Rackets: NYRA (June 2007)

What do you get when you cross an upstate socialite, an international casino boss, forty-five thousand horses, three thoroughbred racetracks, a kaput and federally indicted quasi-state racing authority and about $2.1 billion?

The collective status of Saratoga, Aqueduct and Belmont racetrack franchises—as complicated and as nuanced, multi-dimensional and, well, sexy as the constantly matriculating cast of characters jockeying for a position at the gate of what will no doubt become racing’s most historic franchise deal. Sure, there’s the fact that New York’s rich racing culture is on the block—hopefully for the better—but the resonant issues go so far as affecting economies upstate and downstate by touching on everything inside racing and wagering (betting, horse breeding, racing employment) to outside it (hay farming, hospitality, convention business, concert entertainment and outlet shopping).
After years of deliberation first by former Governor George Pataki, his specially designed committee, former State Comptroller Alan Hevesi, and now Governor Spitzer, his new committee and newly installed Comptroller Tom DiNapoli, not to mention various ripples throughout the state, the legislature will respond this month to the Governor’s recommendation for who should win the franchise for the three racetracks. There are four consortium groups wagering their spots, and while it’s still anyone’s race*, certain circumstances make for hedging our bets.

imageOf all the machinery in place to overcome the misappropriation and good old-fashioned scandal brought to NY racing by New York Racing Association (NYRA), the group has yet to be jettisoned from its comfortable position of holding the franchise for the tracks. Given the extent to which theft, fraud, tax evasion, money laundering and just about every conceivable money related crime, went on, it is incomprehensible that NYRA is even a player in thoroughbred racing. Then again, the lack of controls governing the franchisee makes for little more than Swiss cheese regulation at best. As stated in Spitzer’s 2003 Examination of Employee Misconduct at the New York Racing Association Inc., and Management’s Response, “To understand how crimes are committed [at the tracks], it is necessary to understand how bets are made and processed, and what happens to the money at different stages.”

New York is the birthplace for horse racing in America; Long Island actually hosted the country’s first track in the 1600s. Pari-mutuel wagering was brought into legislation in 1939 as an equal-opportunity moneymaker for both the state and the body charged with fiscal and operational control, in this case NYRA, which won the franchise of all three thoroughbred tracks in 1955 (and four times since then). Specifically, NYRA holds two franchises over the three tracks: One to run thoroughbred races in the state and one to operate pari-mutuel wagering on these races. While not required by law, NYRA is a non-profit, which means it is not required to pay income tax, but it is required to pay pari-mutuel tax, franchise fees to the NY Thoroughbred Capital Investment Fund (CIF) and regulatory fees to NY Racing and Wagering Board (R&W). Despite clear evidence of continued fraud, embezzlement and egregious fiscal crimes by NYRA and its employees, the state has repeatedly extended NYRA’s franchises. At the same time, NYRA has both overstated expenses and applied questionable accounting tactics to understate income, cheating the state, the NY Thoroughbred Horsemen’s Association (to which it is responsible for pensions) and the IRS out of hundreds of millions of dollars. Presently, NYRA’s franchises are set to terminate on December 31, 2007.

At New York’s thoroughbred racetracks, the operational protocol is a labyrinth of opportunities for theft. Starting with the tellers, who operate the ticket windows, and ending with the President and Board, and including every layer of personnel in between, the criminal culture metastasized with every dollar brought through the doors over the last fifty years.

In a pari-mutuel betting model such as the one operated in New York, there is no “house.” Money taken in by NYRA for each betting option (straight up, trifecta, etc.) is pooled. Upon the close of a race, NYRA distributes to winners what is left after expenses, state obligations and purses. The initial collection of monies for bets are taken either at teller windows or via a two-part mechanical process, but redemptions can only happen at teller windows.

imageDespite upwards of $2 million of on-track betting passing through the three tracks per day, basic controls that would exist in any cash reliant operation (like a Wendy’s or Macy’s) are absent.

