis for the Director’s concern.

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• The Director obtained legal advice which agreed that there was a basis for pursuing the matter butthere were deficiencies in the available evidence which had to be addressed before the matter couldbe brought before the VCGA Board for a hearing.

• The Director commenced the second part of the investigation. Again, this involved extensive travel bya "taskforce" consisting of the contracted investigator, a senior officer of the OGR and two barristersacting as legal advisers.

• The interviewing of witnesses was completed in April 2001.

• In August 2001, a cheque in the amount of US$200,000 was paid by IGT to the OGR. Prior to the acceptance of the cheque, the Director had received legal advice from the legal advisers attached tothe "taskforce" that it was open to him to accept the payment. The money was subsequently paidinto Consolidated Revenue. The payment of the cheque was accompanied by an exchange of lettersbetween IGT and the OGR. The OGR provided letters to two IGT personnel absolving them fromany "wrong or negligent conduct". The two IGT personnel, who had sought legal advice in relationto possible defamation proceedings against two members of the OGR taskforce, provided letters tothe VCGA releasing the VCGA, its employees and agents from liability in respect of certain statementsmade by investigators in the course of the investigation.

• The Director subsequently reported to the VCGA Board that he had conducted the investigation, thatit had confirmed his views that the IGT investigation had been inadequate, that IGT had taken stepsto prevent a recurrence, that US$200,000 had been paid towards the investigation costs and that nofurther action was required.

• The Chairman of the VCGA sought legal advice, again from the legal advisers who had been part ofthe "taskforce". The advice recommended that the VCGA Board "note" the Director’s report. TheVCGA Board accepted this advice and, at a meeting of the Board on 28 August 2001, noted the report.It appeared that this would be the end of the matter.

• Information about the investigation subsequently posted on the OGR website as part of the terms ofsettlement referred to the payment of the US$200,000. As a result of this, the issue came to my attention.

For obvious reasons, as Ombudsman, I feel compelled to examine the circumstances under which sucha payment came to be made from a major participant in the gaming industry to a public body createdunder an Act of the Victorian Parliament for the purpose of regulating the industry with particularemphasis on ensuring high standards of probity within the industry.

2.0 LISTING ON THE ROLL OF MANUFACTURERS – COMPLIANCE WITHIN THEGAMING INDUSTRY

Section 62 of the Gaming Machine Control Act 1991 requires that the VCGA must cause to be maintained a Roll of Recognised Manufacturers and Suppliers of Gaming Machines and RestrictedComponents ("the Roll").

Section 63 (1) of the Act requires that a person who manufactures or supplies, or intends to manufacture

or supply, gaming machines or restricted components to gaming operators may apply to the VCGA tobe listed on the Roll. Section 63 (3A) provides that the VCGA must cause to be carried out all investigationsand inquiries that it considers necessary to enable the VCGA to consider the application properly. Theseinclude consideration of whether the applicant and each associate of the applicant is of good repute (s. 65 (2)).

Section 66 of the Act provides for "disciplinary action" against persons listed on the Roll on a number ofgrounds, including the ground that, "for any reason … the person listed on the Roll is not a suitable personto be listed on the Roll or an associate of that person is not suitable to be an associate of a person listedon the Roll". The "disciplinary action" which the VCGA may take includes the issuing of a letter of censureand the imposition of a pecuniary penalty not exceeding $5,000,000. The ultimate penalty, however, isremoval from the Roll.

Similar regulatory regimes apply in numerous jurisdictions around the world. From a gaming industryperspective, to be excluded from any one jurisdiction is a very serious matter because it has the likelyconsequence of attracting the attention of regulators in other jurisdictions. Obviously, this could haveserious effects for a business conducted on a world-wide basis. It is argued by some that this situationhas created an environment of self regulation within the industry. In the past, when businesses activein the industry have identified inappropriate activities within their own operations, they have voluntarilyinvestigated the issues and reported such action to the gaming authorities.

Within the USA, self regulation and reporting by those involved in the gaming industry has, in certaincircumstances, been accompanied by the entering into of formal written agreements with the relevantregulatory authority to maintain a set of agreed standards. An example of this occurred in 1997 whenAristocrat Inc. entered into an agreement with the Colorado Limited Gaming Control Commission USA.This action followed concern held by the Commission in relation to the renewal of the company’slicence to operate as a gaming operator in the State of Colorado.

In some jurisdictions in the USA - the State of Missouri is one example - a gaming company may beresponsible for paying the costs of the regulator’s investigation into the company’s suitability regardlessof whether the inquiry into the company’s suitability is related to a first-time application for a licence,or whether the inquiry is concerned with the continuing suitability of the company to hold an existinglicence. In Victoria there is specific provision for the VCGA to recover the costs of the investigation inrelation to an application to be listed on the Roll (s. 149B of the Gaming Machine Control Act 1991 -see para 3.5 below for details), but there is no specific provision to allow for the recovery of the costsof any other type of investigation such as an investigation into the actions of a person already listed onthe Roll.

IGT is a listed corporation within the USA and is the parent company of IGT (Australia) Pty. Ltd, whichis a gaming machine manufacturer listed on the Roll. IGT has similar licences in some 125 jurisdictionsthroughout the world and presently holds approximately 370 licences worldwide (some jurisdictionshave multiple licences). IGT is an "associate" of IGT (Australia) Pty Ltd within the meaning of theGaming Machine Control Act 1991.

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3.0 LEGISLATIVE AND REGULATORY FRAMEWORK

By way of introduction to this part of the report, I feel compelled to say that I have had great difficultyin following the extremely complex and disjointed nature of the legislation which sets out the objects,functions, powers and duties of the various statutory bodies and offices involved in the regulation ofgambling in Victoria. It has been something like untangling a bowl of spaghetti. I can only hope that thefollowing brief outline achieves its aim of being concise and clear.

3.1 The Victorian Casino and Gaming Authority (VCGA)

The VCGA, which commenced operations in June 1994, is established pursuant to Section 82 of theGaming and Betting Act 1994.

Section 85 of the Gaming and Betting Act 1994 sets out the structure of the VCGA. It consists of a chair-person, a deputy chairperson and not more than 8 other members, one of whom shall be a member ofthe police force nominated by the Chief Commissioner of Police. The chairperson, deputy chairpersonand members are appointed by the Governor-in-Council on the recommendation of the Minister who,before making a recommendation, must be satisfied that the person has appropriate knowledge, experience and expertise to act as a member. A person who has been employed by, or "significantly associated with", a licensee, a casino operator, venue operator, gaming operator or person listed on theRoll at any time within the last four years is ineligible to be a member.

Current Members of the VCGA Board are:-

Mr Brian Forrest ChairmanMs Una Gold Deputy ChairpersonDr Desmond Hoare Mr Graeme McDonald Victoria PoliceMr Peter McMullinMs Christine NevilleDr Carolyn ReMs Sarah Porritt

The various objects, functions, powers and duties of the VCGA are very confusing and have their statutorysources across a number of Acts, including the Casino Control Act 1991, the Casino (ManagementAgreement) Act 1993, the Gaming Machine Control Act 1991, the Club Keno Act 1993, the LotteriesGaming and Betting Act 1966, and the Gaming No. 2 Act 1997. Those objects and functions of the VCGAwhich are relevant to this investigation are set out in Sections 109 and 110 of the Gaming MachineControl Act 1991.

The relevant objects of the VCGA set out in s. 109 are as follows.

"109. Objects of the Authority

The objects of the Authority under this Act are-

(a) To ensure that gaming on gaming machines is conducted honestly and that the man-agement of gaming is free from criminal influence and exploitation;

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(b) To regulate the use of gaming machines in casinos and approved venues whereliquor is sold;

(c) To regulate the activities of key operatives in the gaming machine industry, includ-ing those who manufacture, supply, repair or own, or provide venues for and oper-ate, machines; …"

The functions of the VCGA under the Gaming Machine Control Act 1991 are set out in s. 110 are as follows.

"110. Functions of the Authority

The Authority has the following functions under this Act-

(a) such functions as are necessary or convenient to enable it to achieve its objectsunder this Act; and

(b) such other functions as are conferred or imposed on it by or under this or any otherAct or law."

One of the specific functions imposed on the VCGA under the Gaming Machine Control Act 1991 is the"on-going monitoring of associates and others" under s. 142A, the relevant part of which reads as follows.

"142A On-going monitoring of associates and others

(1) The Authority may from time to time investigate-

(a) an associate, or a person likely to become an associate, of a venue operator, a gaming operator or a manufacturer or supplier listed on the Roll; or

(b) any person, body or association having a business association with a personreferred to in paragraph (a)."

Section 142A goes on to detail the process the VCGA must follow if it is of the view that an associate isunsuitable to be associated with a venue operator, gaming operator or a person listed on the Roll.

3.2 The Director of Gaming and Betting

Mr Bill Lahey is the current occupant of the statutory office of Director of Gaming and Betting.

Like the VCGA, the statutory office of the Director of Gaming is established under the Gaming andBetting Act 1994 (s. 97), but has statutory functions under the Gaming Machine Control Act 1991. TheDirector’s functions under the Gaming Machine Control Act 1991 are set out in s. 119, the relevant partof which reads as follows.

"119. Functions of Director

The following are the functions of the Director under this Act- …

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(d) to investigate the antecedents of –

(i) applicants for licences or listings on the Roll; or(ii) licensees or those listed on the Roll-

and report on their suitability to the Authority as required; and

(e) to report generally to and assist the Authority regarding the operation of this Act."

There are two things to note concerning the functions of the Director. First, while the VCGA has thepower to investigate associates or persons likely to become associates of a venue operator, gaming operatoror a person listed on the Roll, the Director does not have any such statutory power to investigate associates.Second, the powers of the Director are limited to powers of investigation and reporting to the VGCA.

3.3 Delegations from the VGCA to the Director

As mentioned above, the VCGA has the statutory power to investigate associates or persons likely tobecome associates of a venue operator, gaming operator or a person listed on the Roll, but the Directordoes not have this statutory power. This has caused some difficulty for the Director in the past.Accordingly, by delegation dated 28 July 1998 made under s. 107A of the Gaming Machine Control Act1991, the VCGA gave the following delegation to the Director.

"Under section 107A of the Gaming Machine Control Act 1991, the Victorian Casino and GamingAuthority delegates to … the Director of Gaming and Betting …all of its functions under s. 142A (1)of the Gaming Machine Control Act 1991 in respect of investigations into the suitability of -

(a) any person who is or is likely to become an associate of a gaming or venue operatoror manufacturer or supplier listed on the Roll; or

(b) any person body or association having a business association with a person referredto in paragraph (a) above."

By this means the Director obtained the power to conduct investigations into associates on his own ini-tiative without the need to seek specific delegation for a specific case. It is pursuant to this general del-egation from the VGCA that the Director undertook his investigation of IGT. IGT, it will be recalled, wasnot itself listed on the Roll, but was an "associate", as defined by the Act, of its subsidiary, IGT (Australia)Pt Ltd, which was listed on the Roll.

3.4 The Office of Gambling Regulation

Originally the current Office of Gambling Regulation (OGR) came under the umbrella of the VCGA. Asfrom 1 July 2001 the OGR came into existence in the present form. It is not a statutory body. It is anadministrative unit of the Victorian Department of Treasury and Finance. The OGR provides supportfor the Minister for Gaming, and is also the means by which resourcing and other support is providedfor the VCGA, the Director of Gaming and Betting and the Director of Casino Surveillance in carrying

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out their statutory functions of regulating the gaming industry in Victoria. (The latter is another statutory office not relevant to this inquiry, but also occupied by Mr Bill Lahey.) Regulatory activities performed by each of these statutory bodies and offices are funded through the OGR. The investigationof IGT conducted by the Director was funded by the OGR.

The Chief Executive Officer of the OGR is Mr Bill Lahey in his dual capacities as Director of Gaming andBetting and as Director of Casino Surveillance. The stated objectives of the OGR are as follows:-

• To ensure that gambling activities are conducted honestly and are free from criminal influenceand exploitation.

• To ensure that regulation is efficient and effective.

• To act as a source of advice to the Minister for Gaming on gambling issues and ensure that theGovernment’s policies on gambling are implemented.

• To provide information and assistance to allow the Victorian Casino and Gaming Authority toachieve its aims.

• To foster the responsible conduct of gambling activities.

3.5 Recovery of reasonable costs of an investigation

The Gaming Machine Control Act 1991 makes provision for the recovery of investigative costs in certain circumstances set out in s. 149B, the relevant part of which reads as follows.

"Section 149B Costs of Investigating Applications

(1) The Authority may, by notice in writing, require an applicant for any licence, or amendment of any licence, under this Act or for listing on the Roll or an applicant forapproval of a nominee or an applicant for approval under section 3A to pay to theAuthority such amount as is determined by the Authority being an amount not exceedingthe reasonable costs of investigation of the application"

It is to be noted that s.149B does not provide an explicit legislative basis upon which the VCGA candemand or require the payment of the reasonable costs of an investigation conducted by the VCGA intothe activities of a person who is already listed on the Roll. It is to be noted also that it is the VCGA whichhas the power to require payment. The office of the Director has no explicit legislative power to requirepayment of the reasonable costs of investigation.

There is clear evidence that the OGR itself knew of the limits of the power to recover the costs of investigations other than investigations of applications to be listed on the Roll. In January 2001, theOGR included in its legislative proposals to the Minister for the Autumn sittings of Parliament a proposalthat the Act should be amended in order to include specific power to recover the costs of investigationsconducted in the on-going monitoring of persons listed on the Roll. The proposal, forwarded to theMinister as one of 23 proposals, read as follows.

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"1. Cost Recovery for investigations into manufacturers.

"The Gaming Machine Control Act 1991 allows recovery of the reasonable costs if investigat-ing applications under that Act.

"Investigations that precede decisions whether to prosecute or take disciplinary action (DA)under gaming legislation do not form part of an application and therefore cost recovery isnot possible without amending the legislation to allow it.

"It is proposed to amend the Gaming Machine Control Act 1991 to allow recovery of thecosts of investigations conducted in the on-going monitoring of manufacturers listed on theRoll of Recognised Manufacturers of Gaming Machines and Restricted Components (to becalled the Roll of Suppliers when amendments made by the Gambling Legislation(Miscellaneous Amendments) Act come into force).

"The supervision fee levied on gaming operators (who contract with manufacturers) shouldnot be used to offset the costs of these investigations. It is considered unfair for gaming operatorsto be charged for the cost of investigations into activities over which they have no control.

"Cost-recovery would be sought even if no DA was taken or prosecution proceeded. Theremay be practical reasons why no action is taken notwithstanding that costly investigationsreveal issues of concern.

"Cost recovery is commonly sought by United States gaming regulators."

This proposed amendment was "ticked" as approved by the Minister for Gaming. It is to be noted thatthe proposal contained a specific recognition that, "Investigations preceding decisions whether to prosecute or take disciplinary action under gaming legislation do not form part of an applicationand therefore cost recovery is not possible without amending the legislation to allow it." Although theMinister approved the proposal, the amendment did not proceed as intended through the Parliament.

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4.0 BACKGROUND TO THE INVESTIGATION OF INTERNATIONAL GAMING TECHNOLOGY (IGT) BY THE DIRECTOR OF GAMING

4.1 Low value invoicing

As briefly outlined above, the origins of the investigation of IGT by the Director of Gaming flowed fromallegations of the involvement of IGT in a fraudulent practice known as "low value invoicing" in relationto sales of gaming machines in both Turkey and the Netherlands in the period 1992/1993. The practiceof low value invoicing involves the provision of invoices to customers by the vendor which falsely statea lower price than is the true price of the item(s) being sold. This practice allows the customer fraudulently to evade the payment of import duties. The main fraudulent activity involving IGToccurred in Turkey, although it was subsequently revealed that similar activity had occurred in theNetherlands. At the relevant time Turkish import duties involved total impositions of up to 100% of thevalue of imported goods and provided strong incentive for those engaged in the importation of gamingmachines into Turkey to engage in low value invoicing.

5.0 THE IGT "COMPLIANCE COMMITTEE" REPORT

On 11 August 1998, the Director received a report from IGT dated 31 July 1998 which provided detailsof an internal audit and investigation of the practice of low value invoicing by IGT Europe in Turkey in1992 -1993. IGT’s 1998 internal investigation established that the practice of low value invoicing by IGTEurope had been brought to the attention of IGT executives in July 1993, but that IGT executives of thetime ignored the information and failed to initiate any form of investigation into the allegations. The 1998report was provided to the Director and other regulatory authorities in whose jurisdictions IGT heldlicences. The report was circulated by IGT in "the interest of full disclosure" and to apprise regulatoryauthorities of developments and innovations introduced within IGT to prevent similar fraudulent activities in the future.

The report originated from a decision earlier in 1998 by the IGT Compliance Committee that an inter-nal examination of low value invoicing should be conducted by a specially formed ‘taskforce’. This task-force consisted of both internal and externally appointed investigators who conducted the investigationon behalf of IGT under the auspices of "Project Compliance". The decision by IGT to conduct this internalinvestigation was brought about by inquiries conducted by the Colorado Gaming Control Commissionin February 1998. Those inquiries resulted in IGT entering into an "Assurance of Voluntary Compliance"with the Gaming Control Commission of the State of Colorado in August 1998. This agreement stipulated that IGT would conform to certain conditions set down by the Commission in order to prevent similar low value invoicing in the future. Failure by IGT to comply would place their gaminglicence in Colorado in jeopardy.

6.0 KEY ENTITIES IN THE INVESTIGATION

6.1 VCGA and the Office of Gambling Regulation

1. Mr Bill Lahey - Director of Gaming and Betting, Chief executive Officer of the OGR. 2. Mr Max Priestley - Assistant Director (Compliance and Investigation), Office of Gambling

Regulation.3. Mr Claude Minisini - Forensic Behavioural Investigative Services (FBIS), investigator contracted

by the Director.4. Ms Margo Johnson - solicitor for OGR.5. Ms Betty King QC - Barrister, legal adviser to the Director.6. Mr Ian Hill QC - Barrister, legal adviser to the Director.7. Mr Robert Taylor - Barrister, legal adviser to the Director.

