Updated on 05/15/2012 11:54PM

State withholds NYRA casino payments and threatens racing franchise

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Citing a "continued failure to act in the best interest of racing" by the New York Racing Association, state racing regulators said Tuesday that they had instructed the state lottery to immediately suspend payments NYRA receives from a casino at Aqueduct racetrack and that they were exploring the revocation of NYRA's racing franchise.

"We take none of these choices lightly, but unless NYRA immediately starts to act in the best interests of racing and the taxpayers of this state, we will pursue a course of action to re-establish the racing franchise with a qualified, ethical, and responsible steward of horse racing," concluded a letter sent  Tuesday to NYRA's chairman, Steven Duncker, that was signed by John Sabini, the chairman of the New York State Racing and Wagering Board, and Robert Megna, the chairman of a NYRA oversight panel.

:: Read the letter here.

Sabini is a former New York legislator, and Megna is the budget director for Gov. Andrew Cuomo, who has been the association's most high-profile critic over the past several months.

The letter is both a blow to NYRA's short-term finances and a serious threat to the association's long-term prospects of operating New York's three largest racetracks - Aqueduct, Belmont, and Saratoga. NYRA has received approximately $22 million in payments from the casino since it opened late last October, but since then, the association has come under fire for injuries suffered by horses at Aqueduct and because of an investigation into an incorrect takeout rate that NYRA applied to trifecta and superfecta bets over a 15-month period in 2010 and 2011. NYRA officials said they inadvertently applied a 26 percent takeout rate to those bets instead of a 25 percent rate, but a recent state report suggested that NYRA officials were aware they had been charging the wrong rate.

Also, in a strongly worded opening, the letter criticized decisions announced on Monday by the NYRA board to appoint Ellen McClain, the association's chief operating officier, as president and Kenneth V. Handal as secretary. The letter called the appointments inappropriate due to the ongoing investigation of the takeout matter. McClain was NYRA's chief financial officer at the time the takeout was incorrect.

“We believe these actions are entirely inappropriate, violate regulatory standards and NYRA’s own by-laws, and neither the Racing and Wagering Board nor the Franchise Oversight Board recognize the validity of these appointments,” the letter says.

In a statement, NYRA said it would respond to the letter after a review.

It was not believed the casino payments received by horsemen and breeders - approximately equal to the amount that NYRA receives - would be affected by the order. A spokesman for the racing and wagering board, Lee Park, declined to comment further about the letter and said: "The letter speaks for itself."

The letter said that NYRA's casino subsidies would be directed to a "dedicated account designated by Lottery," the state agency that administers slot machines at the state's nine racetrack-casinos. The letter did not provide for how or when the order could be lifted, but a previous section of the letter indicated that the board had recommended the actions until a full investigation of the takeout matter could be completed by the state's Inspector General.

Regarding that investigation, the letter said that NYRA has "continued its failure to produce documents" in the takeout matter that are relevant to the Inspector General's probe, "resulting in the issuance of subpoenas" to NYRA.

"This continuing failure to cooperate not only casts doubt upon NYRA's good faith, but it also demonstrates a basic lack of moral character and fitness to fulfill its obligations" under a franchise agreement NYRA reached with the state in 2008.

Under that agreement, NYRA was required to comply with a litany of standards in order to maintain the 30-year franchise, including exercising fiscal prudence and providing a safe working environment for horses and racetrack personnel. The letter cites "an unprecedented series of breakdowns," a reference to 21 catastrophic injuries at Aqueduct's inner-track meeting last winter, and contends that "NYRA has been unable to meet its prescribed performance standards for jockey and equine safety." The letter also contends that the association has failed "to provide basic living conditions to the backstretch workers who reside in its dormitories at Saratoga."

The franchise agreement was reached after NYRA emerged from bankruptcy in 2008 in a reorganization that transferred the deeds to its three tracks to the state. The agreement provided for the creation of the Franchise Oversight Board, which has the power to recommend that the state legislature revoke the association's franchise. Revocation of the franchise, however, would be difficult if the state did not have specific grounds for the action, and the letter appears to be outlining legal arguments that the state would use in the event of a recommendation.

The letter was sent 11 days after NYRA's board fired Charles Hayward, the association's chief executive, and Patrick Kehoe, its general counsel, following the release of an interim report by into the takeout matter by the racing and wagering board. Hayward, in a letter sent to NYRA's board and in a subsequent public statement, has said that he was not aware that the association was in violation of the law. He has said a full investigation would exonerate him.

The casino at Aqueduct opened on Oct. 30, 2011, 10 years after a law legalizing a casino at Aqueduct was approved by the legislature. It 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 Javits Center in Manhattan, which sits on valuable real estate. Under the plan, which would need legislative approval, Genting would pay $4 billion to build the convention center, but it was unclear if racing was envisioned to continue at Aqueduct.

Under the existing statute, the state's education fund receives 44 percent of the net revenue from the Aqueduct casino during the first year of operation. Genting receives 23.5 percent plus an 8 percent "marketing allowance," and the lottery receives 10 percent. Purses receive 6.5 percent, and the state's breeding fund receives 1 percent. NYRA receives 3 percent for operating funds, and another 4 percent to be used solely for capital expenditures.