Updated on 12/24/2011 3:07PM

NYRA overcharges bettors $8.6M, will lower takeouts to correct error

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The New York Racing Association said on Wednesday that it will lower its takeout on superexotic bets from 26 percent to 24 percent beginning on Dec. 28 to make up for an error that regulatory officials said could have cost bettors $8.6 million over the past 15 months.

The reduction will affect trifecta, superfecta, pick three, pick four, pick six, and Grand Slam wagers. NYRA received approval to lower the takeout on the bets on Wednesday from the New York State Racing and Wagering Board after the board passed a resolution requiring the association to take a series of steps to rectify the error, some of which could be extremely difficult to carry out.

NYRA and racing board officials pinned the error on a provision of complex, wide-ranging amendment to the state's racing law passed in 2008 that affected only NYRA's three tracks -- Aqueduct, Belmont, and Saratoga. Both sides said on Wednesday that they had no knowledge of the provision until alerted to it by auditors over the last few days.

"The racing board is certainly not saying that anything nefarious was done here," said a board spokesman, Lee Park, on Wednesday. "But ultimately NYRA is responsible for it."

At the enactment of the amendment, NYRA was immediately required to raise the takeout on all of its wagers by 1 percent, a measure that drew widespread criticism from price-sensitive bettors. The provision requiring the 1-percent bump, however, expired on Sept. 15, 2010, creating a situation in which NYRA was improperly calculating the superexotic takeout at a 26-percent rate, NYRA and racing officials acknowledged on Wednesday.

That's because an existing New York law that was superseded by the 2008 amendment sets the maximum legal takeout rate for tracks in New York at 25 percent. As a result, when the provision in the 2008 law expired, NYRA should have been required to re-set the superexotic rate to 25 percent, but it didn't.

The association said in a statement that it was reducing the takeout rates to 24 percent in order to make up for the error, which was caught only when the state comptroller began auditing the New York State Breeders' Fund last week, according to an official who spoke on the condition of anonymity.

Because NYRA had been advertising and calculating the superexotic takeout rate at 26 percent, the payouts for the bets were not deceptive or mathematically incorrect. But the payouts on superexotic bets would have been higher – to the total of $8.6 million in improperly calculated payouts – had the takeout rate been set properly at 25 percent.

In a statement, NYRA said that it had no knowledge of the sunset provision until they were alerted to it by the board earlier this week.

"This change was unintentionally overlooked due to the complexity of the takeout provisions in the racing law," NYRA said in the statement. NYRA officials declined to comment on Wednesday beyond the statement.

The error is likely to present political problems to NYRA just months after a lucrative casino at the association's Aqueduct racetrack opened. During the past decade, since casinos were legalized at nine New York racetracks, including Aqueduct, NYRA has come under indictment because of fraud by its mutuel tellers; agreed to the establishment of an independent monitor for its operations; filed for bankruptcy; and reorganized under the guidance of the state while exchanging the deeds to its three tracks for a 25-year racing franchise. Every misstep of the association in the past 10 years has been seized on by politicians as a justification for revoking NYRA's franchise to operate the tracks under state law.

During the Wednesday meeting, the racing board passed several resolutions requiring NYRA to make good on the error, but the steps adopted by the board illustrate how difficult it will be to make any fair restitution because of the unusual impacts created by the oversight.

For example, NYRA will be required to attempt to identify bettors who may have been affected by the error by examining the payouts made to customers of its account-wagering system since Sept. 15, 2010. But while those bettors may receive additional money, the policy will neglect the customers of out-of-state wagering operations who might also deserve higher payouts, along with the legions of ontrack customers who do not have records of their transactions.

NYRA will also be required to take steps to clear up tax issues that the error may now create for bettors, since the higher payouts under the 25 percent takeout rate may trigger automatic withholding provisions. Any effort that requires bettors to pay new taxes on bets that they have already cashed is likely to cause an enormous amount of push-back.

In addition, the error also had an impact at simulcasts sites across the nation, by delivering more revenue to out-of-state wagering facilities and account-wagering operations that took the NYRA signal. Out-of-state betting operations keep the difference between the takeout and the amount they pay for the signal, and in this case, they would have retained an additional 1 percent of the betting handle on all NYRA races since Sept. 15, 2010. NYRA and the board would probably have few legal means by which to reclaim that revenue if they attempted to do so.

And not even the racing board was aware of the error, since it signed off on documents throughout the past 15 months that described the superexotic rate at 26 percent. Under New York's laws, the board is required to review and approve NYRA's business plan every year, and the plan that was approved for 2012 listed the superexotic takeout rate at 26 percent rate. The board also approves NYRA's simulcast contracts, which list the takeout rates applied to all wagers.

Park acknowledged that auditors at the board were unaware of the error until earlier this week.

"This all happened very quickly," Park said.