6.2 International Game Technology Pty Ltd

1. Ms Sarah Beth Brown - Legal Counsel for IGT (USA).2. Mr Richard Nathan - Legal Counsel for IGT (USA).3. Ms Michelle Chatigny - IGT employee (USA).4. Ms LaVonne R Withey - IGT Regulatory Compliance Manager.5. Mr John Stawyskyj - Australian legal representative for IGT.6. Mr Francis Costigan QC - Barrister, legal adviser to IGT.

7.0 ACTION BY THE DIRECTOR ON RECEIPT OF THE IGT REPORT

7.1 Engagement of FBIS by OGR

Following receipt by the Director in August 1998 of the IGT’s "Project Compliance" report, the Directoridentified what he believed to be a number of serious shortcomings in its methodology and findings.The Director was concerned that the IGT internal investigation had simply glossed over the main issues,allocated blame and responsibility for wrongdoing within the company to low level personnel, and hadpresented what Mr Lahey described in evidence to my investigators as a "whitewash report" to regulators.

The Director decided that the matter required further investigation and, pursuant to his delegatedpower to investigate "associates" (delegated to him by the VCGA as described in para 3.3 above), heengaged the services of Forensic Behavioural Investigative Services ("FBIS"), a private investigationsconsultative group located in Melbourne. FBIS, which had been engaged to conduct investigations onbehalf of the OGR in the past, was engaged to review the IGT report and any supporting documentationconcerning IGT’s involvement in low value invoicing.

The FBIS review involved extensive overseas travel by Mr Minisini, Mr Priestley and Ms Johnson to conduct inquiries and interviews of IGT staff. Travel undertaken at that time was as follows:-

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• October 1998 Conducted interviews in France and Germany.• October 1998 Interview staff of IGT Europe in the Netherlands.• October 1998 Travel to London UK to conduct interviews.• October 1998 Travel to The Netherlands for further interviews.• October 1998 Interview IGT staff in Reno and Las Vegas USA.• November 1998 Travel to Colorado USA to conduct interviews.

The conclusions set out in the FBIS report to the Director, dated 2 April 1999, supported the initialconcerns held by the Director, Mr Lahey, and the Assistant Director (Compliance and Investigation), MrPriestley, about the IGT report. The following were conclusions reached by FBIS.

• The report provided by IGT lacked substance and the internal examination which forms the basisfor the report lacked investigative integrity and detail.

• There was a failure by the task force to record formally the interviews conducted with relevant personnel.

• An additional complication, resulting as a consequence of the failure to formally record the inter-views, was the assertion by some interviewees that the paraphrased contents of their statementsof interview did not accurately reflect their true statements.

• Many of the original notes made by the taskforce during interviews were destroyed and not available for examination.

• The report did not always attribute or reflect accurately the statements of those interviewed.

• In the opinion of the FBIS the internal examination and ensuing report was designed to confineany investigative attention of a regulatory agency and to deter any critical examination of the issuesor attempt to determine the overall culpability of IGT.

• In the opinion of the FBIS the internal exercise by IGT was orchestrated in a manner designed toprotect current executives of IGT.

7.2 Legal Advice from Ms Betty King QC

Upon receipt of the FBIS report, the Director referred the matter to Ms Betty King QC for a legal opinionand recommendations concerning any future course of action which might be pursued. Ms King hadbeen previously engaged by the OGR to provide ongoing legal advice on a number of diverse matters.

Ms King provided a lengthy written opinion addressing procedural and evidentiary requirements forbringing the matter to a disciplinary hearing before the VCGA Board. Ms King made the point that,although the Board was not bound by the rules of evidence, it was required to "accord ‘procedural fair-ness’, or as it used to be known ‘natural justice’, to all persons it is considering removing from theRoll". Ms King noted that much of the material on which FBIS relied was,

"… totally unsworn … it consists of summaries of conversations, tape recording of other

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interviews, some of which contradict what is contained in the summaries, photocopies ofdocuments, unidentified handwriting and voluminous hearsay statements."This material, whilst capable of being utilised by the Authority, is not sufficient material,in its current form, to hold up under any scrutiny in a hearing/inquiry situation. The reasonfor this is that the persons who have made these statements to the differing investigators arenot in any way bound to them. If for example, they were called to give evidence at aninquiry before the Authority, they could quite simply change their story and say they weremistaken, wrong or even lying and there would be nothing that any member or theAuthority or Counsel Assisting could do to prevent that occurring. … It would be anextremely unwise course to pursue an inquiry based upon material which has not beensworn to be true by any potential witness."

Ms King QC went on to say that:

"This does not mean that the inquiry should not be pursued. On the contrary there are verystrong indicators that it should. The material as it stands makes out quite a strong case inrespect of the knowledge of high ranking individuals within the company of the low valueinvoicing at the time it was occurring and an equally strong case of a cover-up of thatinformation in its presentation to regulators. The problem that is perceived is that certainof these individuals who have made statements will be under a great deal of pressure, ifthere is an inquiry held, to not adhere to those statements or records of conversations. Ina number of the cases, the individuals concerned who have been involved in conversationswith the FBIS investigators have not made definitive statements within those conversations,but comments such as "he must have known", " I believed he knew" etc. They often go on toexplain why they think or believe such things, but not in all cases. It is essential that thesepeople upon whom reliance is placed by FBIS in their report are absolutely confirmed intheir beliefs and, if possible, the reasoning behind those beliefs. The Authority is entitled touse people’s beliefs, but they must be committed to those beliefs (i.e. sworn statement) andprovide a sound basis for why they held those beliefs".

Ms King identified persons who, in her opinion, should be the subject of interview as prospective witnesses. This included a number of IGT personnel who had been already interviewed by the IGT"Project Compliance" taskforce and who were required to be re-interviewed, together with other persons who had not been interviewed but who were identified as potential witnesses.

Ms King’s advice also sounded a cautionary note to the OGR. Ms King discussed at length the difficulties of compelling witnesses who are not in Victoria to attend to give evidence at a hearing inVictoria. There was also discussion of the difficulties of taking evidence outside Victoria. Ms King alsoexamined the practical difficulties of conducting a hearing before the VCGA Board, the members ofwhich are not engaged on a "full-time" basis. Ms King pointed out that such a hearing necessarilyinvolved "peoples’ livelihood and the future of some very large and powerful companies" and that witnesses and their lawyers would be travelling from overseas. She pointed out that the Board wouldneed to be aware of the necessity to sit continuously. Ms King opined that the duration of any such hearing would "not be of short duration."

Following receipt of the legal advice from Ms King, the Director, Mr Lahey, in consultation with MrPriestley, decided to continue the investigation. In the light of Ms King’s advice it was obvious that further

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investigation was required to enable the matter to be brought before the VCGA Board for determination.Witnesses had to be interviewed and bound to sworn statements and this would necessitate furtherextensive overseas travel. A "taskforce" consisting of Mr Priestley, Mr Minisini, and two barristers, Mr IanHill QC and Mr Robert Taylor, was established. Mr Hill was a replacement for Ms King who becameunavailable due to her appointment as a Judge of the County Court of Victoria. Mr Taylor, who had previously been Ms King's junior counsel in this matter, had continuous knowledge of the issues. It wasintended that Mr Priestley and Mr Minisini were to be investigators responsible for the interviewing ofwitnesses and the obtaining of evidence. Mr Hill QC and Mr Taylor were to provide assessment of theevidence obtained and legal advice on any other matters arising.

7.3 Overseas Travel

Further investigations then took place both in Australia and overseas. During the period March 2000 toApril 2001 the following further overseas travel was undertaken:-

March 2000 Priestley & Minisini travel to The Netherlands.March 2000 Priestley & Minisini travel to London UK.March 2000 Priestley & Minisini travel to Turkey.March 2000 Priestley and Minisini travel to Estonia.March 2000 Priestley & Minisini travel to St Maarten (Dutch Antilles).March 2000 Priestley & Minisini travel to Las Vegas USA.November 2000 Priestley, Minisini, Hill and Taylor travel to Reno USA.November 2000 Priestley & Minisini travel to Memphis USA.November 2000 Priestley & Minisini travel to Detroit USA.March 2001 Priestley, Minisini, Hill and Taylor travel to The Netherlands.March 2001 Priestley, Minisini, Hill and Taylor travel to Las Vegas USA.April 2001 All return to Australia.

The inclusion of the legal representatives in the travel arrangements in order to provide on-the-spotlegal advice is worthy of further examination and comment.

8.0 THE ROLE OF LEGAL ADVISERS TO THE INVESTIGATION

It is clear that, from the time of receipt of the "Project Compliance" report from IGT, the Director soughtlegal advice on a continuous basis on issues raised during each phase of the investigation. Indeed, theultimate decision by the Director to arrive at a resolution of the inquiry was based primarily on legaladvice.

The obtaining of timely and ongoing legal advice in any major investigation is a well established and professional investigative practice. In the initial planning stages of any major investigation it is essential,for any number of practical reasons, to ensure that provision is made for access to a legal adviser dedicated to that particular inquiry. According to Mr Priestley, the OGR seeks legal advice on a continualbasis on a number of issues within its jurisdiction and the IGT investigation was no exception.

It appears however that the role of "legal adviser" as undertaken by Mr Hill QC and Mr Taylor assumed

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different dimensions than might usually be expected. The available evidence strongly suggests that intheir advisory role both actively participated in the Director’s investigation and travelled with MrMinisini and Mr Priestley as a team. The term used by Mr Priestley was that they (i.e. Messrs. Priestley,Minisini, Hill QC and Taylor) all formed a "taskforce" to conduct the investigation.

The practice of legal advisers and, in particular, senior counsel, actually becoming engaged in tacticalphases of investigations is, in my experience, a rare occurrence. When questioned on this aspect,Messrs. Priestley, Minisini, Hill QC and Taylor all advised that the reason for their "hands on approach"by the legal team was due to the fact that IGT had several senior American lawyers present at some interviews of IGT staff. In addition, the involvement of the legal advisers meant having the advantage of instant access to legal advice as the investigation progressed.

The actual process adopted by the taskforce was that Mr Priestley and Mr Minisini conducted the interviews whilst Mr Hill QC and Mr Taylor remained situated at a nearby motel where a room had beentransformed into a working area for the legal advisers. At the conclusion of each interview the legal teamwould analyse responses to questions put to witnesses and formulate questions and/or clarifications tobe asked the following day. This was in addition to any general legal advice required on any other issueswhich may have arisen.

The difficulty for me with the legal advisers working at the "coal face" of this investigation arises when considering the question of the independence of the advice being offered.This issue assumes even greater proportions when one comes to the point of examining the laterrequest made by the Director (to which I will refer below) for legal advice on aspects of the final settlement of the matter, including the acceptance of the sum of $US200.000 from IGT.

Both Mr Hill QC and Mr Taylor were questioned concerning their understanding of the independenceof their advice to the VCGA/OGR in this matter. Both were asked if they regarded their advice as beingeither "in-house advice" or "independent advice". Both responded that they regarded their advice asbeing independent.

I will address this issue in more detail later in this report.

9.0 COST OF THE DIRECTOR’S INVESTIGATION

The costs of the Director’s investigation were substantial and consisted of the following calculations which are exclusive of salaries for Mr Priestley, Mr Lahey or any administrativecosts to the OGR.

Fees for Mr Minisini: $106,764.50

Fees for legal counsel: $376,791.25

Fees for travel and subsistence: $196,747.25

Total $680,303.00

10.0 DETAILS OF PAYMENT OF MONIES BY IGT TO OGR

The monies were paid by way of cheque number 424487 dated August 22, 2001, drawn on the accountof IGT at the Wachovia Bank N.A. Greenville SC in the sum of $US200,000 and made payable to Officeof Gambling Regulation, PO Box 1988R, Melbourne, Victoria. The cheque was handed to Mr Priestleyby Ms Sarah Beth Brown of IGT in Melbourne on 28 August 2001. The cheque was subsequently paidby the OGR through the usual processes into Consolidated Revenue.

I wish to make it absolutely clear that I do not suggest that any of the individuals involved in the investigation, or in arranging or negotiating the payment, received any personal gain from the payment.

11.0 THE EVIDENCE

My investigation has established that there is a considerable amount of common ground between theDirector and IGT on many aspects of the subject matter of this investigation. However, on the issue of thecircumstances which led to the payment of $US 200,000 from IGT to the OGR, there is none whatsoever.The details of the conflicting accounts are set out below. However, I would preface what follows byobserving that it is common ground that the sum of $US 200,000 was paid by IGT to the OGR as a contribution towards the costs incurred in the conduct of the investigation.

12.0 THE IGT VERSION

During the course of my investigation all of the previously mentioned IGT personnel and their legalcounsel in Australia were contacted. In the case of the Australian based representatives, taped interviewswere conducted. In the case of USA based personnel, statements were obtained from relevant personsthrough Mr John Stawyskyj of Blake Dawson Waldron, the legal representative for IGT in Australia.

Evidence received from the IGT personnel is in stark contradiction to that received from members ofthe Director’s investigative team in regard to the question of the first mention of a possible payment byIGT to OGR.

According to the IGT version, the issue was first raised at meetings in November 2000 in Reno, USA. Atthat time the Director’s "taskforce" was in Reno interviewing IGT personnel. Meetings were arrangedbetween the Director’s legal people (Mr Hill QC and Mr Taylor) and their legal counterparts from IGT(Ms Brown, Mr Nathan and Mr Stawyskyj).

12.1 The evidence of Ms Sarah Beth Brown and Mr Richard Nathan

12.1.1 The meeting in Reno on 15 November 2000

Ms Brown has stated that, on 13 November 2000, she was in Memphis for the purpose of being presentduring the interview of Mr Michael Cody, the former IGT compliance taskforce chairman. Mr Cody wasto be interviewed by Mr Priestley and Mr Minisini in relation to their inquiry.

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Ms Brown states that:

"When Mr Minisini and Mr Priestley arrived at Mr Cody’s office on the morning ofNovember 13, 2000 they requested to speak to me outside of the presence of my attorneysand Ms Chatigny.

"I agreed to honor their request for a private discussion and accompanied the investigatorsto the outside front steps of Mr Cody’s office building. Although I do not recall the order inwhich statements were made Mr Priestley and Mr Minisini, I do recollect the following comments.

"(a) They told me that two attorneys, Ian Hill and Robert Taylor, representing theVCGA were present in the United States …………

(d) In addition Mr Minisini and Mr Priestley suggested that the VCGA’s attorneyswould be willing to meet with representatives of IGT while they were in the UnitedStates to discuss where the investigation of the VCGA was headed and how itmight be brought to a conclusion".

The scenario now moves to Reno in Nevada, USA. Ms Brown’s statement continues as follows.

"On November 15, the VCGA’s agents advised me that, as had been mentioned in Memphis,their counsel were present in the United States and could meet with representatives of IGTthat very afternoon. It was agreed that two attorneys representing the VCGA would meetwith representatives of IGT at the conclusion of the day’s interviews at approximately4.00pm".

"I directed that Mr Nathan and Mr Stawyskyj meet with the VCGA’s attorneys. I did notattend due to a combination of a conflict in my own schedule and my feeling that the initialmeeting would best be conducted among outside counsel for both the VCGA and IGT".

"The meeting was held during the late afternoon on November 15th and what transpired atthat time was reported to me during that evening by Mr Nathan and Mr Stawyskyj, who hadbeen in attendance".

Mr Nathan has also stated that he understood the purpose of the meeting with Mr Hill and Mr Taylor inReno was to discuss possible resolution of the investigation. Mr Nathan stated:-

"Shortly after returning to Reno after Mr Cody’s Memphis interview, Mr Minisini and MrPriestley advised either me or General Counsel Brown that the two attorneys for the VCGAwere in Reno and would be available to discuss a possible resolution of the investigationupon the completion of the interviews scheduled for that date. My best recollection is thatthe date would have been November 15, 2000."

Mr Nathan’s account of what occurred at the meeting is as follows.

"A meeting was agreed to which commenced in the late afternoon that date at IGT headquarters in Reno, Nevada. Present were John Stawyskyj, me and two VCGA attorneysfrom Melbourne, Ian Hill and Robert Taylor. The meeting took place in a small conferenceroom. Mr Stawyskyj and I sat on one side of the table and Mr Hill and Mr Taylor on the

other. Mr Hill sat directly across from me. I took no notes of the meeting. What follows ismy best recollection of what transpired at that meeting.

"Mr Hill stated that the meeting was without prejudice and off the record and that neitherhe nor Mr Taylor would repeat anything said in the meeting to Mr Minisini or Mr Priestley.Either Mr Stawyskyj or I stated that we had no objection to anything said in the meetingbeing made known to either of the agents.

"Mr Hill advised that he and Mr Taylor had conducted an extensive review of the facts ofthe VCGA investigation thus far. Mr Hill told us that he held the VCGA and Mr Minisini, inparticular in very high regard. He said that as he was aware of the facts thus far presentedhe would be happy to hear anything we might wish to offer regarding the matters underinvestigation or the conduct of the investigation …….

"Mr Hill suggested that it would be possible to discuss a resolution of the investigation.Either Mr Stawyskyj or I asked what form such a resolution would take. Mr Hill states thatit would be along the lines of Aristocrat. Mr Stawyskyj asked what Mr Hill was talking aboutand Mr Taylor said something to the effect that Mr Nathan should know. Mr Taylor said"like Aristocrat in Colorado". I replied that I was familiar with the proceedings against thatentity in Colorado.

"Either Mr Stawyskyj or I asked exactly what the VCGA attorneys were asking for. Mr Hillsaid that "you (IGT) will have to lose some people and pay some money.

"We inquired as to who he was talking about, and how much money and what it was for?

