08/15/2003 11:00PM

Debate over tote security: How much and who will pay?

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SARATOGA SPRINGS, N.Y. - The National Thoroughbred Racing Association, the sport's marketing arm, will recommend on Sunday that a permanent organization be created to ensure the security of the country's electronic wagering network, which last year handled more than $15 billion but was seriously breached in the Breeders' Cup pick six scandal.

The recommendation, which will be formally announced here on Sunday morning at The Jockey Club Round Table Conference, is unanimously endorsed by the NTRA's board, according to two board members. The board is composed of representatives of racetracks, horsemen's groups, and industry organizations, including The Jockey Club.

Though the recommendation will not offer details about who should be responsible for creating the security organization, NTRA board members said the plan will strongly suggest that the NTRA is in an ideal position to take on the task, perhaps with technological help from The Jockey Club, the longstanding industry group whose role has expanded over the last 10 years into data processing and the development of new technologies for racetracks and breeders.

The proposal will be one of a number of security recommendations that will be announced at the Round Table, following an eight-month industry-wide inquiry to search for holes in the betting network. The industry launched the effort after three former fraternity brothers - including an employee of Autotote, one of the companies that processes wagers - was able to rig several pick four and pick six wagers last year, including the lone winning Breeders' Cup pick six ticket that would have paid out more than $3 million. The three were eventually caught and sentenced to prison terms ranging from one to three years.

The NTRA, along with The Jockey Club, hired Giuliani Partners, a consulting company set up by former New York City mayor Rudolph Giuliani, and another consulting company, Ernst and Young, to conduct audits of the wagering system and issue recommendations.

The NTRA set up three working groups to conduct separate analyses, and the recommendations made on Sunday will be a consolidation of reports submitted by the various organizations. Giuliani will deliver the keynote address at the conference.

The basic idea of the security organization, racing officials who have participated in the working groups said, will be to create an independent group that will set minimum security standards for the wagering network and ensure compliance by racetracks, wagering outlets, and tote companies through ongoing audits and fines. At the same time, state regulators will be pressed to adopt a model rule based on the minimum standards. The model rule would be used to prevent wagering outlets that do not meet the requirements from betting on races in the state, the officials said.

Beyond the political conflicts over who will control the new security group, it faces several hurdles, officials said. Before the group can develop the technology to monitor the wagering network, the industry's three major totalizator companies would need to make significant improvements to their systems, an expensive undertaking. Racing officials also worry that the new group would have no actual enforcement power and that one noncompliant wagering outlet - the proverbial weak security link - could compromise the entire system. Racing officials have already said that the most significant hurdle will be the cooperation and commitment from the tote companies, which have been operating on thin economic margins for the past decade. The NTRA does not now have an estimate for how much the upgrades of the totalizator systems will cost, and the NTRA has had only minimal discussions regarding who will pay for the work.

The three totalizator companies - AmTote, Autotote, and United Tote - process nearly all of the racing industry's North American wagers. The companies, which contract with individual racetracks, derive the vast majority of their revenues from a small percentage of handle on each bet, typically one-quarter to one-half of one percent. Autotote is the largest of the three, with two-thirds of the market.

Totalizator companies have always had an uneasy alliance with the racing industry. Critics of the companies claim they have failed to invest enough money in research and development, and those critics were bolstered several years ago when a report commissioned by The Jockey Club criticized the companies for having antiquated technology. But tote companies are generally supported by racetracks, principally because the tracks believe that competition among the three companies keeps costs down. John Corckran, the president of AmTote, said that his company has cooperated fully with Giuliani Partners, Ernst and Young, and the task forces. He said the company supports the idea of a national security organization, but he also raised concerns about the encroachment of the office on the tote company's existing security controls and the cost of complying with the recommendations."

There are some solutions that may sound efficient and fine in a vacuum, but when you take a look at the costs and everything else, it may not be something that can be done,"Corckran said. "Cost is always an issue."

Several people involved in the working groups said that the tote companies had registered objections to the idea of complying with the minimum security standards during the development of the recommendations. The objections were based on the belief that the tote companies themselves are better qualified to set minimum standards, the officials said.

John Walzak, the chief operating officer of the Ontario Harness Horsemen's Association and a member of one of the task forces, said that he believes the totalizator companies will ultimately comply with the recommendations. He also said the racing industry bears some of the responsibility for the ineffectiveness of the software because of its reluctance to pay the companies higher fees."I would say that the chances of the tote companies complying with the recommendations are 100 percent," Walzak said. "If they don't, they aren't competitive anymore. They would lose their competitive positions. That's the reality of it right now."

Other members of the working groups were more critical of the tote companies. One member said the tote companies are "in a state of denial" about the sophistication of the technology underlying their systems, pointing out that some tote companies are using 9,600-baud modems to transmit data, a transmission rate that is ancient in the age of high-speed Internet access. The member said the companies had still not admitted that their systems were vulnerable and had resisted some changes.

The tote companies also fear that the creation of the security arm will allow the racing industry to mimic the operation of a totalizator system, which, several years down the line, could lead the industry into the idea of creating its own wagering network. The Jockey Club was a strong proponent of an industry-owned wagering network after the release of its report critical of tote technology, and the NTRA considered the idea before dropping it under pressure from tracks.

Alan Foreman, the chairman of the National Thoroughbred Horsemen's Association and a board member of the NTRA, said that the consideration of an industry-owned tote company would be "inevitable" if the security organization was successful. "It's too early to say that we can do that, because we're not there yet," Foreman said. "But we're looking at it."

According to some officials, the NTRA is concerned that the racing industry will have to pull together and possibly block some wagering outlets from commingled pools if the outlets do not comply with minimum security standards - a concern that is illustrated by the circumstances of the Breeders' Cup pick six scandal. The totalizator-company employee who masterminded the Breeders' Cup fraud, Chris Harn, placed the manipulated wagers through a telephone account at Catskill Off-Track Betting Company because he knew that the OTB company did not use a recordingsystem to monitor how touch-tone wagers were placed. The vast majority of wagering outlets with similar account-wagering operations used the recording system at the time.

Racetracks have been reluctant in the past to shut off wagering outlets, especially if the outlets have customers who are heavy players. For example, many racetracks officials who are critical of the controversial practice of rebating nevertheless sell their signals to rebate shops because the handle from the players provides a substantial source of revenue.

To eliminate the possibility that a weak link is let into the system by a track desperate for revenue, the NTRA is hoping that state regulators support the recommendations and approve rules on minimum-security requirements. If that is the case, a state racing commission could refuse to approve an out-of-state simulcast site that does not comply with minimum requirements.

An NTRA board member said this week that representatives from the three largest racing companies - Churchill Downs, Magna Entertainment, and the New York Racing Association - have already agreed to restrict their simulcast networks to sites that comply with minimum-security requirements. Representatives from those tracks declined to discuss the recommendations last week, deferring to the NTRA's Sunday announcement.

Officials of The Jockey Club also declined to discuss the recommendations, but most industry officials said that The Jockey Club would be the best candidate to design the system to monitor the totalizator network. Alan Marzelli, the chairman of The Jockey Club, would not comment specifically on the NTRA's recommendations, nor would he comment specifically on the development of an industry totalizator company. But Marzelli said that The Jockey Club is viewing security effort as an "opportunity for the entire racing industry." "It's evident to anyone who has watched the process that we've had a lot of cooperation from a lot of quarters of the industry, and that we've already had a lot of opportunity to make things better," Marzelli said. "But as you'll see Sunday, there's a lot more to do. And I think you'll see that we have $15 billion reasons to attain what is going to be recommended."