When a teller processed a ticket for payout, a palette for theft was at his disposal. The cash registers used at NYRA tracks were so substandard as to give any teller autonomy over voiding transactions, altering ticket information, tripping the system… all allowing the teller to handle cash at his discretion. Essentially, tellers, the portal for cash in and out of the racing operations, were self-governing agents. Worse still, at the beginning of each race day, tellers would draw an undetermined amount of money to operate from “mini-dealers” (liaisons between tellers and the money rooms). At night, tellers store their currency in two places, with little to no corresponding accounting. (Before 2002, tellers were not even counted out until a racing meet closed 6-10 weeks after receiving the money, with no interim auditing.) Out of hundreds of tellers, management would only sample 2-10 per day to check for shortages. In the event that any were identified, a “short certificate” would be issued to the employee and the amount would be withheld from his next paycheck. There are no records of any employees ever being fired for mishandling of cash. To wit, this was such an acceptable practice, in 1999 one teller went without a paycheck for fourteen weeks to cover his shortages. As early as 1995, auditors informed NYRA that 40% of its tellers were running short and yet management did nothing. When issued evidence detailing tellers’ shorts, NYRA ex-President Terrance Meyocks responded, “Every track has legitimate shorts. I don’t get involved with this.”

Even more disquieting, when then Attorney General Spitzer, the police, governmental agencies and even the IRS began probing, they found a host of criminal behavior so flagrant as to indicate the tellers believed they would not be incriminated by NYRA or anyone, let alone that any controls were in place to monitor their activity.

And what did they find over a variety of stings? Everything. Embezzlement: Tellers would void transactions and pocket the money. Misdemeanor: Tellers were betting while on duty (and sometimes using the money in their cash boxes to do it). Loan Sharking: Tellers “borrowed” money from their cash boxes as seed money to put out on loan to betters. Commingling of NYRA and “personal” assets: One box seized during a Spitzer-led sting in September 2003 contained a gold watch (collateral on a bookmaking loan). Money laundering: In April of 2000, another Spitzer operation led to an undercover agent laundering $300,000 at a teller’s window: The agent, posing as a drug dealer, would hand the teller stacks of cash in small denominations and when he returned several races later, the envelope was returned to him with large bills in replace of the small ones, less a 5% handling fee to the teller. Tax Evasion: Tellers receiving less salary in their paychecks due to shortages are not claiming their full income (nor their winnings) thus failing to pay the full amount of their tax liabilities and potentially being taxed at lower tax rates. Forgery and ID Theft: Tellers assisted big winners to fudge IRS documents upon payout of large amounts to aid winners in skirting gaming tax.

At the “middle management” level, there is evidence of “mini-dealers” and “bay supervisors” (overseers of tellers and mini-dealers in each “bay” of ticket windows) practicing these tactics under the same dearth of protocol and record keeping, on top of colluding with tellers in their illicit activity. Within their reaches were also scams relating to unclaimed tickets as well as intimidating temporary employees to take responsibility for shortages. The lack of oversight of cash handlers meant that despite feeble attempts at regulation, no one knew how much NYRA had in its coffers at any time, as late as 2005.

Outside the betting area, parking attendants and security guards were equally corrupt. Attendants would have entrants drive around parking treadles to short the daily lot counts while pocketing the fees. Undercover visitors also found that attendants assessed an arbitrary parking fee; some cars were “twenty dollar cars,” others were charged less. Security personnel were responsible for thwarting smoking, drugs, fighting, stealing, prostitution and so forth. Yet, when interviewed, it was clear none had adequate training or experience in these areas: Few could define “laundering;” many smoked, drank and bet during their shifts; and if substances were confiscated, rarely did paperwork exist to document the incident. To add malice to mayhem, these same security guards and internal “investigators” were issued guns, but were never taught how or when to use them.

imageFraud at NYRA was in equilibrium with status: Ascending with hierarchy was the ascension of fiscal crime and the bravado with which it was committed. While President of NYRA, Terrance Meyocks charged $140,000 per year on the corporate card, plus took tens of thousands of dollars as “tips” from 1999-2002. His largess in the period also included thousand-dollar dinners, golf outings for his wife, lavish gifts for associates… all of which he expensed (without receipts or documentation) and in addition to a generous salary. When asked about his misconduct he waved it off, “Social life and racing life are two sides of the same coin. I am 24/7 on racing.”

As for NYRA, the corporation, it failed to file or pay most taxes, leases and operating fees (to the state) associated with its business since the early 1990s. Also, there was a wealth of questionable capital expenditures relative to the procurement process (jobs were not put out to bid, vendors were contracted for unnecessary work, vendors won contracts on favoritism, vendors were paid for work before completion of a job, etc.,). Since this period, the State Comptroller’s office has identified millions of dollars spent on a bevy of unnecessary, extravagant or unsupported expenses, as well as incorrect accounting practices—all leading to improper calculations of the franchise fee. As late as 2003, NYRA failed to file IRS Form 8300, which is punishable up to $500,000 and/or up to five years in prison per incident.