"Mr Hill said we should make the offer as to the people and the money. Either Mr Stawyskyjor I stated that it was inappropriate for us to make such a suggestion.

"In particular, it was the VCGA that had conducted the investigation and it was up to thatbody to tell us what it had discovered and, as a result of such discoveries, what its concernswere.

"Mr Hill responded that IGT knows who the people are. Mr Stawyskyj than said, this processis highly inappropriate, as we are dealing with people’s lives and careers. Mr Hill said theVCGA was not prepared to identify individuals and it was up to IGT to come up with alist………….

"Neither the nature nor amount of any payment sought by the VCGA was at that meetingquantified or characterised as a fine or penalty or a contribution to costs. The meeting concluded after no more than one half hour and I never spoke to or I believe saw either MrHill or Mr Taylor again."

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12.1.2 The meeting in Reno on 16 November 2000

Details of the conversation from the meeting in Reno on 15 November 2000 were relayed to Ms Brownby Mr Nathan and Mr Stawyskyj later that same day. Following this discussion, it was agreed that MsBrown would contact either Mr Hill or Mr Taylor and arrange for a further meeting, this time with MsBrown in her capacity as senior counsel for IGT. This took place on the following day, 16 November2000, when Ms Brown and Mr Stawyskyj met with Mr Hill and Mr Taylor at Ms Brown’s office at IGTHeadquarters in Reno.

Ms Brown has stated her recollection to be as follows.

"Mr Hill stated that the meeting was without prejudice and off the record and nothing saidwould be relayed to either Mr Minisini or Mr Priestley. I replied that it didn’t matter to meif they spoke to their investigators about the meeting.

"Mr Hill reiterated that IGT could settle the investigation along the lines of Aristocrat inColorado by "losing people and paying money". I questioned the reference to Aristocratand mentioned that the name seemed to be brought up frequently by the representatives ofthe Authority.

"Mr Taylor took strong exception to my comment and said Aristocrat had nothing to do withthe investigation and references to that company were only made by he and Mr Hill as shorthand for the form a settlement could take.

"I asked if they would care to be more specific as to what they were seeking, and my best recollection is that while refusing to mention any specific names or amount of money, theydid indicate that there were between five to seven people IGT should be prepared to give upand that I should be able to figure out who they were and how much IGT would pay.

"I advised the VCGA’s attorneys that I was General Counsel of a publicly traded corporationand could not go to the Board of Directors without an indication from the regulators as totheir concerns and suggest that the company remove certain people and pay an unspecifiedamount of money. I informed Mr Hill and Mr Taylor that I was not prepared to bid againstmyself. I told them, in substance, that they were the regulators. If they thought we’d donesomething wrong, they should let us know what it was. If they believed employees should befired, they should be prepared to tell me why their termination was warranted.

"They refused my requests and suggested that I figure it out. …

… "On behalf of the company, I continued to maintain that, except for the low value invoicingwhich happened in 1992 and 1993, it had done nothing wrong and, in particular, itsactions and those of the task force in 1998, were appropriate.

Ms Brown has stated her reaction to the meeting of 16 November 2000 to have been as follows.

"The actions I took on behalf of IGT after the interviews of November were a departure fromhow the company would normally respond to a regulatory inquiry, in terms of the numberof counsel engaged and the formality which I insisted be introduced to the process.

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"At that point, I felt the conduct of the VCGA’s representatives left me no choice. In particular,I had to consider the following developments to that point:

(a) The VCGA investigation had been ongoing for over two years with no discernibledirection and had not yielded any new information to change either my or the company’s point-of-view of the facts of the matter.

(b) the tone of the investigator during interviews was becoming increasingly hostile.

(c) The conversations with the VCGA’s attorneys, Hill and Taylor, in November were veryadversarial and inappropriate in that IGT was to suggest the sanctions for itself incircumstances where the VCGA had not established wrongdoing."

12.1.3 Subsequent developments toward the resolution of the investigation

Ms Brown’s statement goes on to describe the next development which occurred in a break during aninterview by Mr Minisini and Mr Priestley of Ms Chatigny of IGT.

"In contrast to the tone and character of the questioning, I was approached by ClaudeMinisini on, I believe April 4, during a recess in Ms Chatigny’s interview and asked if hecould speak with me privately without prejudice. I agreed to speak with Mr Minisini.

"Mr Minisini and I took a short walk outside of IGT’s Las Vegas office. He told me that MaxPriestley had requested that he (Minisini) speak with me and they were of the impressionthat IGT believed the door to a resolution of the investigation was closed. He told me thatwas not the case. I advised Mr Minisini that the conduct of the VCGA gave every contraryindication."I cited the aggressive nature of the previous discussions with Mr Hill and Mr Taylor inNovember.

"I also mentioned what I felt were the absolutely unfounded accusations he had just madeagainst Michelle Chatigny. I told him I thought she was the finest and most honest personin a compliance management role in our industry . I told Mr Minisini that IGT was not giving up anyone and we were prepared to go to hearing.

Ms Brown goes on to state her recollection of a further conversation, this time with Mr Priestley.

"To my best recollection, I met with Max Priestley on Friday, April 16, 2001, at IGT’s Las Vegasoffice. Mr Priestley said that the VCGA understood that any IGT personnel were, ‘off thetable’.

"I understood his statement to mean that the VCGA were no longer insisting on the disassociation of any IGT personnel as a condition of the resolution of the matter.

"In particular, he said that he had no issue with the task force report or the conduct of itsmembers. He said that IGT would be required to acknowledge that its initial response in1993 and 1994 was inadequate and certain of its former executives could have done moreduring that time to investigate the low value invoicing claims in Europe.

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"Mr Priestley did say that the VCGA would want a payment from IGT. I said that we wouldnot pay a fine in light of the fact that no new wrongdoing had been established, other thanthat set out in the taskforce report.

"If the VCGA were to insist upon a payment, IGT would consider a contribution to the costof the VCGA investigation, as it had done so on past occasions in the US.

"I advised Max Priestley at that meeting that his suggested framework by which the VCGA’sinvestigation would be concluded would be acceptable to IGT. I told him that I was planningto be in Australia on company business later in April and would be willing to try andfinalise the matter with him at that time. Mr Priestley and I agreed that I would contacthim as soon as I knew my plans for the end of the month. He stated that the VCGA would suspend its investigative efforts, pending our attempt to conclude the matter on the basis ofour discussion.

Ms Brown described her reaction to this conversation as follows.

"The proposed arrangements outlined by Max Priestley was one which I felt to be in the bestinterests of IGT. It was consistent with the result which I felt would have been the outcomeof a fair and impartial hearing before the Authority.

"Therefore, given that the VCGA’s proposal was consistent with the outcome that the Companybelieved was obtainable through the hearing process, acceptance was virtually mandated.

"The expenses already associated with responding to the VCGA’s investigation were substantial. An analysis done by my own attorneys caused me to believe that a hearingbefore the VCGA would have cost the company up to one million dollars US and would haveoccurred over a period of many months. Under the circumstances, a reasonable contribution toward the cost of the investigation was an acceptable result.

"As General Counsel of a publicly traded company, I felt it to be not only reasonable to conclude the VCGA’s investigation on the basis I discussed with Mr Priestley, but my duty tothe shareholders of the corporation."

Ms Brown travelled to Australia in April 2000. She has stated her recollection of events in Australia to beas follows.

"I travelled to Australia during the third week of April 2001 and met with Max Priestley atthe offices of the VCGA on Spring Street in Melbourne on Monday, April 23, 2001. MrPriestley and I agreed to a discussion without prejudice. Mr Priestley said that a resolutionwithout any sanction against IGT was possible. He indicated that the VCGA had spent inexcess of one million dollars Australian and that he could not conclude the matter withoutrecovering the costs expended by the VCGA.

"Mr Priestley reiterated that he required an acknowledgment that the initial response in1993/1994 was inadequate and that certain former IGT executives should have done morein 1993 and 1994 to look into the invoicing matters at that time. However, he again madeit clear that the VCGA had no issue with the taskforce or current management of IGT.

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"I advised Mr Priestley that the concept of a payment by the subject of an investigation to aregulatory agency was not foreign in the United States but that I would have to consult onthe amount IGT would contribute.

"Under the circumstances, where there was to be no finding of wrongdoing by IGT, wewould not be willing to make more than a contribution toward the total expended. Heemphasised that the VCGA had spent a great deal of money and that the IGT payment couldnot be "token" in nature.

"I advised Mr Priestley that the statements made by Mr Minisini during the interviews of MrNathan and Ms Chatigny were being reviewed by counsel in the United States and Australiato determine whether causes of action might exist against the VCGA and its agents. Weagreed to meet the next day.

"After the meeting of April 23, I convened a late-afternoon meeting with John Stawyskyj,Richard Nathan and Michelle Chatigny to discuss the VCGA’s proposal. My belief basedupon IGT’s costs, was that the VCGA had probably spent closer to two million Australian.

"I based this belief upon my knowledge of the resources directed to the investigation by theVCGA, including repeated travel to Europe, the United States and the Caribbean, and theemployment of an outside contract investigator for a period of years. Adding in the cost oftravelling at least twice to the United States for two attorneys for weeks at a time made obvious the enormous financial commitment already borne by the VCGA.

"I directed John Stawyskyj to review the VCGA’s ability to require a contribution toward thecost of an investigation. He reported back to me that same day that he could find no specific provision that permitted the VCGA to require a payment toward costs.

"He indicated, however, the VCGA might be taking a more expansive view of the provisionallowing recovery of costs incurred during the conduct of the investigation of an application.During the next several days, I made inquiry of the VCGA, either personally or through MrCostigan, as to the statutory basis for requiring the payment. I was advised that the VCGAhad obtained a legal opinion from it’s own counsel that there existed authority to acceptthe costs payment.

"To my best recollection, on Tuesday, April 24, I had a second meeting with Max Priestley atthe Melbourne offices of the VCGA. The topics explored were rather limited. The first concerned the amount of an IGT contribution towards costs of the VCGA’s investigation. MrPriestley again was not prepared to specify an amount. However, he did continue to askme to make an offer as to the amount IGT would be prepared to pay.

"He did say that before we went further with our negotiation, he needed to be assured thatthe amount to be paid would be in a range acceptable to the Authority.

"After some discussion, I advised Mr Priestley that IGT had never paid more than $150,000U.S. in connection with the resolution of any matter. He reiterated that, given the VCGAcosts to date, the payment would have to be considerable and in excess of the $150,000 U.S.

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"I told him that I could not, under any circumstances, go to the Board of Directors and suggest a payment of more than $250,000 U.S. Mr Priestley indicated that the VCGA wouldnot accept an amount of less than $250,000 U.S. ………

"… On Thursday, April 26, I again met with Max Priestley and provided him with a copyof a memorandum setting out the agreed position of IGT and the VCGA as we at IGT under-stood it, together with copies of releases and withdrawals proposed by Mr Nathan. MrPriestley said that he felt that matters could be resolved Monday and we agreed to a meetingin Mr Costigan’s chambers for Monday morning.

"On Monday, April 30, Frank Costigan and I met with Max Priestley and Ian Hill at MrCostigan’s chambers in Melbourne. The VCGA was not in a position to provide definitivecomments on our memorandum or the Nathan/Chatigny withdrawal and waiver documents at that time.

"I returned to the United States later that day and negotiations of the final documentationwere handled between counsel.

"The final figure for the IGT contribution of costs was agreed upon by counsel andapproved by me on August 15, 2001 at $US200,000."

12.1.4 The issue of possible defamation proceedings against investigators

In the course of the Director’s investigation, Mr Nathan was interviewed by Mr Priestley and Mr Minisinion November 10 1998 in Denver, Colorado. The purpose of that interview was to question Mr Nathanin relation to his activities on behalf of IGT since his initial engagement as legal counsel for IGT in 1991.Particular reference was made during the interview to the role of Mr Nathan in the IGT compliance task-force commissioned to investigate allegations of low value invoicing activities by IGT which hadoccurred in 1992/1993.

In relation to his first interview with Mr Minisini and Mr Priestley, Mr Nathan’s statement made in thecourse of my investigation contained the following.

"The interview was non-confrontational in tone and nothing of an accusatory or disparaging nature was raised by the investigators in relation to the conduct of the taskforce investigation or its members’ performance."

On 3 April 2001, Mr Nathan was again interviewed by the same investigators. On this occasion, MrNathan says, the tone of the investigators had changed significantly from the initial interview.

"Mr Minisini stated that I had acted to deliberately mislead regulators in the conduct of theinvestigation. He further made clear accusations that a cover-up of the extent of IGT corporate wrongdoing was undertaken by me, and probably Ms Chatigny as well, from thevery first moment I was contacted by her regarding this matter in 1998. Accusations of asimilar nature were made by Mr Minisini against Ms Chatigny in the presence of MrPriestley during the interview of Ms Chatigny the following day."

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Mr Nathan continued:-

"Subsequent to the accusations of Mr Minisini and Mr Priestley in April 2001 made duringmy interview and that of Ms Chatigny, consultation was had by Ms Chatigny and me withour counsel in the United States and Australia as to whether the statements on the recordmade in Nevada might be actionable in either the courts of the United States or Australia.

"The allegations were, in our view, clearly unfounded and they could nonetheless, be personally and professionally damaging to Ms Chatigny and me. In both the highly regulated close-knit gaming community and, in my own case, as a member of the bar, afalse attack upon character and reputation can have a devastating impact. As a generalrule, such allegations are easily made and difficult to disprove. That is why we place suchemphasis on the proper exercise of an inquisitor’s power. It was a consensus amongst ourcounsel that the VCGA investigators had stepped over the line of proper inquiry in their allegations and that, at least in Nevada, may have already committed the recognised tortof abuse of process and possibly defamation of character as well.

"In April of 2001, I travelled with General Counsel Brown and Ms Chatigny to Australia toserve as an adviser on any discussions concerning possible conclusion of the investigationand also to consider any course of action Ms Chatigny and I might take regarding the state-ments made by Mr Minisini in the presence of Mr Priestley during our interviews earlierthat month."

It was during this visit to Australia in April 2001 that Mr Nathan and Ms Chatigny consulted with Mr SherQC regarding possible defamation action against Mr Minisini and Mr Priestley. This course of action wasdiscontinued when the arrangements for the final resolution of the IGT inquiry were agreed upon. Thatthere is a link between the decision not to pursue the defamation proceedings and the resolution of theinvestigation is strongly suggested by the final paragraph of Ms Brown’s lengthy statement in which thefollowing appears.

"On August 28, 2001, I met with John Stawiskyj, Max Priestley, and Ian Hill in Melbourne,at which time I tendered to Max Priestley a letter of acknowledgement from IGT, letters ofrelease from Michelle Chatigny and Richard Nathan and a cheque in the amount of$200,000 US in payment of the agreed upon contribution towards costs. In exchange, Ireceived from Mr Priestley a letter from the VCGA to Blake Dawson Waldron, together withthe letters of withdawal in favour of Mr Nathan and Ms Chatigny."

The letter of release from Ms Chatigny and Mr Nathan, which are for current purposes identical, contain the following.

"…[he/she] does now … release and discharge the VCGA, its agents and employees for liability of any kind whatsoever, either at law or equity, for any written or spoken state-ments made within the scope and course of an investigation by the VCGA into certain low-value invoicing activities in Turkey in 1992 – 93 and related matters as those statementsrelate to the undersigned. … Specifically, [he/she] releases the individuals identified in thepreceding paragraph as to interviews conducted by means of tape recordings and otherinvestigative documents generated during the course of the investigation."

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As is clear from Ms Brown’s statement, the resolution of the investigation included the provision ofreleases or "letters of exoneration" executed on behalf of the VCGA by Mr Lahey which absolved bothMr Nathan and Ms Chatigny from any "wrongful or negligent conduct" and advised that the "allegationagainst you is therefore withdrawn".

12.2 Evidence of Mr John Stawyskyj

Mr Stawyskyj of Blake Dawson Waldron, the legal firm who represent IGT (Australia), was interviewedunder oath on Wednesday 21 November 2001 in relation to his recollections of the chronology of eventsand meetings which took place between legal representatives of the VCGA and IGT. Mr Stawyskyj hasalso provided a statement to my investigators.

Mr Stawyskyj confirmed that he was present at both meetings with Mr Hill and Mr Taylor on 15 and 16November 2000 in Reno. He confirmed that the first meeting had been attended by he and Mr Nathan,and the second by he and Ms Brown. In the interests of brevity I do not intend to recite in full the detailsof Mr Stawyskyj’s evidence. Mr Stawyskyj’s evidence corroborates the statements of Ms Brown and MrNathan previously set out in this report.

Mr Stawyskyj stated at interview that the issue of the payment of money by IGT was raised at the meetingon 15 November 2000. He stated that the basis on which the payment would be made was not specifiedand that the statement was merely that, "there would be a requirement to be a payment of money." MrStawyskyj stated that it was Mr Hill who first raised the issue. Asked whether the payment was designedto facilitate the resolution of the investigation, Mr Stawyskyj said, " …I don’t know whether it wasdesigned to facilitate it, it was a… stated as a condition towards resolution of the matter".

In relation to the meeting of 16 November 2000, Mr Stawyskyj closely corroborated Ms Brown’s evidence. In particular he confirmed the following.

• Mr Hill commenced the meeting by saying that it was off the record and that nothing said wouldbe repeated to Mr Minisini or Mr Priestley.

• Mr Hill said that the investigation could be settled along the lines of Aristocrat in Colorado, andby that he meant IGT would "lose some people and pay some money".

Mr Stawyskyj outlined his understanding of subsequent developments regarding the payment after thetwo Reno meetings on 15 and 16 November 2000.

"… there were ongoing discussions and there were, in terms of meetings with counsel, therewas another meeting with Ian Hill and Max Priestley attended, both Sarah Beth Brownand…and Frank Costigan on the 30th of April 2001, at which I was not present, …and thenthere was ongoing discussion between Frank Costigan and Ian Hill as to the form of documents that would lead to the resolution of the matter which occurred over a numberof months, again I was not present at those. …At…towards the end of the matter, there weretwo further meetings on the 13th and 15th of August with Ian Hill, which I attended withFrank Costigan."

