12/11/2003 12:00AM

NYRA fined $3M for fraud


NEW YORK - The New York Racing Association, two former directors of its parimutuel department, and four mutuel clerks were indicted on Thursday by the U.S. Attorney for the Eastern District of New York on a charge of conspiracy to commit tax fraud. In addition, NYRA was fined $3 million in a scandal that federal officials claim went on for approximately 20 years.

Under an agreement reached with the U.S Attorney's Office known as deferred prosecution, however, the association can avoid prosecution on this charge and maintain its franchise to operate Aqueduct, Belmont, and Saratoga. Furthermore, the association apparently may restart its video-lottery terminal project with its partners, MGM Mirage.

Vince Hogan, NYRA's director of mutuels from 1988-2002; Clem Imperato, the vice-president of mutuels from 1988-1996; and tellers James Boggiano, Barbara Fasone, Dennis King, and Gerald Pontrelli were each charged with one count of conspiracy to defraud the United States. If convicted, each individual faces a maximum sentence of five years in prison and a $250,000 fine.

Hogan was also charged with making illegal payments to a union official.

The indictments were unsealed at a news conference in Brooklyn on Wednesday during which Andrew Hruska, the acting chief assistant U.S. attorney, outlined the scheme that the racing association and its mutuel clerks used to defraud the government.

According to Hruska, mutuel clerks would take money from their cash boxes and report the differences to management as legitimate shortages, or discrepancies in their cash balance. The association would then deduct that amount from the teller's paycheck. The NYRA would provide the teller a certification document that the teller would send to the IRS claiming that money was an un-reimbursed business expense. When the clerk would fill out his tax return, he would report only what he was paid. According to Hruska, as much as $19 million in income went unreported from 1980 to 1999.

"The indictment charges that NYRA and its senior management knew of the bogus shorts and the benefits that scheme created for NYRA," Hruska said. "It participated in the scheme by helping its own employees to file fraudulent tax returns. In fact, it covered up the scheme when the State Racing and Wagering Board tried to investigate it.

"By their criminal involvement in the scheme, tellers got to cheat on their taxes with the assistance of their employer," Hruska said. "Through its own involvement NYRA got to provide a taxpayer-funded perk to its co-conspirator employees while ensuring labor peace. The U.S. Treasury and the American taxpayers got defrauded to the tune of millions of dollars of unreported income."

According to the indictment, when the NYRA finally cracked down on its mutuel department in 2000, the bogus shorts went down to $34,000.

"We have taken numerous significant remedial steps to make sure that something like this never happens again and to enhance all of our compliance and cash handling procedures," said Barry Schwartz, NYRA chairman.

The indictment alleges that NYRA management allowed this scheme to continue to assist in labor negotiations with the mutuel clerks' union. Specifically, the indictment details negotiations in 1995 between NYRA senior management and the mutuel union in which senior management - who are described only as John Does in the indictment - agreed not to include anything in the new contract "to stop the reporting of excessive, consistent and intentional shorts."

The indictment also charges that in 1999, NYRA disregarded an outside audit that found that mutuel clerks were continuously short by large amounts of money. Moreover, NYRA management issued a letter to the accounting firm that stated "sufficient controls exist to safeguard [NYRA's] assets."

While the indictment charges that $19 million went unreported during a 20-year period, it states that $8 million went unreported from 1994 through 1999.

During that time, Kenny Noe Jr. was the president and general manager of the association, while Terry Meyocks, who would succeed Noe in 1996 as president, was the vice president of racing. Meyocks served as president from 1996 till his resignation earlier this year.

When asked why the U.S. Attorney stopped short of indicting Noe and Meyocks, Hruska said, "We have gone where the facts have led us, we will continue where the facts lead us. The investigation is continuing, but I won't comment as to individuals."

The association must submit to a laundry list of stipulations over the next 18 months in order to avoid prosecution. In addition to paying the $3 million fine over the next three years, NYRA had to accept and acknowledge responsibility for its misdeeds. The agreement requires NYRA to agree to the appointment of an independent monitor by the Court to ensure the association's compliance with the agreement. That monitor will report to State Controller Alan Hevesi's office. Earlier this year, Hevesi unleashed a scathing report about NYRA's finances.

The agreement requires the NYRA to restructure its senior management, parimutuel, legal, security, internal audit, accounting, and human resource departments by March 2004. J. William Byrne has already been named new chief financial officer and Kenneth T. Cook director of security.

Schwartz confirmed that its controller, John Giombarrese, will be fired but retained as an independent consultant. Rich Giancola will be fired as head of the internal audit department. Also, the association had to eliminate the trustee emeritus position, which included 10 former board members, including Noe.

Schwartz said that NYRA would soon begin looking for a new COO. Since Meyocks resigned, his position has been filled by vice chairmen Peter Karches and Steven Duncker as part of a new Office of the Chairman.

Hruska defended the U.S. Attorney's decision to offer the racing association deferred prosecution.

"NYRA will be punished in every way you can punish a corporate entity short of dissolution," Hruska said. "At the same time the resolution has the greatest likelihood of preserving NYRA's ability to continue to make money for the state and the people of New York while purging itself of its criminal conduct. It is a tough, but fair resolution to which we will hold NYRA with no tolerance of deviation."