Relations have become so strained between feuding directors of two state agencies that a couple of Iowa lawmakers have agreed to step in as mediators.

The standoff pits state ombudsman William Angrick against Iowa Lottery chief executive Terry Rich.

Angrick's staff, which investigates citizen complaints, has spent more than two years investigating the Iowa Lottery and has concluded that lottery players could be at risk of being cheated.

Rich says he has responded fully to each of the ombudsman's concerns, but each response has been met with additional inquiries.

Angrick's staff issued a 210-page report in April saying the Iowa Lottery for years has failed to take aggressive enough steps to protect its customers from fraud and theft by retailers.

(Read and download the original report and correspondence by clicking the links at the bottom of this story.)

Relations have become so strained between feuding directors of two state agencies that a couple of Iowa lawmakers have agreed to step in as mediators.

The standoff pits state ombudsman William Angrick against Iowa Lottery chief executive Terry Rich.

Angrick's staff, which investigates citizen complaints, has spent more than two years investigating the Iowa Lottery and has concluded that lottery players could be at risk of being cheated.

Rich says he has responded fully to each of the ombudsman's concerns, but each response has been met with additional inquiries.

Angrick's staff issued a 210-page report in April saying the Iowa Lottery for years has failed to take aggressive enough steps to protect its customers from fraud and theft by retailers.

Angrick has proposed changes in law in the next legislative session to address some of his concerns.

The investigation began after questions arose about a northwest Iowa store clerk who won the lottery six times in 12 months, collecting $264,000. The ombudsman's report, called "Taking Chances on Integrity," included 60 recommendations for changes in lottery procedures and policies.

The report cited 122 instances of alleged impropriety by Iowa Lottery retailers and their employees in 2005, 2006 and 2007. More than half of the incidents involved store clerks accused of stealing tickets from their employer's stores. At least two incidents involved store employees accused of stealing a customer's winning ticket.

Angrick said he is not accusing Rich of being unreasonable, but he contends that Rich has not been fully cooperative.

"This issue is trying to figure out what they accept and what they don't accept" in the ombudsman's report, Angrick said. "It is just a matter of getting some degree of specificity."

Rich has made a number of changes in response to the investigation. These include conducting undercover checks at lottery retailers and developing a searchable computer database for lottery investigators.

In addition, lottery terminals now play an audio notification, "You won, woo-hoo," when winning tickets are checked. The lottery is also developing plans to offer self-serve devices for customers to electronically check their tickets.

Rich estimates the investigation has cost Iowa taxpayers $250,000 to $500,000, including time spent by staffs of both the lottery and the ombudsman's office.

Angrick said he didn't have a cost estimate. It's difficult to identify costs for a specific case because his employees often conduct multiple investigations at the same time, he said.

Angrick's report made 60 recommendations. He says he still awaits more specific information from Rich regarding 30 of them.

They include recommendations to prohibit retailers from charging fees to validate and redeem lottery tickets; establish protocols to improve coordination between lottery security and Iowa law enforcement agencies; consolidate all lottery retailer directives and guidelines into a single electronic manual for quick reference by store clerks; and require any customer contacts concerning potential retailer fraud or theft to be immediately forwarded to the lottery's security division.

Rich said "ill will" had built up between the two departments before his arrival, and he said "it is tough to inherit this kind of a situation. I have decided enough money has been spent. I think that taking it to legislators is the next best step so that the taxpayers of Iowa don't have to continue to fund this feud."

Rich, a former cable TV executive, headed Des Moines' Blank Park Zoo before Gov. Chet Culver appointed him to the lottery post last February.

The two co-chairs of the Legislature's Government Oversight Committee have agreed to Rich's request to mediate the dispute when the Legislature convenes in January. They are Sen. Rich Olive, D-Story City, and Rep. Vicki Lensing, D-Iowa City.

The lottery generated about $60 million in profits for state government for the fiscal year that ended June 30.

Angrick points out that authorities two years ago documented major problems of retailer fraud in Canadian lotteries in Ontario and British Columbia. Canadian investigators found that the lotteries' lax approach to enforcement enabled the theft of some customers' winning tickets.

In 2008 and 2009, the California lottery conducted undercover sting operations and found some clerks paid only a fraction of a winner's prize money or told customers the tickets were not winners and claimed the money themselves.

Rich said he has bent over backward to respond to the ombudsman's inquiry and suggestions. He said he is confident the Iowa Lottery has no major problems with fraud and theft. He noted that undercover investigators have visited hundreds of Iowa Lottery retailers in recent months to determine whether clerks are cheating lottery winners. They have not found a single instance of dishonesty.

The case involving the store clerk who won $264,000 was fully investigated, Rich said. Lottery officials concluded that Linda Rost, a clerk at Stan's Corner in Lake Park, was a heavy player of lottery games and legitimately won $264,000 in lottery prizes. Her biggest prize was $250,000 in an instant-scratch game.

The final straw for Rich was an eight-page letter he received last month from Angrick that included a 15-page attachment. Angrick complained in the letter that while Rich was publicly telling the media he is a proactive regulator, the lottery had not responded to 30 recommendations.

"A lottery that does not adequately protect its customers risks losing their confidence, potentially harming the lottery, and, in turn, the government that depends on its profits," Angrick wrote in the Nov. 16 letter.

Angrick said he welcomes the opportunity to meet with lawmakers and Rich to discuss his concerns.

He said his staff has previously made lengthy lists of recommendations following other investigations involving state government. One example involved recommendations for child abuse cases handled by the Iowa Department of Human Services after the beating death of 2-year-old Shelby Duis in January 2000.

Rich said he looks forward to meeting with Angrick to talk about the list of recommendations. He said he is optimistic their differences can be resolved if they simply focus on the proposed legislation.

Olive said he thinks Rich and Angrick are both trying to do their jobs.

"This happens a lot with legislators working with constituents," Olive said. "We end up in the middle of a situation. You need to hear both sides and try to resolve the issues. So we will see what happens."