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In relation to those two meetings, Mr Stawyskyj said,

"…certainly, I was informed towards the end of the matter in the meetings in August, fromthe 13th to the 15th of August by Ian Hill that without agreement on what were the outstanding issues at that stage, which was money and a media release, that there wouldbe no settlement, no resolution of the matter".

12.3 Evidence of Mr Frank Costigan QC

Mr Frank Costigan QC was interviewed under oath on 14 December 2001. Mr Costigan QC said he wasengaged on or about 12 December 2000 to represent IGT in connection with allegations that had beenmade by Mr Claude Minisini against both Ms Michelle Chatigny, an IGT employee, and Mr RichardNathan (these have been discussed above). Mr Costigan QC stated that these allegations had arisen during the course of the Director’s investigation and had been totally unexpected by IGT. Subsequentlythis aspect of the matter was referred to Mr Sher QC. Mr Costigan QC said that, in addition to this issue,he had been retained to represent IGT and the company’s reputation in general, and to formulate documentation to permit IGT to arrive at an acceptable settlement of the investigation.

It was put to Mr Costigan QC that Ms Brown had stated that Mr Hill QC had raised the issue of a resolution to the investigation with her and, whilst there was no specific money figure mentioned or anyparticular course of action, the terminology used was that "IGT would have to lose some people and paysome money." Mr Costigan QC indicated he was aware of this claim by Ms Brown. When asked whenhe first became aware of it Mr Costigan QC indicated that he could not recall, but believed he becameaware of these details at the first meeting he had with Ms Brown in January.

Mr Costigan QC went on to say that finally the parties were left with two issues; one was the mediarelease and the other was the contribution to the costs of the investigation. Mr Costigan QC said he,"kept saying to Ian Hill that we shouldn’t be paying anything for the cost of the investigation becauseit wasn’t our fault, you know, but…we made some kind of…not legal commitment, but some kind ofa commitment to making a contribution".When asked if the contribution was a "good will gesture", Mr Costigan QC said the following.

"Yes, and also it was…it was a bit more than that because…certainly…the Americanscame out three times to see me and ... I knew, from what John had told me, they’d been outa couple of times before I ever came into it ...and…these were at a very senior level of thecompany and ... it was a time at which there was a major merger or a takeover in the States… and … it was proving immensely expensive to the company.

"But even more than that, it’s disruptive to have senior executives involved in anything likethis, so, commercially they just wanted to settle it, provided they got the withdrawal. So wefinished up… we were not happy about a media release, we couldn’t understand why theAuthority wanted to have a media release, I mean…it wasn’t a matter of major publicinterest…they seemed to have some feeling that they should be transparent and we were notobjecting to that but…we were very troubled about a media release having a significantamount of money paid by us and that’s why we knocked fifty thousand off, you know …then finally the Authority said they wouldn’t take less than $US200,000. I … my suspicionwas that there was bluff in that and that we could’ve actually said …. we’re not paying any-

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thing, you know … we couldn’t believe that they were going to go on with this massive hearing that would’ve taken months…

" … I don’t think they would’ve ever gone to a hearing before the Board because they werein terrible trouble over the investigation and the fact is there was a very significant independent inquiry in America with very reputable, independent people on it and therewas just no basis for the allegations that were made out of frustration, I think.

"So, I didn’t believe they would ever go to a three months hearing …Geoff Sher would’vebeen there and I would’ve been there and … immensely expensive but we … we just wantedto close it ... it had been very disruptive and we wanted to put it behind us ... so ... weweren’t prepared to call their bluff…and so we agreed to pay $US200,000 ... towards thecosts, you know."

This then is the relevant evidence obtained from IGT and their representatives supporting their versionof events surrounding the circumstances of the payment of the monies to the OGR.

13.0 THE OGR VERSION

Although, as I have said above, the investigation was conducted by the Director under powers delegatedto him by the VCGA, it was conducted with resources provided through the OGR. Mr Priestley, forexample, is an employee of the OGR and the costs of travel and the fees paid to Mr Minisini, Mr Hill QCand Mr Taylor were all funded by the OGR. For that reason I shall refer to the account of events givenby the Director and other individuals involved in the investigation collectively as the "OGR version". Tomake matters even more confusing some witnesses habitually referred in their evidence to the investigation as the VCGA inquiry.

Whatever terminology is applied, the OGR version is, as I have stated above, starkly different to thatgiven by IGT personnel and advisers. In essence, the OGR version is that the offer to pay the moneywas suggested by IGT and was accepted following receipt of written legal advice, dated 7 May 2001, fromMr Hill QC to the Director. During the course of my investigation all relevant personnel from the VCGAor the OGR were interviewed and evidence taken under oath.

13.1 Evidence of Mr Bill Lahey

Mr Bill Lahey, the Director of Gaming and Betting and the Director of Casino Surveillance for Victoriawas interviewed on 5 December 2001. A synopsis of the answers provided by Mr Lahey has been compiled and the following information is drawn from that synopsis.

Mr Lahey confirmed that he was the senior member of the OGR associated with the IGT inquiry and was theperson who had the ultimate responsibility for the oversighting, conduct and outcome of the investigation.

Mr Max Priestley, the Assistant Director Compliance and Investigation had the responsibility of the "dayto day" running of the tactical side of the investigation. Mr Priestley reported to Mr Lahey on a regularbasis including telephone briefings whilst Mr Priestley and Mr Minisini were overseas and meetingsupon their return.

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Mr Lahey advised that the IGT Report to the Compliance Committee which he received in July 1998 wasthe first time he became aware of the self-regulatory investigation conducted by IGT into low valueinvoicing in Turkey in 1992-1993. He regarded the contents of that report as being both "superficial andinadequate" and used the term " a whitewash" to describe the report in general terms. This was the reason he commenced his investigation of IGT.

He had arrived at this position following his reading and examination of the IGT report and on the basisof his knowledge and experience of the similar matter of "Aristocrat" which had been the subject of similar allegations of low value invoicing.

He did not believe that IGT’s response in the report was suitable to permit IGT to remain on the Rollin Victoria. He then referred the matter to FBIS for review. The engagement of FBIS according to MrLahey was normal practice within the OGR at that time as FBIS had conducted two similar investigationson behalf of the OGR and possessed a suitable skill base to review the report and to investigate IGT. Anadditional reason for the retention of FBIS was that the level of the skills possessed by OGR staff at thattime did not match the perceived complexity of the IGT investigation. The decision to engage FBIS wasdiscussed with Mr Max Priestley and based on the above information it was felt that FBIS were the mostlogical and cost effective choice to conduct the investigation.

Mr Lahey confirmed the series of events which took place in the initial investigation which involved theteam of Mr Priestley, Mr Minisini and Ms Johnson travelling overseas. On their return, meetings wereheld to discuss whether IGT had reacted properly and whether there had been a "cover up" by IGT.

Mr Lahey was questioned on the issue of operational investigative planning, for example, the preparation of a major investigation plan. He advised that there was no major investigations planningundertaken, but he had taken steps to ensure that there were sufficient funds available for the investigationto be undertaken. He further stated on the same issue that:-

"We knew what was required to be done, or had a good idea of what was required basedon the Aristocrat experience, and we had a good idea of what it was going to cost and Iassured that the budget was able to withstand a large complicated investigation I think thatI set aside $AUD400,000. The ultimate cost was $AUD677,000."

I shall comment further on the issue of operational planning later in this report.

Mr Lahey confirmed that, following the return of the investigators at the completion of the initial phase ofthe investigation, he sought legal advice on the current state of the evidence from Ms King QC because hewanted expert advice on the subject of commencing possible disciplinary proceedings against IGT. At thatpoint, Mr Lahey stated, he believed there was sufficient evidence to commence such action.Subsequent advice established that there was insufficient evidence to commence the course Mr Laheydesired. Further investigation was necessary before disciplinary proceedings could be contemplated.

Mr Lahey confirmed that it was his decision to retain the services of Mr Hill QC following the departureof Ms King QC. Mr Hill QC was engaged to perform the same role as that previously undertaken by MsKing QC. It was his understanding that Messrs. Priestley and Minisini were jointly briefing and advisingMessrs. Hill QC and Taylor on a daily basis and he (Lahey) spoke with them on occasion by telephoneor via e-mail. He was satisfied that he was being fully briefed and kept up to date on developments byMr Priestley. He also conferred with Mr Hill QC and Mr Taylor on those occasions.

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He recalled that in November 2000 the "team" went to Reno, Nevada, USA, although he was unable torecollect whether, after interviewing witnesses, Mr Priestley and Mr Minisini then departed and Mr HillQC and Mr Taylor remained in Reno.

He stated that the first time he become aware of the existence of the IGT offer of payment of monieswas:-

"… After Priestley and the others had come back in April I think. I can’t remember, it wasaround about that time. I think it was the end of April. Priestley came into my office andsaid they have made this offer.

"After they came back we discussed the conclusion of the investigation and that it wasunlikely if any disciplinary action could be taken because they had all gone. [meaning theIGT personnel responsible for the low value invoicing]

"I think it was some time after that he came in and said Sarah Beth Brown had arrived andthat she had made an offer here in Melbourne. They had engaged Frank Costigan QC ontheir behalf and they wanted to settle the issue and had made an offer of $US250,000."

Mr Lahey also advised that :-

"Priestley told me that there had been no discussion between Priestley and Sarah BethBrown, he simply told me she had made an offer. This was the first time I had heard orknew about it."

He continued:-

"Hill or Taylor had not been instructed to open or negotiate a settlement in November 2000,nor had I authorised any approach to IGT for payment of money at any time either beforeor after. If someone had given such instructions to Hill and Taylor it would have been completely and utterly without my knowledge."

As to the advice of Mr Hill QC dated 7 May 2001, Mr Lahey advised that he had requested that adviceand the reasons for doing so were two-fold. One related to the likelihood of any disciplinary actionbeing taken against IGT, and the other was the appropriateness of accepting the IGT offer of paymentof monies. He further stated that one was in terms of corporate governance and what IGT had put intoplace as he was not satisfied with their actions in this regard. The IGT auditing function was not acceptable and he wanted IGT to :-

"…make full admissions to regulators and to "name names" to act as a deterrent to othersenior executives of other large organisations who thought that they could get away withthis."

Mr Lahey went on to say that there was a lot of discussion concerning the above and there were concerns about defamation action. Further discussions took place about the publishing of the outcomeof the IGT investigation on the OGR web-site. However, he was not entirely satisfied with the outcomeand advised as many other regulators as possible of the results.

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On 28 August 2001 the results of the investigation were tabled before the VCGA. A copy of the document put to the VCGA Board by the Director is attached to this report as Appendix 1. I am advisedthat this is the first occasion the whole matter had been brought to the attention of the VCGA Board.

13.2 Evidence of Mr Max Priestley

Mr Priestley was interviewed under oath in relation to this matter on 29 November 2001. He had previously provided this office with all documentation held by the OGR relevant to the IGT investigation.He had also provided, at my request, a re-construction of expenditure incurred by the OGR during theinvestigation.

During his interview Mr Priestley confirmed the sequence of events which led to the commencementof the investigation. It seems to me little will be gained by engaging in unnecessary repetition of theaccepted common ground existing between the parties. Rather, I shall concentrate on those issues indispute: the question of when discussions allegedly first occurred concerning the payment of themonies by IGT, who raised the issue and subsequent developments in Australia concerning the settlement and payment.

Mr Priestley advised that neither he, nor anyone else on the "team", had briefed Mr Hill QC or Mr Taylorto negotiate with IGT for payment to offset the cost of the OGR investigation. He had no knowledge ofsuch negotiations in November 2000 or at any other time. Mr Priestley advised that he was not presentat the meetings in Reno in November 2000 between Mr Hill QC, Mr Taylor and IGT representativeswhen, according to IGT, the matter of a financial contribution was discussed.

He confirmed, however, that he was the person who had received the cheque for $US200,000 from MsBrown in August 2001. The cheque was accepted, he said, on the basis of it being a contribution by IGTto offset the cost of the investigation. He then gave the cheque to finance people within the OGR who,to his knowledge, lodged it in consolidated revenue. He further advised that neither the VCGA nor theOGR received a direct benefit from the payment of the cheque.

He stated that Ms Brown approached him on the subject of resolution, which included payment, inMelbourne in April 2001. Mr Priestley said that Ms Brown advised him that IGT had Mr Costigan QC acting on its behalf and that they wanted to resolve the matter. According to Mr Priestley, he advisedher that Mr Costigan QC should speak with Mr Hill on the subject.

Mr Priestley further stated that this was the first time he had any conversation with any person from IGTconcerning the payment of the money and it was the first time he became aware that Ms. Brown wasmaking such an offer. In the course of questioning on this issue he emphasised that this was the oneand only occasion that he spoke to Brown about the payment and resolution of the matter.

Mr Priestley emphatically stated that:-

" … other than this discussion and the exchange of pleasantries about the weather and allthe rest of it, that was it. I left the legal people to sort it out. Absolutely."

My clear understanding of Mr Priestley’s evidence is that as far as he is concerned there was no intent

by him or the OGR to initiate an approach regarding a possible settlement, and that no approach wasmade by him or, to his knowledge, other OGR representatives to IGT concerning the possibility of a resolution or a payment. His evidence is very clearly that the first approach on the issue of resolution,including payment, was made in Melbourne in April 2001 by Ms Brown.

13.3 Evidence of Mr Claudio Minisini

Mr Minisini, the Chief Executive of FBIS, was interviewed under oath on 13 December 2001.

In essence, he confirmed what I have previously referred to as the common ground regarding the termsof his engagement by the OGR, travel and sequence of events. He advised that he was the only full timeFBIS representative to be engaged, although Mr Kelvin Glare, a former Chief Commissioner of Police forVictoria, was engaged on the periphery of the matter in a consultative role to Mr Minisini. Mr Minisiniadvised that his role was one of a subordinate contracted employee to that of Mr Priestley and that hereported directly to, and received his instructions exclusively from, Mr Priestley. Mr Minisini describedhis role during the investigation as simply a "fact finder, a gatherer of information".

Mr Minisini was questioned in relation to the allegation by Ms Brown that, on 4 April 2001, Minisiniasked to speak with her "privately and without prejudice", that they had then taken a short walk outsideIGT’s Las Vegas office and Minisini told Brown that Mr Priestley had asked Minisini to speak with Brownregarding Priestley’s belief that "IGT believed the door to a resolution of the investigation was closed."In response, Mr Minisini stated that the alleged:-

" … conversation did not occur. It is untrue. Mr Priestley has never asked me to approachanyone and, to be perfectly frank, it is not my place to do so."

13.4 Evidence of Mr Robert Taylor

Mr Taylor was interviewed under oath on 18 January 2002. Although Mr Hill QC was interviewed underoath the previous day, I have chosen to set out Mr Taylor’s evidence first. My reason for this is becauseMr Taylor is the legal representative who was continuously retained throughout the Director’s inquiry.

Mr Taylor stated that, throughout the inquiry, he regarded his role as that of legal adviser who providedobjective independent advice to the VCGA. He never regarded himself as an "investigator" and all members of the "team" represented the VCGA in various ways.

As to the pivotal issue of the November 2000 meetings in Reno Nevada, Mr Taylor stated that he couldnot recall exactly if and when Mr Priestley and Mr Minisini left for Memphis. He recalled that at sometime during the inquiry they did leave, however he stated that he did not disagree with the chronologyof events presented to him during the interview relevant to this issue.

Mr Taylor recalled the two interviews in Reno. He was unsure if they had occurred on consecutive daysbut agreed that the first took place on 15 November 2000 at the offices of IGT on Prototype Drive. Hisrecollection was that Ms Brown was present, but he was unsure whether this was at the beginning orthe end of the meetings. He recalled that she had apologised for not being present for the entire meeting.

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He recalled that both Richard Nathan and John Stawyskyj representing IGT were present. Both he andMr Hill QC were present representing the VCGA.

Mr Taylor advised that IGT had called the meetings and that he and Mr Hill QC were not entirely sureof the purpose of the meetings. His understanding, however, was that IGT representatives wanted tomeet with the VCGA lawyers out of some desire on their part to extend professional courtesy or simplyout of curiosity. Mr Taylor stated that he could see no reason not to meet with the IGT lawyers.

It appears that neither he nor Mr Hill QC were aware that Mr Nathan was going to be present at themeeting. The presence of Mr Nathan elicited some comment from both Mr Taylor and Mr Hill QC whowere uncomfortable with his presence as he was a person identified for future interview by the OGRinvestigators.

According to Mr Taylor there was some "polite, though innocuous, discussion about coloured televisionand other things". Mr Taylor was uncomfortable with the presence of Mr Richard Nathan because:-

"We wanted to interview Mr Nathan. Mr Hill and I had some view about Mr Nathan’s conduct particularly in relation to the preparation of the IGT report.

"We felt that it was inappropriate that Mr Nathan was apparently continuing to play a significant role as a legal adviser to IGT when in our view he was a legitimate subject ofinquiry and interview. On that basis we were uncomfortable with his presence.

"Mr Nathan did most of the talking and wanted to know what were the concerns of theVCGA. Mr Hill advised him to the effect that there were two primary areas of concern andthat these were obvious from the type of interviews already conducted. He (Nathan) was,in a sense, of an aggressive disposition and he started off to tell us a range of things."

Mr Taylor advised that there were two principal points of concern for the VCGA: that the company haddiscouraged the disclosure of low value invoicing issues which had occurred in the Netherlands; andconcerns about the 1998 IGT internal investigation and report concerning low value invoicing in Turkey.

Mr Taylor stated that there was some discussion about the future of the investigation and he and Mr HillQC made it clear to Mr Nathan and Mr Stawyskyj that the matter would be proceeding as they were farfrom satisfied that all investigative action had been taken.