The only thing more mystifying than this litany of decay is that NYRA is allowed to throw its hat back into the ring at all. Especially when considering Spitzer himself identified “this culture of criminality within a government chartered non-profit raised questions of corporate accountability and transparency” in the 2003 “NYRA Misconduct Examination.” Indeed, what starts as a dark, sexy, made-for-cable situational series quickly sobers into a hollow, seedy, valley of social degradation.

Since 1999, $3 billion per year has been wagered on New York’s thoroughbred races (from all sources on and off the tracks), yet NYRA shows little transparency and has successfully maintained resistance to close oversight from outside agencies. This is not to say no one is watching. The Racing and Wagering Board (R&W) and the NY Thoroughbred Capital Investment Fund (CIF) are the agencies responsible for the oversight of any franchise holder (both are funded through proceeds derived at the racetracks, the extent of which has been negligible). State Racing Law grants R&W the ability to cancel and revoke a franchisee’s license any time it behaves illegitimately. In the event a franchisee is terminated, all rights transfer to CIF (including title to the racetracks), allowing CIF to contract with a private racing association until a suitable franchisee replacement is appointed. Nevertheless, NYRA has long been able to lurk in R&W and CIF blind spots due to their respective fiscal weaknesses—another chicken and egg conundrum. Arguably, their inability to execute authority over NYRA is tantamount to having committed the myriad of felonies themselves. Nonetheless, little mention is made regarding the restructuring or re-empowering of either of the two.

The franchise terms coming available on January 1, 2008 are for both the racing and the pari-mutuel wagering at Saratoga, Aqueduct and Belmont; for a twenty-year period, with no requirement for a payment to the state, though Governor Spitzer has indicated a twenty-year term may be too long. Proposals turned in by the four consortiums vying for future control of New York’s thoroughbred racetracks—Empire, Excelsior, Capital Play and NYRA—share many similarities. It is the nuances that differentiate them although, given the precarious nature of the review process, key players both on the bidder and the state’s side are postured under cloak and dagger, making a public dialogue abashedly impossible.

There are four main pillars that will buttress future operations at the thoroughbred racetracks, which have long stood as houses of cards. The biggest factor is the addition of Video Lottery Terminals (VLTs) at the tracks. NYRA contracted MGM Mirage to partner in launching and managing VLTs at Aqueduct in 2001. However, Nevada State Gaming regulations prohibit casino operators from colluding with felons (NYRA was indicted in 2003), stalling MGM from mounting the “racino” (an area housing VLTs). The state has so far approved installation of 4,500 VLTs at Aqueduct, projecting additional revenue of $650 million per year, but lawmakers have yet to authorize the added activity at Belmont.

imageSimulcasting New York’s thoroughbred racing to OTBs inside and outside the state is a locomotive for revenue and marketing that can heighten tourism at the tracks. Every indication exists that betting on NY thoroughbred racing at out-of-state facilities is increasing. In the past, nearly half of NYRA’s gross handle derived from out-of-state betting. Yet the details of these agreements between NYRA and the facilities remain unavailable for review; out-of-state revenue generated through these deals is not subject to pari-mutuel tax by New York State. At the same time, as out-of-state handles increase, in-state handles are decreasing, creating another wormhole of lost revenue for the state.

Theories abound regarding how renovations should be handled at Aqueduct and Belmont, though most agree Saratoga is a perfect Grand Dame of the race world and only minor updates are required there. Empire would create Aqueduct as a full-scale racing and entertainment district to accommodate tourism and convention business with concerts, retail and outlet shopping, hospitality and a wealth of amenities. To capture the high rollers, their proposal includes luxurious glass suites at Belmont. Endemic to Empire’s core anchoring in the equine community, their proposal calls for millions to be spent on the backstretch areas at all tracks (where grooms’ quarters are kept). There is speculation Excelsior will shift the focus of the parks toward gaming and make racing a “stepchild” in its own home. But Excelsior’s leader Steve Wynn says he is pursuing a “magical” place at Belmont. Similar to plans for Aqueduct, the park would feature retail shops, hotels and entertainment facilities. “Racing by itself has not resonated with human beings. It is a dying industry,” Wynn said and pointed to Excelsior’s partner, celebrated jockey Jerry Bailey, as the person charged with revitalizing racing. Capital Play plans to tie development of retail and commercial areas, food courts, hotel complexes and multi-entertainment venues at the racetracks (nightclubs, live theater, concert areas, restaurants and cinemas) to aggressive marketing partnerships with OTBs and other cooperative ventures. NYRA’s proposal shows no efforts to overhaul the properties beyond offering a facelift to the facilities. To boot, NYRA’s proposal limits facility improvements to painting, landscaping, barn repairs, enhanced lighting and safety rails, though most fall into a “non-guaranteed” schedule. Indeed, even at dilapidated Aqueduct, NYRA’s strategy is to sell off ancillary properties it currently holds, which are in close proximity to the park, and use any capital gained toward the projected repairs.

