Inspector General’s Report on ‘MIT Group’

Inspector General’s Report on ‘MIT Group’

In January 2005, James M. Harvey was about to start his final semester at the Massachusetts Institute of Technology. Looking for an interesting independent study project for his last term, he considered a project evaluating the Lottery games Powerball and MegaMillions to determine which was more advantageous from the player’s perspective. While researching Powerball and MegaMillions, he also reviewed other Lottery games for comparison. That was when he began looking at Cash WinFall and noticed its unique “roll-down” feature.

In an interview, Mr. Harvey said that it took him only a few days to determine that it was possible to make a profit playing Cash WinFall. He did research, ran calculations and talked to friends in his MIT dorm, Random Hall.

Among other things, Mr. Harvey went to Lottery headquarters in Braintree and asked for the agency’s administrative bulletins for Cash WinFall. Although no one could locate the administrative bulletins, he was able to meet with a Lottery official who was very familiar with the technical aspects of the game. That conversation bolstered Mr. Harvey’s own analysis: during a roll-down, each ticket is worth more than it costs.

Back at Random Hall, Mr. Harvey embarked on two projects: drumming up interest in a party to watch the Feb. 6 Super Bowl and organizing a betting pool to play the next Cash WinFall roll-down, which he expected to occur the next day – Feb. 7. He didn’t generate much enthusiasm for watching the New England Patriots play for the championship, but his analysis of Cash WinFall had broader appeal. About 50 people each put $20 into Mr. Harvey’s lottery pool for the Feb. 7, 2005 roll-down.

Mr. Harvey and members of the MIT group bought 500 tickets at nearby retailers. One of those tickets matched four of the six winning numbers, paying $2,364. Together with some three out of six matches, Mr. Harvey’s group had turned $1,000 into about $3,000.

When Mr. Harvey and a fellow MIT alumnus, Yuran Lu, incorporated their betting enterprise in 2010, they named it Random Strategies Investments LLC in honor of the dorm where the Cash WinFall plan was launched.

According to Mr. Harvey, word circulated on the MIT campus about Cash WinFall and others formed similar betting pools that semester, as many as six. Other than Mr. Harvey’s, none of the MIT groups seems to have lasted very long or grown very large.

The $3,000 in winnings from the Feb. 7, 2005 roll-down drawing remained invested in the pool for future roll-downs. Upon graduation, some members of the MIT group invested additional money in the pool. Mr. Harvey and his colleagues ramped up their ticket purchases as quickly as funds allowed, to the point where they could buy 300,000 tickets for each roll-down drawing.

Mr. Harvey said his calculations determined that in general buying about 300,000 tickets was the best strategy. However, he varied the number of tickets purchased for particular roll-downs based on several factors: the amount required to push the jackpot up to $2 million, estimates of how much other groups would bet, and even weather forecasts. As long as the sets of numbers were chosen so that winning combinations were well distributed across the range of possible outcomes – and as long as no one hit the jackpot – Mr. Harvey could be virtually certain he and his investors would make a profit.

Even when the MIT group had enough money to purchase 300,000 tickets for a drawing, its ticket buying was limited by other factors. One constraint was simply getting enough ticket slips filled out. Mr. Harvey developed a computer program that would generate sets of numbers that would provide an optimal distribution across the range of possible drawing results. Under Lottery rules, betting slips can’t be computer generated so the group had to fill out betting slips by hand – oval by oval – to match each set of numbers generated by Mr. Harvey’s computer program. Simply filling out the betting slips was time-consuming. However, the betting slips could be reused so that once the slips had been created, Mr. Harvey and his friends did not have to repeat that part of the operation.

Another constraint was locating stores that would handle large volume purchases. Many retail outlets balked at processing tickets on the scale that the MIT group and other high-volume bettors were seeking. Handling 10,000 tickets, including scanning in the slip with the requested numbers, could easily take several hours. Many store managers objected to having a staff member monopolized for long stretches. Although retail stores make a 5 percent commission on Lottery sales, tying up a clerk for hours at the lottery terminal could interfere with other store operations.

In addition, the MIT group, like other high-volume bettors, invariably had thousands of “free bets” to redeem from prior drawings. The store clerk is required to do twice as much work to process a free bet. First, the agent must scan the earlier ticket to redeem the free bet and then scan the betting slip. In addition, the store only gets a 1 percent commission – 2 cents – on a free bet redemption because it is considered a claimed prize, not a new sale. In Mr. Harvey’s words, “it was really a grind.”

Over time, Mr. Harvey said the group found a handful of retail Lottery agents – a Texaco station and a White Hen Pantry in Belmont, a convenience store in Back Bay across the Charles River from MIT, and a Mobil station in Amesbury – that would process the group’s large orders accurately. The MIT group used these four locations over and over again.

Other factors could also slow Random Strategies down. If the weather was humid, the ticket machines were more likely to jam. If a terminal was running low on ink, it could take several tries to redeem a winning ticket. Once, a power outage in the Belmont and Cambridge area interrupted the group’s pre-roll-down ticket buying.

Identifying the winning tickets was also time-consuming. Mr. Harvey wouldn’t describe his ticket-sorting operation in detail, saying his system was proprietary. He did reveal that he kept records showing the panels of six-number sets played in each drawing so that as soon as the numbers were announced he could quickly know how many winners the group held at each prize level. He also said he has storage boxes filled with millions of losing Cash WinFall tickets to present to auditors. Mr. Harvey said state and federal tax authorities have audited his group almost every year since they started playing Cash WinFall.

Tax compliance was also a headache for high-volume bettors. Every time Random Strategies turned in a batch of winning tickets, the Lottery generated a W-2G for every member of the group. Even small investors in the MIT group – for example, someone who won $800 over the course of a year – would get dozens of W-2Gs every year and have to spend hours accounting for their winnings on their tax returns. The hassle prompted some people to cash out and leave the investment pool, Mr. Harvey said. The tax hassle was one reason that the MIT group, which began with 40 to 50 people, dropped to a couple dozen participants in the years after graduation and ended with 10 members at the conclusion of Cash WinFall earlier this year.

For Mr. Harvey, operating the Cash WinFall investment pool was a nearly full-time occupation during the group’s seven-year participation in the game. It also involved substantial time commitments from two or three other members of the MIT group. Mr. Harvey did other engineering projects on the side when his schedule permitted, but refining the calculations, filling out betting slips, organizing ticket purchases, claiming prizes and keeping track of the group’s business records was time-consuming work.

It was also a lucrative enterprise. Mr. Harvey said the MIT group wagered between $17 million and $18 million on Cash WinFall. He declined to disclose what its profits were. The OIG estimated that the MIT group made at least $3.5 million before taxes, assuming that it had profits before taxes of a minimum of 20 percent during its seven-year participation in the game.

The rewards of his participation in Cash WinFall have not dramatically changed Mr. Harvey’s lifestyle. Mr. Harvey said that when he began playing Cash WinFall, his car was a 1995 Chevrolet Corsica which he had purchased for $500 at a government auction. As the MIT group became successful at Cash WinFall, he upgraded his ride to a high-mileage 1999 Nissan Altima.