Mr Taylor said there was an exchange towards the end of the meeting when Mr Hill QC made it clear toMr Nathan that he and Mr Taylor were uncomfortable discussing anything concerning the investigationwith Mr Nathan. Mr Nathan allegedly responded to this by asking if they thought he was a "crook".According to Mr Taylor, Mr Hill QC replied that they were not in a position to respond to that questionas there were still a number of interviews to be undertaken. Mr Nathan replied, "give it your best shot".

Mr Taylor went on to say that he and Mr Hill QC were still not entirely clear as to why they had beenasked to attend the meeting. The meeting lasted for about one hour and Mr Taylor stated that he wasunable to recall if the issue of the resolution of the VCGA inquiry was discussed. However, he wasadamant that there was no discussion of the payment of monies by IGT or loss of staff as being conditions required for resolution of the investigation.

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Mr Nathan’s statement concerning the meeting on 15 November 2000 was read to Mr Taylor and hisresponse was invited. He stated that there was a great deal in the statement that he disagreed with andsaid:-

"Let me say this without any doubt at all: it was not suggested by me or Mr Hill that the mattercould be resolved by IGT offering money, termination of staff or a combination of both ofthose two. I have no recollection of Mr Stawyskyj at any stage complaining about the proprietyof Mr Hill’s conduct, my conduct, or the conduct of the investigation of the VCGA.

"I do not know if Mr Priestley or Mr Minisini took Ms Brown to one side and arranged themeeting."

Mr Taylor also advised that he kept no notes of the meeting nor, to his knowledge, did anyone else.

In relation to the meeting which took place on 16 of November 2000, Mr Taylor stated that Ms Brownhad contacted him by telephone to arrange the second meeting and that he had called her back. Themeeting took place at Ms Brown’s office at IGT at about 10 a.m. and lasted for about an hour. Again hestated that no notes were taken by anyone present.

The statement obtained from Ms Brown regarding this meeting was read to Mr Taylor. He respondedthat there was no discussion regarding a resolution of the investigation or about payment of monies orthe disposal of staff.

He recalled Ms Brown saying something to the effect:-

"… that it was clear to her from the tone of the interviews and what she had been told thatMs Chatigny and Mr Nathan were significant issues with the inquiry of their conduct. Shemade it clear to us that she regarded herself as a fairly vigorous litigator and that she wasprepared, if necessary, to defend the company’s position and, specifically, Ms Chatigny’sposition. She did not make the same offer in respect of Mr Nathan.

" She also made a comment that if it was solely an issue of money that might be a differentmatter, or something to that effect but she had a high opinion of Ms Chatigny and she wouldsupport her".

Mr Taylor recalled Mr Hill QC saying that :-

"the inquiry would continue, the investigation was not complete and that there was nobasis for a resolution at that stage".

Mr Taylor stated that he believed that Ms Brown had raised the issue of money in the context of wanting to know how the matter could be resolved.

"She said something to the effect where is this going?", and was, Mr Taylor stated, advised that the inves-tigation would continue. According to Taylor, Ms Brown then stated, "if it was only a matter of money,and I thought she said or meant if it was simply a case of IGT paying a fine".

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Mr Taylor stated his view that the payment of the money was not in lieu of any penalty that may havebeen imposed as a result of any proceedings before the VCGA, and that the payment had no effect whatsoever on the investigative process.

Mr Taylor was then questioned in relation to his understanding of the chronology of various aspects ofthe investigation. He advised that, according to his understanding, the finalisation of the investigationshad not occurred until after the "team" had returned from the second visit to the USA. The reason the"team" had returned to the USA in March/April 2001 was to complete outstanding interviews that hadnot taken place in November 2000. The intervening Thanksgiving and Christmas holidays in the USAhad also been a delaying factor. In the period between November 2000 and March/April 2001 Mr Taylorand Mr Hill QC examined and analysed material obtained to date.

Mr Taylor stated that it was his belief that an approach concerning the possibility of finalising the inves-tigation did not occur until their return from their second trip to the United States. It was his under-standing that the approach was made "initially by Mrs Brown to Mr Priestley" after their return and "wehad concluded all of the interviews that we proposed to do".

According to Mr Taylor, following their return from the USA, the legal team were then confronted withformulating a report to the Director, Mr Lahey, with recommendations about future action. The optionsincluded:-

"recommending to the Director via way of notice to the Board that IGT disassociate itselffrom the parent company, that the parent company disassociate itself directly with variousindividuals. We at that point didn’t consider, having regard to the final interviews particularly the ones with Ms Chatigny and Mr Nathan were given the opportunity torespond, that the Board would view those suggestions favourably…..… and we did notforsee that there was any likelihood that either of those things would happen".

The issue was raised with Mr Taylor of possible proceedings before the VCGA in view of the fact thatvery few of the original IGT personnel who were involved in the low value invoicing activities in1992/1993 were still employed by the company. Mr Taylor said that Mr Pike had resigned from IGT inJanuary 2001 although they were still concerned about Mr Nathan and Ms Chatigny. There were veryfew people left in the company, "possibly one or two in the Netherlands".

Mr Taylor stated that the position of Mr Lahey was that there had been a cover-up by IGT. Following theproposal by Ms Brown in April 2001of a possible resolution of the matter, Mr Lahey had requested MrHill (who subsequently advised Mr Taylor) to consider the proposal and the various issues involved.This consideration resulted in the legal advice from Mr Hill and Mr Taylor to Mr Lahey dated 7 May 2001.A copy of that written advice is attached to this report as Appendix 2.

Mr Taylor advised that any negotiations regarding the ultimate resolution of the matter between IGT andthe VCGA had been conducted by Mr Hill QC and Mr Costigan QC. A number of meetings had occurredduring the period April 2001 to August 2001 to discuss and formulate the terms of a final resolution ofthe matter. There had also been some involvement of Mr Sher QC who had been retained to representthe interests of Mr Nathan and Ms Chatigny. Mr Taylor had taken no part in these negotiations, althoughfrom time to time he was advised by Mr Hill QC of developments.

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During discussion of the contents of the advice of 7 May 2001, Mr Taylor agreed with the propositionthat the VCGA could not issue an order requiring payment of costs in the circumstances of the IGTinvestigation where an entity is already on the Roll, that the Gaming Machine Control Act 1991 is silenton the issue of payment towards costs in these particular circumstances and such payment was therefore not prohibited.

He continued that the payment was not being required nor sought as a pre-condition to settlement.IGT were not under any compulsion to make such a payment. He was told by Mr Hill QC that the payment was in recognition by IGT of the fact that they had not investigated the low value invoicing practices correctly or thoroughly and this had necessitated the investigation by the VCGA.

Both Mr Hill QC and Mr Taylor ultimately arrived at the position that there would be no further actionin the matter by the VCGA in relation to ongoing investigations or proceedings before the VCGA Board,and the payment of money by IGT would not have altered this position.

Mr Taylor said :-

" I would not have been prepared to countenance for one minute receiving a sum ofmoney, of which I received not one cent, my client had not received one cent but whichwent to the taxpayers of Australia, in consideration for not proceeding to a full AuthorityBoard hearing had I thought it appropriate, justified and capable of resolving the matter.

"We did not seek a payment of a sum of money and we probably reached a conclusion onthe way back from the US that it was not going any further. The expectation then of a sumof money had simply not been raised. The fact that Ms Brown precipitated matters by arrivingin Australia and then setting forth with a set of terms in a sense brought the matters to a head.

"I draw no improper inference from Ms Brown offering a payment as part of her proposalbecause my understanding was that was part of the industry practice in the US.

"Mr Hill and I had already discussed in very general terms that in our view the matterwould not be going any further and then when we would get the timeline to actually sitdown and prepare the basis for all that.

"Hill and I both realised that Lahey was fairly keen for the matter to proceed and that wewere not necessarily going to give him advice that he would want to hear.

"I was absolutely clear about this proposition. I did not agree to sign that memorandum ifI thought for a moment that we were compromising an investigation that otherwise wouldhave resulted in more severe action being taken by the Authority Board."

13.5 Evidence of Mr Ian Hill QC

During his interview, Mr Ian Hill QC provided evidence which reflects and corroborates that providedby Mr Taylor and other OGR witnesses.

Following confirmation by Mr Hill QC of the terms and reasons for his being retained in the investigationand his provision of daily legal advice to Mr Priestley and/or Mr Lahey on the progress of the investigation,he was questioned on his specific role as part of the "tactical team" undertaking the investigation. MrHill QC advised that he always regarded himself as the provider of "independent" legal advice during theinvestigation. He stated the request that he become part of the "team" came directly from both MrLahey and Mr Priestley and that assuming that role was, in his experience, not unusual.

As to the meeting in Reno on 15 November 2000, he advised that he recalled the meeting very well. MrHill QC stated his recollection of the reason for the meeting as follows.

" … my understanding was, and my understanding came through what had been relayedto me by Mr Priestley and Mr Minisini, that the lawyers acting for IGT would be interestedin meeting with us. We thought that it was an opportunity; one, to meet with them and seewhat they had to say, if anything; and two, to get out of the motel room and generally meetsome other lawyers"

As to the discussion which occurred at that meeting, Mr Hill QC stated:-

"Well, I did not know in advance that the meeting was to include Mr Nathan. At that stageMr Nathan was a person who we were considering interviewing.

"I indicated at that meeting that I didn’t think it appropriate that I discuss any of the matters pertinent to our investigation with Mr Nathan as he was a person who we weregoing to interview. It was a short meeting after which we left".

Mr Hill QC was asked if a resolution to the matter and the payment of money and loss of IGT staff werediscussed at that meeting. He responded:-

"In no meaningful way or sense. As I say, we weren’t prepared to speak about the matterswith Mr Nathan. The investigation was not complete and as far as we were concerned theinvestigation was continuing."

"We may have indicated that, and it would have been a fact known to them because of theway in which the interviews had been conducted in the preceding days, that there were anumber of persons who we were now considering interviewing that we hadn’t been, including Mr Nathan and Ms Chatigny.

"There was no discussion about the resolution of the matter at that time."

When asked if discussion had occurred about the payment of money and loss of staff by IGT he respond-ed, "definitely not."

The questioning then moved to the meeting in Reno on 16 November 2000 and the purpose of thatmeeting. Mr Hill QC said:-

"As I recall it we had been asked to attend at offices principally by Mrs Brown. Mrs Brownapologised to us for not being present at the meeting the previous day, because it had put

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us in an embarrassing situation and I think that she recognised that. Secondly we hadmade it plain prior to that time that we wished to interview other persons who we reallyhadn’t perhaps formally requested of IGT to make available. They included some furthersenior executives of IGT, in particular Mr Nathan and Ms Chatigny.

"As a result Ms Brown said to us that it would not be possible for those interviews to takeplace until she obtained for those prospective witnesses independent legal advice, independentof IGT. We had a schedule of witnesses already prepared but we ran into a difficultybecause, if I recall it, the next was Thanksgiving, Thanksgiving fell within the next week.

"Because of that it was explained to us it would be difficult for independent legal advice tobe gained for these witnesses. That’s all we spoke about".

As to the issue of any discussion concerning the resolution of the investigation Mr Hill QC stated: -

"Ms Brown made the comment at one stage that if it was a question of money, that was adifferent prospect than if I meant the disassociation of IGT America from IGT Australia orif it meant that Ms Chatigny was going to find herself in trouble. I recall specifically that Iindicated to her that we were not in a position at that stage to talk about the resolution ofthis matter as our investigation was continuing. I think if you look at it the objective factsprove that assertion."

Relevant parts of the statements provided by Mr Nathan, Ms Brown and Mr Stawyskyj were then read toMr Hill QC and a response invited:-

"Firstly I did not suggest that they would need to lose a certain amount of individuals oremployees. I do not speak in such terminology. I find that remark offensive. Two, I did notsay that Mr Nathan’s presence was an impediment to a resolution of this matter. We werethere simply as an act of courtesy to discuss matter generally with the lawyers who had beenacting for IGT.

"I do recall one point that was made by Mr Nathan which he doesn’t seem to have recordedthere, was along the lines when I said that we were uncomfortable in speaking about mattersat all in his presence because he would be interviewed. He said to me, ‘Well you think I ama crook.’ I said, ‘ I can’t say that Mr Nathan as we have not completed the investigation’.He said, ‘Give it your best shot’. I recall that specifically because that was right at the end ofthe meeting and we parted company.

"You must remember too, … that Mr Nathan had been present throughout as had MrStawyskyj the Australian lawyer, and that there was from time to time, as often happens insuch interviews, a degree of, animosity is perhaps putting it strongly, but there were somestrong differences of opinion from time to time, so the conversation that he repeats may bein his memory. It certainly did not occur that way. I can tell you by looking at the objective facts if that was the case as you will recall it we went back in March/April whenwe interviewed a large number of people in March/April.

"I had no discussions with Mr Nathan, with Mr Stawyskyj or with Mrs Brown because the

matter was being investigated to the best of our ability we were exploring all issues. So therewas no discussion then about resolving the matter."

The questioning of Mr Hill QC then returned again to the specific issues of the alleged statements con-cerning payment of money and loss of staff by IGT. Hill stated:-

"No, there were no discussions about losing staff. That is not part of my terminology. Wemay have indicated that we had certain ‘targets’, is the word that we use here. I don’t thinkI ever used it in that way, but that we had a number of people that we were going to makeinquiries of because of what we, at that stage, perceived their conduct to be, and we identified those persons by name.

"There were no discussions about money."

The conversation then moved to the meeting that took place on 16 November 2000. The statementsupplied by Ms Brown of IGT was read to Mr Hill QC and his response invited. He replied:-

"It is not accurate. I explained to you before what happened at the meeting".

The conversation with Mr Hill QC then moved to the issue of the chronology of events and specificallyhis understanding of the point at which the investigation was finalised. He stated:-

" The investigation as such if you are referring to the interviewing of witnesses or exploringother avenues which we could investigate, that aspect was concluded probably about the11th of April, thereabouts, 2001".

Mr Hill QC agreed that the entire matter was ultimately finalised towards the latter part of the year.

According to Mr Hill QC, the payment of $US200,000 by IGT to the OGR was:

"a recognition by them that the investigation by the Office of Gambling Regulation as it isnow correctly called was both necessary and appropriate".

On the question of the payment being accepted in lieu of any penalty that may have been imposed, MrHill QC said, "Most certainly not."

The matter of the legal advice dated 7 May 2001 prepared by Mr Hill QC and Mr Taylor was then discussed. He confirmed that it was Mr Lahey who had orally requested the advice and that a numberof meetings had occurred with Mr Lahey prior to the advice being requested. The role of Mr Hill QCand Mr Taylor with respect to this aspect was described by him as follows.

"For us to report to him from time to time as to the investigation, the progress of the investigation, where we saw the investigation going and matters of that nature. Mr Laheywould give us instructions from time to time about the matter generally.

"He was concerned about the corporate governance of IGT throughout and the fact thatwhat had occurred in 1992-1993 in Turkey, not occur again and that there be sufficient corporate governance to make certain it couldn’t occur again."

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Discussion then moved to the matters of the IGT Compliance Report and the sufficiency of the evidencegained through the OGR investigation. Mr Hill QC advised that he had read the IGT report and that inhis opinion:-

"there were a number of questions about that report that needed to be answered. In particular how they investigated the matter, how they came to the conclusions that they did,whether in fact the matter was appropriately documented, whether witnesses had said thethings that were described to them as having been said".

As to the evidence that was gathered and the degree of success of the OGR investigation he commented:-

"We certainly conducted a much fuller examination of all the issues that IGT had conductedand indeed there were identified a number of shortcomings in the way in which the task-force had conducted its investigation."

On the question of additional evidence being gained by the OGR investigation over and above the evidence already revealed in the IGT Compliance Report, Mr Hill QC stated:-

"Well, until you investigate these matters … you don’t know and these matters needed to beinvestigated. They were serious matters both the allegations of low value invoicing wereserious. There were suggestions that there had been a cover up of those very things when itfirst became known to IGT.

"There had not been, and they conceded that there had not been, an appropriate companyresponse and that when the taskforce ultimately had been formed to investigate the matterswe had concerns as to whether the taskforce, which effectively was an internal rather thanexternal taskforce, had identified the real issues and had explored all avenues about thematter. Until we investigated all of those matters we of course didn’t know what we wouldfind or where the investigation would take us."

The issue of the OGR being the only gaming regulator worldwide to investigate the IGT ComplianceReport was then discussed. Mr Hill QC who stated:-

"That may be so. That should not reflect adversely on Victoria. Victoria has a certain standard of excellence within the gaming industry worldwide.

"I think that if you asked the gaming field generally those jurisdictions whereby matters arepursued rigorously and where the industry is very well controlled, you would be told theyare Nevada, Colorado and Victoria. The first two being in America. My recollection is thatColorado did make some inquiries about the matter. Certainly Victoria did.

"We are very concerned here as we must be because the gaming industry to ensure that itis legal and free from the dishonest conduct or the suggestion that there is dishonest conduct. Clearly here in 1992/1993 there were clear allegations of criminal conduct onbehalf of IGT. IGT is the parent company of IGT Australia. IGT Australia is licensed andcomes within our jurisdiction".

On the question of there being very few people left in IGT who could possibly be brought to accountfor involvement in the low value invoicing activities in 1992/1993 Mr Hill QC stated:-

"Essentially that is so . Mr Pike of course was one of the principal targets, but in respect toothers clearly others had left the employment of IGT, but again, as I repeat, until we hadconducted our investigation we weren’t to know".

14.0 EVIDENCE OF MR BRIAN FORREST, CHAIRMAN OF THE VCGA

Mr Forrest was interviewed on 28 March 2002 in relation to the role, function and relationship of theVCGA with the Director of Gaming and Betting and the OGR. He also provided evidence regarding theextent of his knowledge of the OGR investigation.