In this high stakes cat and mouse game, NYRA maintains an inimical countenance. There is scant evidence NYRA is assuming responsibility for its fiscal aberrations of the past. It has diverted funds from the state, the IRS and numerous public-funding groups like the Thoroughbred Breeding and Development Fund and the Horsemen’s Fund, in excess of hundreds of millions of dollars. Since last year alone, the state has issued $40 million to NYRA in bailout money in response to NYRA’s threat of claiming bankruptcy and shutting the circuits down. Nevertheless, federally indicted NYRA is in bankruptcy court and is also suing the state, claiming it owns the land under the racetracks and therefore cannot constitutionally lose the franchise. NYRA is the only non-profit vying for control of the franchises.

Excelsior Racing is the net result of a tumultuous turn of events surrounding a motley crew of characters. Casino superstar Steve Wynn is leading the group, taking the place of Steve Swindal, soon to be ex-son-in-law of Yankees owner George Steinbrenner, who had to remove himself from the race when his wife (Steinbrenner’s daughter) filed for divorce. Neither the Yankees nor the Steinbrenners are vested in the pursuit. But listed on the roster are: Richard Fields, an American Indian casino developer and Donald Trump protégé who launched the Hard Rock casino; Bill Mulrow, reportedly a close friend of Spitzer’s who was on the short list to replace former Comptroller Hevesi; former Congressman Rev. Floyd Flake; and Jerry Bailey, the celebrated jockey, who was installed to lend the group racing credentials. Running relay for the group’s PR efforts is Howard Wolfson, a top advisor to Hillary Clinton. Tishman Speyer Properties (part owner of Rockefeller Center and other NYC properties) was an original partner in the group, but backed out this spring. The group is also rich with a team of politically juiced lobbyists. Excelsior plans to run the tracks as non-profits (to continue capital investments into the facilities and tracks) and the VLTs for profit. The scenario is prompting many top thoroughbred owners to promise to leave New York racing should Excelsior win the bid.

Traditionally a group of breeders, trainers, horse owners and racing-related professionals, The New York Thoroughbred Horsemen’s Association (NYTHA) has expanded its reach by founding Empire Racing. Partners include racing operators Churchill Downs (operators of Kentucky and New Orleans race grounds) and Magna Entertainment (a Canadian group that also handles parks in California, Florida and Maryland), concessions and sports arena operator Delaware North, SL Green Realty, Merrill Lynch, Woodbine Entertainment (operators of Canadian casino and tracks), an upstate socialite and Scientific Games (wagering and ticketing services). Delaware North, based in NY, also owns and operates VLTs at both Finger Lakes and Saratoga; it operates the racing at Finger Lakes. Former Governor Hugh Carey joined the group to focus especially on the backstretch, purses and ancillary components of the racing experience. Empire has retained an outside squad of lobbyists specializing in government relations. The group is headed up by Jeff Perlee, who has been recruiting members for Empire that already exhibit racing and gambling business interests. Given the 6,000+ souls represented by Empire, it is a kitchen crowding over with cooks. If Empire won the New York thoroughbred franchises, the group, through its owners, would control the Triple Crown (Kentucky Derby at Chuchill Downs, Preakness at Magna and Belmont). The group means to create an “equine empire zone” with the intention of connecting the equine industry of Saratoga with SUNY, Cornell University, a West Point breeder and the Farm Bureau, claiming the network will enhance economic development and create jobs.

Seemingly the farthest from winning the bid is Capital Play, an Australian gaming company with the ability to materialize generous bids, though it seems incapable of staying in the race, despite more than adequate funding and acumen. Global Betting Gateway, an offshoot of Capital Play, is the wagering system it uses internationally and will serve as the model to be implemented in New York. Early on, when bids called for proposals responding to six possible scenarios, the proposal Capital put forward only addressed one. This past November, the group was disqualified for omitting a $1 million litigation bond with its bid. When Spitzer reignited the call for bids this Spring, Capital got back into the race. This time the group offered a proposal addressing several scenarios, all which individually showed values competitive to the proposals entered by Empire and Excelsior.

