Hello, and happy Halloween, as GamblingCompliance takes a look at how a raft of US states were given a chilling warning from the Department of Justice that their potential lottery privatization schemes could be illegal under US federal law.

It’s scary times in the treasury departments of many US states as the governors of New York, New Jersey, Texas, California, Illinois and Michigan and others ponder the possibility of selling off their lotteries to private operators in order to raise cash to plug significant budget shortfalls.

However, responding to a request for a legal opinion on state lottery privatizations from the office of Indiana Governor Mitch Daniels, the DoJ this month said that a lottery “conducted” by a private company would likely violate federal law.

According to the Justice Department, a set-up such as the UK’s National Lottery – where an operating contract for the lottery has been retained by private company Camelot since the National Lottery’s inception in 1994 – would not qualify for an exemption to criminal prosecution under US laws that prohibit the “promotion of lotteries in interstate commerce.”

The DoJ said that “to qualify for the exemption the lottery must be conducted by the state and only by the state, not jointly by the state and a private for-profit entity,” adding that “to be said to ‘conduct’ a lottery, the state must maintain and exercise control over all significant aspects of the lottery operation.”

The opinion went on: “To the extent that such authority is delegated to a private management, the management company should operate more in the role of an agent of the state, than a partner that shares in the authority to make significant business decisions.”

While the Justice Department acknowledged that contracting private companies for lottery retailing, marketing or consulting purposes would still likely to be legal under US law, this is not what most states had in mind when they mulled their multi-billion dollar cash-injecting lottery leasing schemes.

The DoJ’s statement has already spooked Indiana’s Governor to shelve his plans to privatize the Hoosier Lottery, and, as one observer told GamblingCompliance this week, it will almost certainly force a re-consideration in those other states that had been pondering similar moves.

The decision could therefore place the US lottery market outside of an emerging trend towards lottery privatizations that this week reached Turkey and Australia.

According to a report in Friday’s Sydney Morning Herald, the New South Wales government will formally announce plans for a billion-dollar sale of its own state lottery in a budget address in early November – with Aussie gaming firm Tatts Group an early favourite to acquire the business.

Meanwhile, the Turkish Government will open a tender process later this year to issue a ten-year operating licence for its national lottery to a private company, having this week received the approval of the Turkish competition authority. Greek gaming operator OPAP fancies its chances in Turkey, but international lottery giants GTech, Scientific Games and Camelot may enter the bidding too, according to reports from the country.

It is - or was - the US lottery market that was always considered the biggest prize, however. A report by Christiansen Capital Advisors, published last year, estimated that all 42 state lotteries in the US would have a private equity value of over US$202bn, even based on their 2005 revenues.

That money is now likely to remain unavailable to state lawmakers thanks to the DoJ’s advice, leaving them to pursue other funding options as they spend this election-year Halloween haunted by the prospect of truly frightening budget shortfalls ahead.