08/25/2014 10:41AM

Inspector general report cites 'missed opportunities' in NYRA takeout error


New York Racing Association officials, including its former chief executive and general counsel, “missed several opportunities” to discover that the association was charging a takeout rate in some superexotic pools that was in excess of the law for a 16-month period in 2010 and 2011, according to a long-delayed report issued by the inspector general of New York on Monday.

The report, which was ordered by state regulatory bodies in April 2012, after the release of an earlier report by the New York Racing and Wagering Board, states that the error was due to a “misreading of and inattention to the law” by NYRA officials, including chief executive officer Charles Hayward, general counsel Patrick Kehoe, and NYRA’s regulatory compliance officer, Pasquale Viscusi. Hayward and Kehoe were both fired by NYRA’s board in May 2012, shortly after the release of the racing and wagering board report, while Viscusi was “stripped of the responsibilities of ethics officer and regulatory compliance officer.”

The report by New York Inspector General Catherine Leahy Scott does not plow much new ground in the understanding of the takeout matter, which added to a groundswell of criticism of NYRA by state officials, especially Gov. Andrew Cuomo, and led to a state takeover of the NYRA board. Leahy Scott was appointed as inspector general by Cuomo in May, 2013.

Hayward, a former chief executive of Daily Racing Form, has insisted that NYRA officials “did not deliberately apply an incorrect takeout rate,” according to a statement issued by his lawyer at the time, and the report seems to corroborate that contention by stating that Hayward and Kehoe “were under the mistaken belief” that NYRA could keep the rate in the superexotic pools at 26 percent despite the sunset of a law in 2010 that had mandated the rate rise to that level.

However, the report also notes that a bettor alerted Hayward to the error in a forwarded email in August 2011, and that Hayward failed to notify the association’s legal department about the error. In his response to the bettor, Hayward explained that “NYRA could not request a reduction in the takeout rate at that time,” a release accompanying the report said.

Hayward “questionably testified” to the inspector general that he failed to read the letter in its entirety, the release said, missing the significance of the takeout rate being in excess of existing law.

“Regardless of the veracity of this representation, Hayward was, at best, careless in his reading of this e-mail,” the release states.

In a statement released by his lawyers on Monday, Hayward said that the report “confirms what I said two years ago – that the incorrect takeout rate was the result of simple human error, an unintentional oversight by many people.” Hayward, who was chief executive at NYRA for 7 1/2 years, filed a grievance against NYRA after he was fired contending that the association owed him the compensation under the remaining years of his employment contract, an action that was later settled between the two parties.

The sunset of the law in September 2010 restored the rate in the superexotic pools to 25 percent. In all, bettors received reduced payouts from the higher takeout level to an amount equal to $7.3 million, the report stated. NYRA officials lowered the takeout rate to 24 percent after the error was discovered, despite resistance from New York’s off-track betting companies, which retain the difference between the takeout and the amount they pay to various racing and state constituencies mandated by New York law.

The report also found fault with “other executive staff and operational divisions within NYRA and entities associated with NYRA [that] failed to appreciate the importance of the sunset,” including the New York State Racing and Wagering Board; the association’s former chief financial officer, Ellen McClain; NYRA’s internal and external auditors; the association simulcasting department; and the association’s board at the time.

“The Inspector General found that every level of internal control and audit at NYRA failed to identify the incorrectly charged takeout rate,” the report stated.

In 2012, Gov. Cuomo pushed for legislation that allowed the state to take over NYRA’s board, in the process giving the board the responsibility of hiring a new chief executive for the association. The report states that it has issued various recommendations to the board that would avert a similar problem in the future, including tightening internal controls to note the impacts of legislation and regular reviews of the association’s takeout rates. The new NYRA board “has agreed to and implemented these recommendations,” the report states.