Mr Forrest said he has held the position of Chairman of the VCGA since September 2000 and that therole of the VCGA is to ensure the probity of the gaming industry and to regulate participants in theindustry within Victoria.

Mr Forrest provided an overview of the organisational structure of the VCGA and the relationshipbetween the VCGA and the OGR and the roles of each respective office. He stated that in relation tothe gaming industry in Victoria the Authority is the "primary decision maker". Mr Forrest said that theVCGA Board currently consists of eight members, although the legislation makes provision for a maximumof ten members who are appointed for a period of up to 3 years which is renewable. The Authority conducts its business in both public and private sessions and the full Board meets every month. Panelsof 3 members of the Board also conduct hearings each month.

The Board has a primary decision making role including the approval of premises for gaming, gamingvenue operations, and gaming machines. The Authority also has an appellate role in hearing appeals byindustry participants in disciplinary matters.

The results of all probity checks and investigations in relation to applicants within the gaming industryare reported to the Board by the Director for final approval. As the VCGA has no dedicated staff, theOGR provides such staff as are required and provides administrative support which, for example, maytake the form of the provision of the services of legal practitioners from the Legal Branch of the OGR,or other staff to perform secretarial support duties.

The operational activities of the VCGA are the responsibility of the OGR which uses its investigators andcompliance staff for this purpose. Mr Bill Lahey, the Director of Gaming and Betting, provides advice asrequested to the Minister for Gaming. Mr Lahey, as a public servant, is responsible to the Secretary ofthe Treasury. Altogether there are approximately 140 staff at the OGR with some 40 compliance staff,who are in the main ex-police members.

Mr Forrest emphasised, however, that the VCGA and the OGR perform different statutory functions.

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The following points were then made by Mr Forrest at interview.

• The VCGA had provided a general delegation to the Director pursuant to Section 142A(1) of theGaming Machine Control Act 1991 to enable the Director to investigate "associates". (This delegation has been referred to above at para.3.3 of this report.) This delegation was in force atthe time of the Director’s investigation of IGT.

• It is not the role of the VCGA to monitor the conduct of an investigation. The VCGA relies onthe Director to conduct investigations pursuant to the delegation and ultimately report to theBoard the outcome of his investigations.

• The Board independently considers any recommendations made by the Director. By this meansthe VCGA is kept at "arms length" from any investigation so that they are not seen as both prosecutor and judge in the same matter.

• The Authority first became aware of the IGT investigation in August 2001 when a report(Appendix 1) was provided to the Board.

• Mr Forrest personally became aware of the investigation shortly before the above date becausethe Director had informed him that the matter required listing as an agenda item for the nextVCGA Board meeting. Prior to this he had no knowledge of the Director’s IGT investigation.

• Upon receipt of the Director’s report to the VCGA Board, Mr Forrest requested legal advice, forthe benefit of the Board, on the question of the appropriateness of accepting the $US200,000from IGT.

• On 22 August 2001, Mr Forrest received a two page legal advice from Mr Hill. This further advicefrom Mr Hill QC is attached to this report as Appendix 3. Mr Forrest stated that the VCGA Boardrelied upon the advice provided by Mr Hill QC as contained in the two page memorandum. Healso advised that originally he had requested that Mr Hill QC appear before the VCGA Board however upon reflection he decided that this was not necessary provided written legal advicewas made available to the Board. Mr Forrest requested that Mr Hill QC provide the advice as hewas aware that he possessed a detailed knowledge of the OGR investigation.

• He stated that at no time were any of the Board members advised prior to making a decision inthe matter of the roles played by Mr Hill QC and Mr Taylor as part of the OGR "taskforce" otherthan that they had provided legal advice to the OGR.

• He was aware that QCs had from time to time been engaged, but in his opinion their involve-ment in this case went further than looking at documents.

• The Director’s report to the Board made no reference to the extent of the involvement of Mr HillQC or Mr Taylor.

• The Board had no knowledge that a "taskforce" as such, had existed to investigate IGT.

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• Mr Forrest had not seen the legal advice dated 7 May 2001 provided to the Director by Mr HillQC and Mr Taylor until after the Board had made their decision in the matter of IGT. Mr Forrestand the Board relied upon the two page legal advice received on 22 August 2001 in its consideration of the proposed outcome of the IGT investigation.

• If the Board had been aware that Mr Hill QC and Mr Taylor had been part of the "taskforce" thenthe appropriate and prudent course would have been to obtain the legal advice from someoneelse.

• He had subsequently ascertained the exact cost of the IGT investigation. Earlier at the Boardmeeting on 28 August 2001 he had been given an estimate of the cost.

• He had no prior knowledge of the Director requesting legislative amendments to the GamingMachine Control Act 1991 in early 2001. (These proposed legislative amendments were for-warded to the Minister for Gaming on 05 January 2001. The most relevant – a request for anamendment to allow for cost recovery in investigations of the type here in question – has beenexamined above at paragraph 3.5.)

• The Director submitted his report to the VCGA Board "for noting". On 28 August 2001 in privatesession the Board agreed to note the report on "the outcome of an investigation conductedunder delegation".

15.0 DISCUSSION / EVALUATION

There are a number of issues emerging from the evidence gathered in the course of my investigation.I shall deal with them under the following headings.

• Operational planning and management of the investigation.• Settlement as a result of claimed systemic / structural problems.• The Director of Gaming and Betting.• Payment of US$200,000 to the OGR.• Legal advisers.

15.1 Operational planning and management of the OGR investigation

Correctly formulated operational planning is fundamental to any major investigation. A good operational plan will include projections regarding the use of financial and human resources and willprovide for regular assessments of progress measured against those projections. It should also providefor an assessment of progress in the context of the main purpose of the investigation, in this case thegathering of evidence which would provide a reasonable prospect of success in a hearing before theVCGA Board.

The Director’s investigation of IGT ran for some two and a half years. The Director stated that therewas no major investigations planning undertaken, but he had taken steps to ensure that there were sufficient funds available. He said he had a good idea of what it would cost and set aside $AUD400,000.

The ultimate cost was $AUD677,000. The IGT investigation has been described as being the most extensive undertaken by the OGR and was, by any measure, a large-scale inquiry. However, the evidenceavailable to me suggests there was little or no formal operational planning.

It seems to me that, had the investigation been correctly planned with cost projections and "mile-stones", or performance indicators, set for the completion of various phases of the investigation, therewould certainly have been far greater control and a much earlier indication of what, with hindsight, cannow be seen as a lack of progress. It is ironical that the legal advice of 7 May 2001 by Mr Hill QC andMr Taylor to the Director, in which they advised that a settlement of the matter was appropriate, citesseveral of the procedural and structural difficulties identified by Ms King QC at the outset as reasons fornot proceeding to a hearing before the VCGA Board. (I shall refer to this in more detail in para 15.2below).

It seems to me very clear that the application of sound investigative methodology and, indeed, of somevery basic techniques of good management, in the form a detailed operational plan would have greatlyenhanced the Director’s capacity to assess progress at each stage of the investigation and may well haveresulted in the investigation being terminated at a much earlier point, thereby avoiding unnecessaryexpenditure.

This is an issue which is deserving of consideration and rectification within the Office of GamblingRegulation if it is to undertake complex investigations in the future.

15.2 Settlement as a result of claimed systemic / structural problems

I have referred above (at para 7.2) to the advice provided by Ms Betty King QC. In her advice Ms KingQC referred to the difficulties of compelling witnesses who are not in Victoria to attend to give evidenceat a hearing in Victoria and the difficulties of taking evidence outside Victoria. Ms King QC also referredto the practical difficulties of conducting a hearing before a part-time VCGA Board. Ms King QC pointedout that a hearing involving possible removal from the Roll necessarily involved "peoples’ livelihood andthe future of some very large and powerful companies" and therefore witnesses and lawyers would betravelling from overseas. She pointed out that the Board may have to sit continuously for a lengthyhearing.

These same difficulties were referred to by Mr Hill QC and Mr Taylor in their advice of 7 May 2001, inwhich they advised that settlement of the investigation appropriate. Mr Hill QC and Mr Taylor wrotethat among the matters they had taken into account included, "the logistical difficulties of conductinga long and protracted hearing before a part-time Authority Board; the evidentiary considerationsregarding international witnesses; the limited disciplinary options open to the Authority Board …".

It is apparent to me that the gaming industry is international and that a regime of regulation in Victoriamust be able to deal with this fact. It is of great concern that a recurring theme in legal advice fromsenior counsel is that the current structure of the VCGA Board is, in effect, an impediment to the effective operation of the system of regulation.

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15.3 The Director of Gaming and Betting

ORGANISATION CHART

There are a number of issues raised by the evidence concerning the office of the Director which I shalladdress under this general heading. The first concerns the complexity of the Director’s reporting lines.

• The Director reports to the VCGA Board on matters regarding the discharge of his statutoryresponsibilities, but this does not include the requirement for him to report on the progress ofany investigation he is undertaking.

• The Director is appointed by the Governor in Council, but the funding and staffing of his officeis supplied through the Department of Treasury and Finance. Mr Ian Little, the Secretary of theDepartment of Treasury and Finance has advised that the Director reports to him only on thosematters which affect the Director’s responsibilities as a public servant. In Mr Little’s words, hesupervises the "bread and rations" of the OGR. Although Mr Little does not receive briefings oninvestigations conducted by the OGR, as he regards those matters as entirely the statutoryresponsibility of the Director, he does monitor and approve applications for travel by membersof the OGR. In the matter of the IGT investigation the Secretary would have approved travel asrecommended by the Director.

• In addition, the Director advises the Minister for Gaming on matters of policy advice in relationto gaming regulation. In such circumstances he would not advise the Minister of active investigations being undertaken by the OGR. An example of this aspect of the Director’s functionis the Director’s advice to the Minister in January 2001 regarding the need to amend the legislationto allow for the recovery of the cost of investigations into persons already listed on the Roll(referred to above at para 3.5 of this report). In his evidence the Director identified the documents containing the proposed legislative amendments and advised that he had caused theproposed amendments to be forwarded to the Minister.

• It is also apparent that the Director, quite properly, is entirely autonomous in the choice of andthe conduct of any investigations he may undertake. I am unable to find any requirement for theDirector to report to any person or body during the course of any investigation.

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MINISTER FOR GAMING CHAIRMAN OF THE CASINO& GAMING AUTHORITY

Mr Brian Forrest

VICTORIAN CASINO & GAMINGAUTHORITY BOARD

MEMBERS

DIRECTOR OF GAMING & BETTINGDIRECTOR OF CASINO SURVEILLANCE

CHIEF EXECUTIVE OFFICEROFFICE OF GAMBLING REGULATION

Mr Bill Lahey

Mr Hon John Pandazopoulos

SECRETARY TO THEDEPARTMENT OF

TREASURY & FINANCEMr Ian Litle

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It seems to me, however, that while the Director is required to answer to "three separate masters" in thedischarge of his statutory responsibilities, this situation has the potential to create a conflict of interest.On the one hand it may seem necessary to the Department of Treasury and Finance, by whom theDirector is funded, for him to exercise expenditure restraint, to cut costs or to recover part of the costsof an investigation.

Conversely, from the viewpoint of the Authority, which performs a function independent of theDepartment of Treasury and Finance, such a course of action may be regarded as being entirely inappropriate and inconsistent with its responsibility to investigate certain matters. An Ombudsmanmust always be careful not to stray into areas of policy, but it seems to me that these potential administrativeand management tensions exist as a result of the complexity of the legislative and administrative environment within which the Director must carry out his important and extensive statutory functions.

The second issue concerns specifically the Director’s pursuit of the IGT investigation and the circumstances of its conclusion.

It is clear to me from the evidence of Mr Lahey that it was always his intention to pursue the matter vigorously and to gather sufficient evidence with which to place IGT before the VCGA Board for disciplinary action. This is a commendable intent on the part of the Director, who has some seriousresponsibilities to ensure high standards of probity within the gaming industry in Victoria. It is clearfrom his comments that Mr Lahey was not entirely satisfied with the ultimate outcome of the IGT investigation. There is no available evidence to contradict Mr Lahey’s evidence that the first occasionon which he personally became aware of the IGT "offer of payment", was in April 2001 following advicefrom Mr Priestley on the matter. Mr Lahey stated that he agreed to the acceptance of the sum of$US200,000 following his consideration of the advice of 7 May 2001 from Messrs. Hill QC and Mr Tayloron the issue of accepting the monies.

On one view, therefore, it seems difficult to be too critical of the Director in relation to the final out-come of the investigation. However, there are number of issues which, in my opinion must be considered in this context.

Apart from some difficulty I have regarding the appropriateness of the legal advice as a basis for theDirector’s decision to settle the investigation (to which I will refer below), I also have concern that MrLahey was fully aware that the Gaming Machine Control Act 1991 did not make explicit provision forthe recovery of costs in such circumstances as the IGT investigation. This knowledge on his behalf isevidenced by the fact that, in January 2001, he had caused proposed amendments to be put forward tothe Minister for Gaming, to amend the legislation to include the provision for him to recover such costs.Mr Lahey also advised in his evidence that at the time of the proposed amendments being put to theMinister he (the Director) was fully aware of the provisions of the Gaming Machine Control Act 1991.He stated:-

"I repeat myself, there is no power in the Act that allows the Authority to seek, demand paymentof recovery of costs nor is there a power in the Act to oblige the manufacturer to pay".

There is also the "background" issue of the possible defamation action. It will be recalled that Mr Nathanand Ms Chatigny were taking legal advice in regard to the possibility that statements attributed to theDirector’s investigators Mr Minisini and Mr Priestley in the course of the investigation were actionable.

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That this was taken into consideration in the settlement is clear: part of the settlement involved thereceipt of letters from Mr Nathan and Ms Chatigny releasing "the VCGA, its agents and employees" fromliability in respect of these statements.

There is also the question of the power of the Director to reach any settlement at all or to do anythingother than report to the VCGA Board. It is my opinion that s. 142A (1) of the Gaming Machine ControlAct 1991, and the delegation by the VCGA to the Director of the power to investigate associates, bothclearly limit the Director to the conduct of investigations. I am unable to locate any provision, in eitherthe legislation or in the delegation dated 28 July 1998, that permits the Director to exceed the delegatedauthority by agreeing to such courses of action as accepting payment or issuing letters of exoneration.It seems clear to me that the Director may only negotiate matters to a point where a proposed solution,or range of options, can be put to the Board in detail for the Board’s approval. In my opinion these areissues that are more appropriately determined by the VCGA Board, prior to any terms of settlementbeing finally agreed upon.

In this context I note that the negotiations regarding the amount to be paid occurred well prior toAugust 2001. The legal advice of Messrs. Hill QC and Taylor, dated 7 May 2001, refers to the willingnessof the company to pay an amount of US$250,000. Ms Brown stated that the final figure was "agreedupon by counsel and approved by me" on 15 August 2001 and that she handed the cheque to MrPriestley on 28 August 2001, the very day the Director’s report was put to the VCGA Board for "noting".There is evidence that the cheque itself was dated 22 August 2001.

This leads me to an examination of the Director’s report to the VCGA Board (Appendix 1 to this report).The purpose of this document was to inform the VCGA Board of a remarkable settlement to a very long,expensive and apparently vigorously pursued investigation which had been conducted by the Directorunder a power vested by statute solely in the Board, but which had been delegated to the Director bythe Board. In my opinion, this document is remarkable for its brevity and what it does not say. It doesnot seek the Board’s ratification of a proposal, or approval of the terms of settlement. It recommendssimply that the Board "note this report". It does not even fully describe the terms of the settlement. Itdoes not, for example, mention the letters of exoneration to the IGT personnel. Nor, perhaps moreimportantly, does it refer to the letters of release provided to the Director’s investigators by the IGT personnel in respect of the alleged defamation. Both were very clearly an integral part of the settle-ment. Mr Forrest has stated that he had no knowledge of the extent of the involvement of Mr Hill QCand Taylor in the investigation, or that there had been a "task force".

It seems clear to me that neither Mr Forrest nor the Board had any real idea of the extent and cost ofthe investigation until 28 August 2001. It was not until after the 28 August 2001 that Mr Forrest, on hisown initiative ascertained the exact cost of the investigation.

In my opinion, the available evidence strongly suggests that the approval of the Board was seen almostas a mere procedural formality. It is also my opinion that very important information concerning matters which were an integral part of the settlement were not disclosed to the Board.

Attachment 1 of the Directors Report to the VCGA Board is also worthy of examination and comment.Paragraph 13 of that Attachment sets out in detail various managerial steps that have been introducedby IGT to prevent the future occurrence of low value invoicing activities within the company.

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However, an objective observer must exercise caution when considering the degree of influence thatthe OGR investigation had on IGT management in compelling them to introduce the stated managementinitiatives. On the one hand the OGR would have us believe that it was as a direct result of their investigation that IGT were compelled to introduce the managerial steps. Conversely IGT would argue,and I believe with some justification, that the OGR investigation revealed nothing new. It would be theirposition that all of the managerial steps as detailed in Attachment 1 had been earlier identified andimplemented as a result of the IGT Compliance Investigation and Report undertaken in 1998, prior tothe commencement of the OGR investigation.

This proposition is supported by the contested evidence of various IGT employees and their legal representatives in advising that they did not believe that IGT had done anything wrong in the conductof their Compliance investigation and therefore should not have made a financial contribution towardsthe OGR investigation or to lose staff as a result of any wrongdoing on their behalf.

15.4 Payment of contribution to costs of the investigation

It seems clear enough that the payment of the sum of US$200,000 was a contribution in part towardsthe costs incurred by the investigation. Equally clearly, the contribution to the costs of the investigationconstituted part of the terms of settlement, resolution or finalisation of the investigation. It is not a caseof negotiations occurring about payment of a contribution to the costs of the investigation after thefinalisation or resolution of the investigation.

What is not clear is whether that contribution was requested by the representatives of the Authority, orwhether it was offered by representatives of IGT during negotiations for settlement. The evidence onthis issue consists of two clear-cut but starkly contradictory accounts.

