Urban Trade Breakdowns: Stefan Mendal — The Alternative to Alternative Investing

On a cold and gray February in 1992, about a dozen men quietly moved into a non-descript office park in Norfolk, VA and begin unpacking and carefully sorting reams of laser-printed paper slips they had shipped in from Melbourne, Australia a few days earlier. And when that was done, they withdrew $7m from the local Crestar bank branch (which was also transferred from Melbourne) and used the funds to buy stacks of cashier’s checks in small amounts. 

This was February of 1992, and the Virginia Lottery was a big thing back then. And as the Lottery pot grew past $20m (which was a lot at the time), the locals were getting excited. The men in the office were also watching the lottery grow, but they were cool. They had a plan. And ‪on February 13th, with the pot at $27m, they divided up the paper slips and money orders and assigned each man a carefully mapped route to dozens (or hundreds) of local gas stations and convenience stores. There they planned to spend $7m buying $1 Virginia lottery tickets.

And within a day or so, they had bought millions of tickets. So much so, that they started to clog the system. By ‪3pm on the 14th, the Chesapeake branch of the Farm Fresh Grocery Store had to put an “out of order” sign on their lottery terminal to handle the men’s orders. That branch alone sold a staggering $3m in tickets that day. At a Miller Convenience Store branch in Norfolk, clerks had to steer customers to other locations while they printed over $600k in tickets for the quiet customer with the trunk full of money orders and lottery slips. And this was a problem for the men. It turns out, convenience store clerks are not properly trained to clear millions of dollars in lottery trades. That is the domain of Wall Street. And by the 11:15pm lottery deadline ‪on February 15th, the men had purchased only $5m of the $7m tickets they had planned to buy. Oh shit, they thought, this is not good.

So what the fuck was going on?

The men were agents of a small Australian firm called International Lotto Fund (ILF) and ILF was manage by a Romanian-born economist and 13 time lottery winner named Stephan Mendal. Yeah, you read that right. The dude won the lottery 13 times. How the fuck does that happen? Well, it’s really not as hard as it sounds, and I’ll get to that, but first a little bit on Mendal.

Mendal was born in Communist Romania and worked as an economist for some State-owned industrial polluter of rivers making $88/month. Now, although Romania was cheap back in the day, $88/mo was not enough to feed his family and so he begins thinking of ways to make money and improve his situation. And being mathematically inclined, he quickly realizes that he could beat the Romanian lottery without a ton of money. In a nutshell, if the lottery payout is greater than the cost to purchase every combination of numbers required to guarantee a win, you are assured a profit if you can buy enough tickets. And you don’t need to win the grand prize. If you work the numbers right, you can buy less than the total number of lottery combinations and still make a profit on the smaller payouts.

So long story short, he does just that and wins enough to bribe his way out of Romania and move his family to Israel and ultimately Australia, winning lotteries all along the way. And this begins a decade long cat and mouse game with lottery officials that looks something like this: Mendal works the system and wins the lottery, the regulators change the rules, Mendal changes strategy, and then Mendal wins the lottery again. If you work on Wall Street, this is something you understand.

But by 1990, the Australians (and the British, whose lottery he could also play as an Australian resident) are onto his shit and so he goes global and begins looking for bigger targets. And Virginia was perfect. At the time the Virginia lottery was one of the largest in the US and it was easy prey. Virginia had a 6-number lottery, where players picked 6-numbers between 1 and 44. That means 7m possible combinations. So all Mendal needed to do was raise investor money to buy $7m in tickets at a time when the payout was greater than his capital and he could make some real cash money. And by then, his shit was organized. In all those years of lottery hustling he had formed ILF and he knew the ropes. And that brings us back to the men in Norfolk.

If you didn’t catch it, the men needed to buy $7m in tickets to secure every possible number combination in the Virginia lottery. But they clogged the system and could only buy $5m. Fuck. This was Mendal’s biggest play yet and if it failed, he was fucked. And since he hadn’t locked up every number combination, this was no longer a sure thing. It was gonna be a yolo.

At 11:25pm on February 15th, 1992, people across Virginia turn on their TVs to watch the lottery drawing. And some official looking motherfucker next to a skirt reaches into a rotating cage of bouncing balls and draws the following: 8, 11, 13, 15, 19 and 20. Which was one of the 3m combinations of numbers sold to one man with a stack of paper slips and cashier’s checks at the Farm Fresh Grocery Store in Chesapeake the day before. Ka-ching.

Ok, so that’s cool, right? Well, the Virginia Lottery officials and the IRS and the FBI and the CIA did not think so, and all four agencies initiated investigations into the winning. But fuck, it was all legal, like it or not. So begrudgingly, Virginia releases the funds, after taking 30% in Federal taxes and another 4% in Virginia State taxes.

But there is a final chapter to this here story. Mendal was an Australian resident and Australia and the US really like one another. And when the US really likes another country, we form these tax bromances so that a US citizen working in Australia does not have to pay Australian taxes on their local earnings and vice versa. So on March 24th, 1992, Mendal fills out IRS form 1001 and requests to be paid 100% of the $27m. But the IRS and the State of Virginia do not like this one bit and they challenge the claim in court. And they lose. Which gets them really pissed, so they appeal to the US Court of Appeals. And in March, 1994, in the case of “The International Lotto Fund v. United States of America” (what a gangster name for a case — one day I hope to be the plaintiff in “u/cantedlight v. The United States of America”), the judge decides in favor of Mendal, ordering Virginia to pay the motherfuckers “the full amount of each annual installment, when due, without federal or state income tax withholding throughout the life of the Order”.

Buffet once called the lottery a tax on stupidity. And I can’t argue with that. But this is all still very confusing to me. If a lottery can be beat tax-free by a Romanian mathematician, while a smart-ass global company like Amazon can pay zero Federal income taxes, I don’t feel very smart writing checks every April. Maybe Buffet got his words mixed up. Maybe what he meant to say was that taxes are a lottery on stupidity. Who knows. But that’s not the point. When some dude goes from rags to riches by figuring out a way to win the lottery 14 times and retires on an Island in the South Pacific with his winnings, that’s one fuck of a next-level money hustle and a pretty cool story.