Updated on 05/16/2012 5:05PM

Letter indicates state may seek to revoke NYRA franchise

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A letter sent Tuesday by the heads of the two regulatory agencies overseeing the New York Racing Association is likely the opening salvo of what is expected to be a bruising legal and political battle over control of NYRA’s three tracks and the payments the association receives from a casino at Aqueduct.

The letter stated that the two agencies, the New York State Racing and Wagering Board and the Franchise Oversight Board, “will pursue a course of action” to name another operator for the three tracks “unless NYRA immediately starts to act in the best interests of racing and the taxpayers of this state.” In addition, the letter stated that the state’s Lottery Division had been notified to immediately redirect NYRA’s 7 percent share of the net revenues from the Aqueduct casino to a segregated fund.

The letter satisfies a provision in an agreement between NYRA and the state that the two regulatory boards could recommend a revocation of NYRA’s racing franchise only after the association had been notified of “a material breach of the performance standards” in the agreement. NYRA reached the agreement in 2008, shortly after emerging from a bankruptcy reorganization, and the agreement required the association to give up the deeds to Aqueduct, Belmont Park, and Saratoga, the three tracks it operates.

The agreement gave NYRA the franchise to operate the tracks for 25 years, but it required the association to comply with a litany of requirements and submit to additional regulation by the Franchise Oversight Board, which is headed by Robert Megna, Gov. Andrew Cuomo’s budget chief.

Critics of NYRA, which include Cuomo, have said that the association has been mismanaged, and over the past six months, the critics have seized on a series of breakdowns at Aqueduct’s inner-track meet and an investigation into an incorrect takeout rate that NYRA applied to many of its superexotic bets over a 15-month period in 2010 and 2011. NYRA officials have said that they inadvertently applied the wrong rate – an error that neither the racing and wagering board nor the oversight board caught. Nevertheless, a recent report prepared by the racing and wagering board suggested that NYRA officials were aware that they had been charging the wrong rate.

The letter, which appeared on Cuomo’s letterhead, outlined three areas in which the boards contend that NYRA has violated the franchise agreement. It alleged that NYRA was not cooperating fully with an investigation by the state Inspector General into the takeout matter. It cited the breakdowns at Aqueduct as evidence that NYRA has been unable to meet performance standards for jockey and equine safety. Third, it said that NYRA has failed “to provide basic living conditions to the backstretch workers” at Saratoga.

Also, the letter criticized the decisions announced Monday by the NYRA board to appoint Ellen McClain, the association’s chief operating officer, as president and Kenneth V. Handal, the association’s new general counsel and ethics officer, as secretary. The letter called the appointments inappropriate due to the ongoing takeout investigation and a violation of NYRA’s own bylaws. McClain was the chief financial officer at the time the takeout was incorrect.

A source familiar with the letter said that the reference to the violation of the bylaws was in regards to a provision stating that vacancies in the president, vice president, and secretary positions can only be filled with a new appointee “for the unexpired term of the vacant office,” which, in this case, would be until the next meeting of the NYRA board. The person said that NYRA indicated to the board that the appointments were permanent.

A spokesman for the racing and wagering board, Lee Park, said that the board would not comment on the letter.

In a statement released late Wednesday, NYRA defended the appointments, saying that it “has a fiduciary obligation to exercise its business judgment to protect the best interests of racing and the income stream that parimutuel wagering provides to the state.” The statement also took issue with the contention that NYRA could not appoint officials that were employed by NYRA during the takeout incident, contending that “this reasoning would effectively paralyze the corporation based on innuendo.”

NYRA receives 3 percent of the revenue from the Aqueduct casino for operating funds and 4 percent of the revenue for capital expenditures. Since the casino opened Oct. 30, NYRA has received approximately $22 million in total payments.

Those payments are apparently on hold. The Lottery, which was directed to place the funds in a “dedicated account,” did not respond to phone calls Wednesday. The directive from the letter will not impact the share that purses and breeders receive from the casino, a state official confirmed late Tuesday.

Despite the horsemen’s share remaining intact, Jeffrey Cannizzo, executive director of the New York Thoroughbred Breeders, an advocacy organization for breeders in the state, said in a statement he released Wednesday that the diversion of NYRA’s share of the casino payments was “catastrophic.”

“The ability of NYRA, or any New York racetrack operator for that matter, to do business and execute the plans of a decade to revitalize racing is predicated on the contractually arranged [casino] revenue,” the statement said. “Without the [casino] revenue, neither NYRA nor any other operator will be in business. There will be no racing in New York.”

In contrast to portions of the letter pointing to its authority to revoke the franchise, the letter did not cite a section of racing law in which the state had the authority to suspend the casino payments, so it was unclear how the state arrived at that position. As a result, it’s likely that NYRA’s attorneys are exploring whether the state has the right to authorize the suspension of the payments, either under the franchise agreement or the state’s racing law.

The casino at Aqueduct is operated by Genting New York, part of a Malaysian conglomerate that is seeking table games at the casino and lobbying for additional casino licenses. The Aqueduct casino is the largest casino in the state, and Belmont is considered a leading site for an additional casino by companies that are seeking additional licenses.

Earlier this year, Cuomo said he supported the passage of a constitutional amendment allowing for Vegas-style casinos. He also acknowledged that he had been meeting with representatives from Genting on a plan to build a convention center on Aqueduct’s grounds, to replace the state-owned Javits Center in Manhattan, which sits on valuable real estate. Under the plan, which would also allow Genting to expand the Aqueduct casino under a new revenue agreement with the state giving the company a larger share of the proceeds, it was unclear if racing was envisioned to continue at Aqueduct.