Representatives of the OGR state unanimously and categorically that an unsolicited offer of a contributiontowards the costs of the investigation, as part of the terms of settlement, was made by representativesof IGT.

On the other hand, the representatives of IGT are just as unanimous and categorical in their assertionsthat a request or demand was made of them by representatives of the Authority that a payment be madeby way of settling or finalising the investigation. Representatives of IGT claim that the subject of the payment as part of the settlement was initially introduced by the OGR’s legal advisers at the meetingsin Reno in November 2000, before the investigation had been finalised.

It seems to me that, given the straightforward accounts given by representatives of the Authority on thisissue, the equally straightforward but opposing accounts given by representatives of IGT, and the complete absence of any independent evidence in support of either, there is no way of conclusivelydetermining which is the correct version of the facts. But the stark contrast between the two stories,the obviously self-serving nature of the respective accounts, and the clarity, certainty and unanimity withwhich each has been given, makes it impossible to reconcile the respective accounts by reference to amisunderstanding or some similar explanation. Whilst it would be most illuminating to determinewhich account is correct, in my view it is not possible on the available evidence to do so. In my opinion, this must caution an objective observer to be circumspect.

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Fortunately, an inability to determine which party initiated the matter of the payment – and which partyis to be believed and which party is not to be believed on that particular issue - is not a critical obstacleto determining the issue of whether receipt of the payment was appropriate and proper.

In attempting to answer this question, the 7 May 2001 legal advice of Mr Hill QC and Mr Taylor is allimportant. Their advice quite clearly stated that the sum could be accepted and that it was "entirelyappropriate that this contribution formed part of the terms of settlement". The basis for forming thisview was partly that, "there is nothing in the provisions of the Act that prevent such a term".

Can it be that it is "entirely appropriate" for the VCGA, the OGR or the Director of Gaming and Betting(or, for that matter, any public body) to receive a payment, being part of the terms of settlement of aninvestigation such as the one here in question, simply because there was "nothing in the provisions of theAct that prevents such a term" of settlement? I know of no principle of law which supports this statement.

The VCGA and the Director of Gaming and Betting are statutory creatures established and constitutedunder an Act. Obviously, in considering whether the VCGA, the OGR or the Director of Gaming andBetting have the power to receive a sum by way of a contribution towards the costs of an investigationas a term or condition of the settlement or finalisation of the investigation, one must examine the extentof the powers conferred upon those bodies by the Act.

It is trite to say that it is a well established principle of law that a statutory body has only those powers,functions and duties conferred by statute, together with such incidental powers as are necessary toenable the body to perform its statutory powers, functions and duties. I have not been able to find anyprovision in the Act which confers power upon the VCGA or the Director of Gaming and Betting todemand or require payment by an entity under investigation of the costs of an investigation concerningthe issue of the entity’s continuance on the Roll. Nor have I been able to find any explicit power permitting the VCGA or the Director of Gaming and Betting to demand or accept such a payment aspart of the terms of settlement or finalisation of any investigation.

In the absence of an explicit power, can it be said that a contribution towards the cost of an investigationby the entity under investigation as part of the settlement of that investigation is necessary to enableeither body to perform their powers, functions or responsibilities? In my opinion, clearly not.

In support of this conclusion, I refer to sections 142A and 149B of the Gaming Machine Control Act1991. Section 142A provides for "on-going monitoring of associates and others" by the VCGA. It is clearthat the investigation here in question was conducted under this provision. Section 149B (1) conferspower upon the VCGA to require applicants for, among other things, a licence or listing on the Roll, topay to the VCGA "such amount as is determined by the Authority being an amount not exceeding thereasonable costs of the investigation of the application".

So far as I can see, the power of the VCGA under s. 149B to require payment for investigations of "applications" cannot be read as extending to "on-going monitoring" investigations of the type contemplated by s. 142A. In my opinion it can be very strongly argued that the statute, by conferringexplicit power only to demand and receive the costs of investigations of one specific type – the investigation of "applications" described in 149B (1) - excludes the power to demand and receive costsof any other type of investigation conducted under the Act. An inference can be drawn that, where theParliament has deemed it necessary to provide explicit powers to demand and receive payment of the

costs of a particular and clearly specified type of investigation, it necessarily follows that a power todemand and accept a contribution towards the cost of any other type of investigation cannot be seen asan incidental power necessary to enable the Authority to perform its powers, functions and duties.

I think it can equally be said that the acceptance of money, even if not demanded, is not necessary toenable the Authority to perform its powers, functions and responsibilities under the Act.

However, in the end, the Ombudsman is not a court of law and cannot make a conclusive determinationof the powers of the VCGA or the Director of Gaming and Betting. But, in circumstances such as these,where there is no explicit power to receive a contribution, the Ombudsman may express an opinion onwhether the acceptance of a payment, such as that here in question, is appropriate for a regulatoryauthority entrusted with the responsibility of ensuring the highest standards of propriety in the gamingindustry.

Was the receipt of this sum of money appropriate in all the circumstances? I believe that in the absenceof a clear, explicit power to do so, the acceptance of the sum was inappropriate.

The purpose of the Gaming Machine Control Act and the objects of the VCGA are to establish a systemfor the regulation, supervision and control of gaming machines and gaming equipment with the aims ofensuring that games on gaming machines are conducted honestly and that the management of gamingmachines and gaming equipment is free from criminal influence or exploitation. In determiningwhether an applicant should be placed on the Roll, the VCGA may consider whether the applicant andassociates are of good repute having regard to the character, honesty and integrity of the applicant. TheVCGA may also consider whether each director of a company is a suitable person to act in that capacity.The VCGA may take disciplinary action against any person on the Roll if that person or an associate isnot considered to be a suitable person to be on the Roll.

Given the stated objects of the VCGA, it seems to me that the Act expects the VCGA and the Director ofGaming and Betting to be disinterested parties in the performance of their functions under the Act.Obviously it is expected both the VCGA and the Director of Gaming and Betting will act impartially andobjectively and at all times be at arms length from the people within the industry regulated.

In the absence of an explicit legislative mandate, I believe it is inconsistent with the above for the regulator /investigator to require or to accept payment of the costs of their investigation from the person investigated.Indeed, it seems to me that it invites allegations of impropriety and failure to act independently andimpartially. To ask or to seek such a payment from the person investigated may be perceived to be athreat that, unless such a payment is made, an adverse decision may ensure. To accept a gratuitous offerof the payment may be seen as an inducement for a favourable decision.

15.5 "Independence" of legal advisers

I wish to make it perfectly clear at the commencement of these comments that I do not question thepersonal or professional integrity of either Mr Hill QC or Mr Taylor. I have no doubt that their advicewas always advice which they believed to be the best advice and was not "facilitative".

In defence of the acceptance of the payment as a contribution to costs incurred, it has been argued thatthe Director and the VCGA Board was acting on the legal advice of independent legal advisers. The legal

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advisings that I refer to are those dated 07 May 2001 and August 2001. Certainly, Mr Hill QC and MrTaylor have been emphatic that, at all times, they regarded themselves as independent advisers to theVCGA, the OGR and the Director. Being members of the Victorian Bar, they were not employees of theVCGA, the OGR or of the Director of Gaming. In this context, they certainly were independent.However, if, by the claim of independence, it is suggested that the advisers were giving advice "at arm’slength" in respect to the receipt of the money from IGT, then I cannot agree.

Both legal advisers were part of a "taskforce" established to investigate IGT. They travelled overseas aspart of that taskforce and closely participated in the day-to-day operation of the tactical phase of theinvestigation. Their fees and expenses were a significant portion of the costs of the overall investigation.Although, as I have said above, the close integration of the legal advisers into the taskforce is, in myexperience, unusual, I do not suggest it to be improper. I have no doubt that Mr Hill QC and Mr Taylorbrought with them a high level of skill and experience which was heavily drawn upon and was advantageous to the investigation.

The difficulty I have is that Mr Hill QC and Mr Taylor were not well placed to give truly independent,arm’s length advice to the Director and the VCGA on the question of the acceptance of the money from IGT.

In essence, the legal advisers were being asked to advise on whether it was appropriate, legally, for theVCGA to accept, as part of the terms of settlement for the finalisation of the investigation, a contributionto the costs possibly incurred, at least in part, by them. In short, they were not "disinterested parties".In saying this, I am not saying that there was anything improper in the Director seeking legal advice fromMr Hill QC and Mr Taylor, or that there was anything improper in them providing legal advice. What Iam saying is simply that they were not at arm’s length and, in the broad sense, could not be said throughtheir advisings dated 07 May 2001 and August 2001, to be providing "independent" legal advice.

Mr Lahey was aware of the role of Mr Hill QC and Mr Taylor in the investigation. He was also aware, orought to have been aware, of the issues discussed above which are raised by the acceptance of the payment. In these circumstances, if the Director of Gaming and Betting wished to have independentadvice, he should have gone elsewhere.

16.0 CONCLUSIONS

• The investigation was initiated because of a commendable desire by the Director of Gaming andBetting to pursue his statutory duties with vigour.

• The investigation suffered from poor strategic planning and management. There was no formalinvestigation plan by which progress, and the likelihood of success or failure, could be criticallyassessed. The first part of the investigation, after extensive overseas travel, returned very little,if any, useful evidence and it became necessary to re-interview witnesses. Costs blew out. ByApril 2001, more than two years after its commencement, the investigation had failed to obtainevidence which would prove significant misconduct against current officers of IGT.Responsibility for the failure to apply sound investigative techniques and basic good management must lie with the Director, Mr Lahey, and Mr Priestley, the Assistant Director(Compliance and Investigation).

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• The available evidence does not allow me to reach any conclusion on the question of when, andby whom, the proposal to settle the investigation was first raised. The available evidence doesnot allow me to reach any conclusion on the question of when, and by whom, the possibility ofpayment of money by IGT should be part of the settlement.

• There is nothing to contradict the evidence of the Director, Mr Lahey, that he first heard of theproposed payment in April 2001 and he sought legal advice from Mr Hill QC and Mr Taylor.However, given that the Director has very serious statutory responsibilities to ensure high levelsof probity in the gaming industry; given that the Director knew of the central role played in theinvestigation by Messrs. Hill QC and Taylor; and given that the Director knew, or ought to haveknown, of the difficulties with the recovery of costs in respect of investigations other than investigations of applications to be listed on the Roll, the Director ought to have sought advicefrom a completely independent source. He failed to do so.

• The acceptance of the payment of US$200,000 by the OGR by way of payment of part of the costsof the investigation was inappropriate and a poorly judged decision.

• The available evidence does not allow me to reach any conclusion regarding the impact of thepossible defamation proceedings by persons associated with IGT against OGR investigators onthe decision by OGR to negotiate a settlement.

• The evidence suggests that the approval of the VCGA Board was seen almost as a mere procedural formality. This demonstrates on the part of the Director :-

- a disregard for, or lack of understanding of, the limits of the powers of the Director otherthan to report to the Board; and

- a disregard for, or lack of understanding of, the deliberative and decision making role ofthe Board.

• The information supplied to the VCGA Board in the Director’s report on 28 August 2001 was inadequate. It did not fully inform the VCGA Board of the terms of settlement and did not givean accurate or sufficiently detailed account of such a major investigation. Responsibility for thismust ultimately lie with the Director.

17.0 RESPONSES TO MY DRAFT REPORT

17.1 Draft Report

Section 23 (7) of the Ombudsman Act requires that the Ombudsman shall not in any report make comment adverse to any person unless that person has been given an opportunity of being heard in thematter and his defence is fairly set forth in the report. In compliance with this provision I provided acopy of a draft of my report to the Director of Gaming and Betting. In addition, as is the usual practiceof this Office, a draft of my report was circulated to other parties who have a direct interest in the outcome of my inquiry, in this case the Minister for Gaming, the Chairman of the VCGA, and the

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Secretary of the Department of Treasury and Finance, of which the OGR is a part. I requested that anycomments be at my office by close of business on 13 May 2002.

This system is designed to ensure fairness and to provide interested parties with an opportunity toaddress perceived errors of fact and process.

Ever mindful that the purpose of this exercise is to ensure fairness rather than being a means by whichthe Ombudsman attempts to draw out and then destroy any disagreement with his conclusions, mycomments in relation to the responses are general and address only the issues which I think are relevant to the main purpose of my inquiry.

17.2 OGR response

I did not expect the Director or the OGR to be pleased with my draft report and I was not surprised toreceive a response which expressed strong disagreement with many matters covered in my report. Ina covering letter which accompanied the response, the Director "insisted" that his defence could not befairly set forth in my report unless it and its attachments are included in their entirety. As a statementof principle, I do not accept this argument to be the case. I would not normally include a response inthe manner and form in which the Director’s response is included in this report. The Ombudsman hasa discretion on the manner in which he reports and is not obliged to make his report a platform forattempts by agencies who may be criticised to diffuse criticism by confusing issues, deflecting blame andgenerally muddying the waters. However, in this particular case, in the interests of fairness and transparency, I have included the Director’s response in full as Appendix 4.

The OGR response is a robust attack on my investigation and on my draft report. The OGR is entitledto put its defence in the most vigorous terms, but attempts at obfuscation by resort to bluster andrhetoric will not deflect the Ombudsman’s attention from the crucial issues. What follows is my attemptto strip the OGR response to its essence.

The OGR response identified four main heads of objection:

• methodology;• independence of legal advice;• operational planning; and • inability to determine who initiated payment.

I shall address each in turn very briefly.

Methodology

The main thrust of the OGR response on this issue is as follows.

• There were a number of issues which were put by the IGT witnesses as fact but which were neverput to the OGR witnesses for comment;

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• that there was no analysis or comparisons of the evidence to identify inconsistencies within theevidence of IGT witnesses; and

• that the means of gathering evidence from IGT witnesses was flawed.

I reject these propositions. I do not accept that the essential elements of the IGT version were not putto OGR witnesses to the extent necessary. More importantly, I do not accept that the circumstances ofthis investigation required me to seek the OGR response to each and every detail of the IGT account or,equally, to seek the IGT response to each and every detail of the OGR account. Had the issue of whetherthe payment was sought or offered been a pivotal issue, I may have conducted a kind of shuttle betweenthe parties, as suggested by the Director. But the request / offer issue, as I have stated elsewhere, is reallyan interesting sideshow to the main issue and, in my opinion, the Director’s protestations in this regarddivert attention from the main issue. The evidence indisputably reveals that there are two versions ofevents which are both very clear but which are absolutely irreconcilable. I understand, and have alwaysunderstood, that the proponents of each of these versions would regard the other version as incorrect.The evidence of OGR witnesses was very clear: they deny having any knowledge of the payment ofmoney as part of a settlement prior to the completion of their interviews in the USA. They claim to havefirst heard of the proposal for a payment after they had returned from the USA for the last time. Surelythe Director is not suggesting in the face of this evidence that, had each and every minor detail of theIGT version been put to OGR witnesses, they would have said anything other than that those detailswere incorrect? I think not. Moreover, my report makes it very clear that, although the question ofwhether the payment was offered or sought is an interesting issue, it was the receipt of the money byOGR, regardless of the offer/request issue, which I concluded to be inappropriate.

Independence of legal advice

The OGR response repeats many of the things I said about Mr Hill and Mr Taylor in my draft report. Iacknowledged they are independent members of the Bar and that they brought valuable skills andknowledge to the investigation. I did not "impugn" them.

Operational planning

If the OGR regards the documents referred to in the response as "operational plans" for the conduct ofa major investigation, my views on this issue are confirmed.

Inability to determine who initiated payment

Whilst who initiated payment was not the central issue to be determined, it at least needed to beexplored.

Again, the OGR response attempts to argue that the OGR version is the correct account and that theIGT version is inaccurate. I accept, and always have accepted, that the OGR is strongly of this view, justas IGT would be of the opposite view.

Much energy is also expended explaining how the Director – quite properly, in my view – keeps theBoard at arm’s length during the currency of an investigation. These arguments miss, or perhaps avoid,

the main point here. The real issue, in my view, is that the evidence suggests that the approval of theVCGA Board was seen as almost a mere procedural formality and, in addition, the Board was not fullyinformed of the facts. My reasons for so concluding are clearly set out in my report and will not berepeated here.

Finally on this issue, I make one more point. I chose not to make a major issue of it in my report, butsince the OGR response raises it, I will now mention it. The Director’s claim – made to the VCGA in theDirector’s report, and repeated in the OGR response to my draft report - that the OGR investigationcaused IGT to make changes to personnel and to corporate practices and policies – may be an over-statement. While there is evidence that several key IGT personnel resigned in the course of the OGRinvestigation, there is evidence in IGT documents that remedial action referred in the Director’s reportwas planned and implemented prior to the OGR investigation. The claimed causal link is, in my view,open to question.

Other matters arising from the OGR response

The OGR response contains many statements and arguments I could take up and dispute, but I will confine my comments to the following errors of fact which I feel I must address.

Alleged failure of Ombudsman to say that legal advice was flawed(page 10 of the response).

In my discussion on this issue in paragraph 15.4 I plainly state my disagreement with the advice provided by Mr Hill and Mr Taylor. Moreover, I would hope it is clear from my report that, havingregard to the Director’s request to the Minister for an amendment to the legislation to allow him torecover costs, the Director should also have had some serious reservations.

Failure to tape record half of interview with Mr Hill QC (page 5 of response).

The failure of the second tape of the interview with Mr Hill QC was due to a technical malfunction.This failure was noticed after Mr Hill QC had left my office. He was immediately contacted by telephone and so advised. It was agreed that should any matters requiring further clarification byhim occur in the future, he would be available for further interview. Suggestions of some "sinister"motive behind not mentioning this in my draft report are completely rejected.

Interview of Mr Brian Forrest, Chairman of the VCGA (page 7 of response).