In Spring of 2006, Governor Pataki appointed an ad hoc committee to solicit bids on the franchises. Proposals received were measured on a one hundred point grading system. In Fall 2006, Pataki named Excelsior at the lead with 94.6 points, Empire just a step behind at 93 and NYRA at 76.5 points. When Elliot Spitzer migrated from the Attorney General’s office in Manhattan to the Governor’s mansion in Albany, he initiated a new panel to ingeminate the bidding process in which both the bidders and their proposals would be scrutinized. This month, the Senate and Assembly are scheduled to meet with the Governor for a final determination of who will win the franchise. Most legislators in Albany have voiced exasperation with NYRA and, Joseph Bruno, Republican majority leader in the State Senate, has made statements suggestive of the state considering NYRA’s successor à la carte from all bidders, saying separately, “This thing has been a cash drain, while tracks in other states are cash cows.”

Theoretically, by the close of this year a new franchise holder will be named and integrity, fairness and world class racing will be restored to New York’s lauded racing heritage. Or not. Meyocks’ sentiment that leakage, even at the teller level, is part and parcel to horseracing is hardly unique. “Rail birds,” who used to flock at the state’s thoroughbred parks to bid on the races, are steadily becoming extinct as competing, seemingly more “fair,” wagering outfits distract their interests. Likewise, the decline of the facilities (except Saratoga) has caused “a day at the races” to become a questionable family outing.

Over the last few years, NYRA has made considerable changes to all levels of personnel—from the Board to the tellers—and overhauled many of the fallible protocol that led to the earlier disarray. Pundits holding a grudge against NYRA may side with a statement made last fall by the Pataki administration’s racing committee spokesman Scott Reif when he said, “The state did everything possible to assist NYRA in overcoming their ongoing fiscal challenges, including providing them with nearly $300 million in grants, loans, subsidies and access to private sector capital. In the end, NYRA refused to help itself.”

At the time of this printing, NYRA launched its Internet based cash-back account wagering program. President and CEO Charles Hayward said in a statement, “The official release of [the NYRA Rewards Program]…is a tremendous victory for the State of New York…Wagers placed through NYRA Rewards generate the highest financial return to NYRA, to purses, to breeder awards, and to the State.”

By adding racinos, a reward program, internet betting and stringent security barns to thwart pre-race doping of the horses (the last instituted by NYRA several years ago to impart a sense of integrity in the races), the stakes of holding the Saratoga, Aqueduct and Belmont franchises are radically increased. Regardless of which party wins them this month, the onus remains at the state level to prevent management from falling into the missteps of the past.

Unlike New Jersey and Nevada, which have governing bodies to specifically oversee gaming in their states, New York only has the Racing and Wagering Board (R&W), which is funded by the state through proceeds derived from the races. Whereas NJ and NV boast gaming regulations that make it more difficult to work in gaming sectors than to be nominated for Governor, the consensus in and around NY racing is that the structure of R&W is at best unclear in its membership, mission and protocol. When established in 1973, the board was given “general jurisdiction over all horse racing activities and all pari-mutuel betting activities, both on-track and off-track, in the state and over the corporations, associations, and persons engaged therein.” However, little governance was established to oversee its methodology or to provide support in its endeavors. In the event R&W revokes a franchisee’s license, the Thoroughbred Racing Capital Investment Fund (CIF), which was established by the State Racing, Pari-Mutuel Wagering and Breeding Law (Racing Law), is authorized to operate the tracks, or contract a private company, until a franchisee is installed by the state. CIF is funded through a dividend of proceeds derived from NYS thoroughbred racing, which, due to NYRA operating at an on-going loss, makes CIF fiscally inept to manage the tracks without disruption of racing operations.

Unassailably, reconstruction of the state’s racing model, and the governance of it, is critical for the advancement of thoroughbred horseracing in NY. Time required to fashioning NY’s racing governance after NJ’s or NV’s could stalemate progress to the point of making racing altogether ineffectual in this state. Reform is long overdue, but as to how and when (and if) it will be forthcoming either incrementally or otherwise, Governor Spitzer has been keeping his cards close to his chest. Regardless of who finally wins the bid on the Saratoga, Aqueduct and Belmont franchises, the best bet would be a state initiated trifecta: Reform, regulation and accountability.

nada marjanovich

nada marjanovich

Nada Marjanovich is Publisher and Editor of Long Island Pulse Magazine. Prior to founding the title in 2005, she worked extensively in the internet. She's been writing since childhood and has been published for both fiction and poetry.