I have a discretion regarding the form of evidence I take in any particular matter. In this instance Iconsciously chose not to take the evidence under oath. There was no need to do so because by thattime my investigation had reached a point where there was no evidence to suggest the VCGA wasinvolved in any of the issues under examination. The information I sought from Mr Forrest concerned matters such as the formal structure of the relationship of the VCGA with the Directorand the OGR. The Director’s belief that this interview was not tape recorded is not correct.

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Ombudsman’s "own motion" investigation (page 9 of response).

There are only two ways the Ombudsman can commence an investigation: by receipt of a complaint,or on his own motion. The Minister first brought this matter to my attention with a request that Iinvestigate. I later sought to clarify with the Minister’s office whether the Minister was to be formallyregarded as a complainant and was advised that he did not wish to be so regarded. Nevertheless,the information caused me concern and I commenced an investigation on my own motion.

Alleged failure to recognize that costs recovered were not applied to the OGR (page 10 of response).

I refer the reader to my report at paragraph 1.1 (at dot point 10) and paragraph 10.0 which clearlyand unequivocally state that the cheque was paid to Consolidated Revenue. Further, at paragraph10 and paragraph 13.2 it is clearly stated that neither the VCGA nor the OGR received a direct benefit from the payment of the cheque.

Conclusions on Director’s response

The response says (at page 1) that the Minister’s response to the proposed amendment to enablethe recovery of costs in investigations concerning possible disciplinary action indicates that theacceptance of costs was consistent with government policy.

It seems to me that the Minister’s approval may be an indicator of the government’s policy, but it isthe Parliament’s approval which is important when one is considering the powers of a statutory officer.

17.3 VCGA response

Mr Brian Forrest, Chairman of the Victorian Casino and Gaming Authority has indicated orally that hehas no substantial comment to make on my draft report. At his request however, I did include some further comment on minor procedural amendments relative to the statutory functions and structure ofthe VCGA Board. One matter that Mr Forrest did raise, however, related to his knowledge of the costof the OGR / IGT investigation. He advised that at the VCGA Board meeting on the 28th of August 2001he had been provided with an estimate of the cost. He had subsequently ascertained the exact cost ofthe investigation after the 28th of August 2001. At his request, I have amended my draft report to reflectthis information.

17.4 Department of Treasury and Finance response

On Tuesday 21 May 2002, Mr Ian Little, Secretary for the Department of Treasury and Finance, telephoned me and advised he had no comment to make on my draft report. He did mention in passing that the Director "advises" the Minister rather than "reports to the Minister" as was stated in thedraft and I made the necessary alteration on this minor point.

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17.5 Minister for Gaming

On Tuesday 21 May 2002, the Minister contacted me and advised he had no need to consult with meregarding the content of the draft report.

B W PerryOMBUDSMAN

Appendix 1

The Director’s Report to the VCGA Board

(Retyped due to poor quality of original)

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OFFICE OF GAMBLING REGULATION

REPORT FOR NOTING – RESULT OF INVESTIGATION CONDUCTED UNDER DELEGATION PURSUANT TO SECTION 142A

PURPOSE

1. To advise the Authority of the outcome of an investigation conducted under delegation pursuant tosection 142A of the Gaming Machine Control Act 1991.

BACKGROUND

2. By delegation dated 28 July 1998 the Victorian Casino and Gaming Authority delegated to theDirector of Gaming and Betting all of its functions under section 142A of the Gaming MachineControl Act 1991.

3. On 11 August 1998 a report was received from International Game Technology, Nevada, USA,("IGT"). That report advised the outcome of an internal investigation conducted by IGT into allegations of invoicing irregularities by its wholly owned European subsidiary IGT Europe b.v. during the period 1992-1993).

4. IGT is the largest manufacturer of computerized casino gaming products and the largest operator ofproprietary gaming systems in the world. IGT has offices in Australia, Argentina, New Zealand, Peru,South Africa and The Netherlands. The company has assets of $US1,872.5 million and employs some3400 staff worldwide.

5. IGT is an associated entity to its Australian Subsidiary, IGT (Australia) Pty Ltd. IGT (Australia) Pty Ltdis a "person listed on the Roll’ in Victoria pursuant to Part 3, Division 6 of the Gaming MachineControl Act 1991.

6. The report received from IGT disclosed that employees of IGT Europe b.v. engaged in the inappropriatepractice of low value invoicing in relation to a number of transactions involving the sale of gamingmachines in Turkey contrary to the policy of IGT that such practice was unacceptable.

7. The practice of low value invoicing involves the invoicing by the seller of its customers at a false andlower price that is actually the true price thus allowing the customer to falsely pay lower importduties.

8. The invoicing irregularities described in the IGT report involved a total of 394 gaming machines witha gross value including parts and shipping of US$1.6 million. The differences between the actualvalue and the low value invoicing was US$1.2 million.

9. Following receipt of the IGT internal report I initiated an investigation into the matters raised in thereport. The conduct of that investigation has now been concluded.

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10. The investigation involved the use of an outside investigator and barristers working with theAssistant Director of the Compliance and Investigation Branch and a solicitor from the Legal andLegislation Branch. The location of the events under investigation and the persons involved in thoseevents has necessitated extensive travel by the investigative team.

11. Over the past three years members of the investigative team have travelled on five occasions toEurope and/or North America and conducted 75 tape-recorded interviews with various persons relevant to their inquiries.

ISSUES/COMMENTS

12. As a result of our investigations IGT has acknowledged the inadequacy of its initial response to theallegations in 1993. A number of senior managers and executives of IGT and IGT Europe b.v. whocomprised the senior corporate leadership of the organisation during the period when these allegations first came to light have left the organisation. IGT has instituted practices and policies toavoid a repetition of such events.

13. The following individuals have been identified as being among IGT’s corporate leadership during1992 and 1993:

John J Russell PresidentRaymond Pike General CounselDick Vink Director of International SalesDean McClain Vice-President International SalesRonald Reiland Managing Director of IGT Europe (February 1992-April 1993)

14. Each of these individuals have since left the employ of IGT having resigned their respective employ-ment on the following dates:

John J Russell 24 March 2000Raymond Pike 31 December 2000Dick Vink January 1995Dean McClain April 1994Ronald Reiland November 1996

15. In recognition of the appropriateness of the investigation conducted by the delegate of the VictorianCasino and Gaming Authority, IGT has agreed to contribute the sum of $US200,000.00 towards thecosts of what has necessarily been a lengthy and expensive investigation.

16. A document detailing the outcome of the investigation is attached herewith and marked asAttachment 1.

17. In light of the changes to the senior corporate leadership of IGT and the practices and policies instituted by IGT as a result of this investigation, I report that I am now of the view that no furtheraction is required.

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18. It would be of considerable benefit to the maintenance of public confidence in the integrity of gambling in this State to make public the relevant details of this investigation. In addition it wouldreinforce to the gambling industry here and overseas, that the Authority is prepared to commitwhatever resources are necessary to pursue investigations into the suitability of licensed participantsin Victoria.

19. As a result I will publish on the Office of Gambling Regulation Website the contents of Attachment 1.

RECOMMENDATION

20. That you note this report.

Approved ………………………..

Bill LaheyDirector of Gaming and Betting

ATTACHMENT 1

1. International Game Technology is a listed corporation within the United States of America.

2. International Game Technology is the parent company of IGT (Australia) Pty Ltd a gaming manufacturer listed on the Roll of Registered Manufacturers and Suppliers of Gaming Machines andRegistered Components established pursuant to section 62 of the Gaming Machine Control Act1991 Victoria (the Act).

3. International Game Technology is an associate of IGT (Australia) Pty Ltd within the meaning of "associate" as defined by section 4 of the Act.

4. In the years 1992 and 1993, employees of International Game Technology’s wholly owned subsidiary,IGT-Europe, engaged in the inappropriate practice of low value invoicing in relation to a number oftransactions involving the sale of gaming machines in Turkey. Employees of IGT-Europe engaged inthat practice despite the fact that it was the clear policy of International Game Technology that suchpractice was unacceptable.

5. The practice of low value invoicing involves the invoicing by the seller of its customers at a false andlower price than is actually the true price of the items being forwarded thus allowing the customerto falsely pay lower import duties.

6. Following enquiries made of it by gaming regulators in 1998 International Game Technology established a taskforce to investigate and report as to the participation by IGT-Europe in low valueinvoicing in Turkey in 1992 and 1993.

7. The Director of Gaming and Betting (Victoria) (the Director) as a result of concern about the allegations of low value invoicing practices by IGT-Europe and other manufacturers during this timein Turkey and as a result of the failure of International Game Technology to immediately conduct athorough investigation when such allegations first arose in July 1993 has caused an investigation tobe commenced.

8. Amongst the issues investigated on behalf of the Director have been issues concerning the reactionof the then senior management of IGT-Europe and International Game Technology to the allegationsof low value invoicing when it was brought to their attention in July 1993 by the then current manager of IGT-Europe.

9. It is the position of the Director that the response of the then senior management of IGT-Europeand some previous senior and executive management of International Game Technology to allegations that employees of IGT-Europe had participated actively in low value invoicing was inadequate in that a proper investigation was not conducted. Instead the management relied on thestatements of the previous managing director of IGT-Europe that no low value invoicing hadoccurred.

10. International Game Technology has acknowledged that the allegations of low value invoicing whichwere reported in the Report of the Taskforce to the Compliance Committee dated 20 May 1998 werefactually accurate and should have been thoroughly investigated at the time the allegations were firstmade in July 1993.

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11. The Director has now concluded his thorough investigation.

12. That investigation has confirmed and strengthened the view held by the current senior managementof International Game Technology that the incidents of low value invoicing which occurred in 1992and 1993 were serious, and that a more thorough investigation should have been conducted at thetime allegations were first made in July 1993.

13. International Game Technology has now taken the appropriate and necessary steps to prevent arecurrence, including having:

• Advised each employee world-wide of the company’s zero tolerance policy of low value invoicing;• Revised and redistributed the company Code of Conduct;• Conducted worldwide compliance sensitivity training;• Established compliance integrity phone lines as a means for employees to make confidential

reports of suspect activities;• Increased the visibility and level of authority of the director of compliance through promotion to

Vice-President;• Centralised international compliance under the parent company’s Vice-President of Compliance

and the hiring of regional compliance officers, located in international offices, who report directlyto Compliance in Nevada;

• Modified specific IGT-Europe shipping procedures to include segregation of duties, independentreview, and dual approvals of key transactions;

• Adopted written shipping policies and procedures for each international office to include standardisation of essential documents and requirements for documentation detail;

• Internal Audit, which now reports to General Counsel of the company, has increased frequencyand scope of audits of international offices in coordination with the compliance department.

14. International Game Technology has agreed to pay the sum of $US 200,000.00 towards the investigations costs.

15. International Game Technology has indicated that consistent with its policy of disclosure of all relevantregulatory matters the company will notify all appropriate gaming authorities within jurisdictions relevant to International Game Technology of the above matters.

16. On the basis of the acknowledgments made by International Game Technology in paragraph 10 andthe steps taken by International Game Technology as outlined in paragraph 13 the Director is nowof the view that no further action is required.

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Appendix 2

Legal advice dated 7 May 2001

(Retyped due to poor quality of original)

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IN THE MATTER OFTHE VICTORIAN CASINO AND GAMING AUTHORITY

and

IN THE MATTER OF ANINVESTIGATION INTOINTERNATIONAL GAMETECHNOLOGY LTD.

MEMORANDUM

1. As our instructor and client are aware we have been briefed to provide ongoing advice to theDirector of Gaming and Betting and Director of Casino Control, Mr Bill Lahey, (the Director), regardingthe course of an investigation conducted by officers of the Victorian Casino and Gaming Authority,(the Authority), into International Game Technology, (the Company). The background to this investigation is well known both to Mr Lahey and our instructor, we will not restate it here.

2. The investigation has reached a stage where it is clear that certain former officers of the Companywere less than diligent in the manner in which they dealt with allegations of low value invoicingengaged in by a European subsidiary of the company in the early 1990s. When these allegations surfaced the Company took no action and terminated the services of the manager who first documented the practice and drew it to the attention of North American management. Only as aresult of inquiries by another regulator did the matter become the subject of an investigation by theCompany in 1998. The Company self reported the earlier conduct to the Director and other regulatory agencies world wide. As a result of certain concerns regarding the original allegations andthe scope and nature of the Company investigation, the Director, acting on advice, determined toconduct a thorough and detailed examination of both the original allegations and the Companyinvestigation.

3. A number of individuals were identified as part of that investigation as being of concern to theDirector. These individuals held significant positions of influence in the company at the time of the1998 investigation. Some of them also had held positions of significant influence at the time theoriginal low value invoicing issues surfaced. Some of these people were clearly in a position to influence the activities of the Company and the company’s Australian subsidiary, listed on the roleof manufacturers in Victoria (the Australian entity). Of these individuals Mr Raymond Pike was ofparticular concern.

4. In January of 2001 Mr Raymond Pike severed all managerial connection with the Company. At thistime Mr Pike had been Chief Operating Officer. As a result of significant concerns regarding the probity of the 1998 investigation and the real motive behind it, further interviews and inquiries wereconducted in Europe and the United States in March and April of this year.

As a result of these interviews and the further investigations an approach was made by Ms Sarah BethBrown, Vice President and General Counsel for the Company to Mr Max Priestley, Assistant Director

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in charge of Compliance and Investigation for the Authority. Ms Brown’s approach was to discuss apossible settlement of the matter and a conclusion to the investigation.

5. Mr Lahey is aware of the terms of that approach and it is currently being negotiated. We are of theopinion that a settlement of this matter is appropriate. We are not satisfied that in the event that itis possible to prove significant misconduct against currently serving officers of the company thatsuch conduct by those still with the company will result in any action against the Australian entity.Some of the matters we have taken into account in considering this include; the logistical difficultiesof conducting a long and protracted hearing before a part time Authority Board; the evidentiary considerations regarding international witnesses; the limited disciplinary options open to theAuthority Board; the remedial steps already taken by the Company and the fact that the individualwe consider significantly responsible for the manner in which the investigation was ultimately conducted and the fact that an investigation was not conducted when the low value invoicing issuefirst arose. (Mr Pike), is no longer involved in the Company.

6. As Mr Lahey is aware this investigation has been time consuming and expensive. It has identifiedmatters of concern both to the Authority and to the Company. In addition to noting significant managerial changes to the Company the settlement that is proposed would also involve an acknowledgment by the Company that the costs of the Authority investigation are significant. To thisend the Company is willing to make a contribution to the legal costs of the investigation in the sumof US$250,000.00. We consider it entirely appropriate that this contribution form part of the termsof settlement.

7. Our reasons for this view are as follows:a. There is nothing in the provisions of the Act that prevents such a term;b. The company agrees that at the time the Low Value Invoicing issue arose they did nothing

sufficient (or anywhere near sufficient) in response to it;c. The company agrees that its management arrangements at the time were inadequate;d. The company agrees that there were legitimate concerns regarding the sufficiency of its internal

investigation;e. The cost to the Victorian tax payer has been significant, it is appropriate to recoup some of that

cost;f. The company has made significant changes to its practices as a result of this investigation.

8. If Mr Lahey or our instructor has any questions concerning this matter they should not hesitate tocontact us.

Ian D Hill Robert W TaylorSeabrook Chambers Joan Rosanove Chambers7 May 2001 7 May 2001

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Appendix 3

Undated legal advice to Mr Forrest

(Retyped due to poor quality of original)

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MEMORANDUM OF ADVICE

Re: IGT

In this matter myself and junior Counsel, Robert Taylor, were briefed by the Legal and Legislation Branchto advise generally in respect to an on-going investigation into certain matters pertaining toInternational Game Technology (IGT).

Our role, which has been a continuing one over some 18 months, has been to advise Solicitors from theLegal and Legislation Branch, the Assistant Director of the Compliance and Investigations Branch, andan outside investigator, as to each step in the investigative process, bearing in mind the objects and principals embraced by the Gaming Machine Control Act 1991 (Vic).

As such we have become familiar with all the material gathered during the investigation. Of necessitythe investigation has been lengthy and complicated.

In our opinion the investigation which has involved the interviewing of many witnesses both here andoverseas has been a complete and thorough one.

In addition I have had lengthy discussions with Counsel and Solicitors acting on behalf of IGT.

I have read the Director’s Report and Attachment 1 and have concluded that those documents adequately describe the salient features of the investigation.

It is clear that employees of IGT-Europe (a wholly owned subsidiary of IGT) participated in the practiceof low value invoicing in Turkey during the years 1992 and 1993. The purpose of this practice was toallow its customers to illegally pay lower import duties. The benefit to IGT was that by such artifice itwas able to sell its gaming machines to these customers who otherwise might not have purchased theirmachines.

It is also clear that IGT had a policy that this practice was unacceptable. However when it came to lightin 1993 the then senior management of IGT failed to thoroughly investigate it. Significantly the seniormanagement who so failed to act are no longer within the employ of IGT. As a result there is no actionthat we can pursue against any individual identified as failing in a duty to properly investigate allegationsof dishonest conduct.

In 1998, as a result of enquiries made of it by regulators, IGT through its current management commenced its own investigation. IGT through this management has acknowledged that the incidentsof low value invoicing which occurred in 1992 and 1993 were a serious breach of propriety and that amore thorough investigation by IGT should have been undertaken by them in 1993.

In addition IGT has now taken the appropriate and necessary steps to prevent a reoccurrence.

In my view having regard to all the circumstances and in particular to the recent changes to the seniorcorporate leadership of IGT and the practices and policies instituted by IGT as a result of our investigation no further action in this matter is required.

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In my opinion the current management of IGT can be demonstrated in these matters to have actedappropriately and are free from criminal interference or exploitation. The "sins" of IGT’s former management cannot and should not be visited upon the current management. They have, as I havesaid, acted appropriately and demonstrated their concern that there be no reoccurrence by implementing necessary strategies and policies.

It is my strong opinion and recommendation that the matters contained within the Director’s Reportand within Attachment 1 be noted and that this matter be resolved as so proposed.

And I so advise.

I D HILL QC