02/14/2008 12:00AM

Youbet to shut down offshore rebate shop

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Youbet.com plans to stop taking bets at its offshore rebate shop International Racing Group beginning Friday and will close the business over the next several months, the company announced on Wednesday.

Located in Curacao, IRG has been beset with a variety of problems for the past nine months, most significantly an investigation of some of the company’s customers by the the U.S. Customs Enforcement and Immigration office in Las Vegas. Investigators from the agency seized records of IRG from Youbet’s California office in October, and later seized $1.5 million in funds held by IRG on behalf of its customers.

The investigation is ongoing.

In the wake of the seizure, betting at IRG declined significantly, and Youbet began laying off employees. In a filing with the Securities and Exchange Commission, Youbet said that the company would continue seeking the recovery of the seized funds, but that “the likelihood of recovering these funds is uncertain.”

Youbet purchased IRG in 2005 for $2 million in cash and a block of shares, in a deal that also promised the former owners of the company $9.7 million in payouts if the business hit certain financial targets. In the Wednesday filing, Youbet said it would take a $9.9 million charge to its earnings because of the closing. Youbet estimated that it would cost an additional $800,000 to pay for severance and other costs associated with the shutdown.

Youbet’s decision to purchase the rebate shop raised eyebrows in the racing industry. Although the company was one of the more popular rebate shops in North America, IRG had only months earlier been named in an indictment alleging that members of an organized crime family had used it and other offshore shops to run an illegal gambling business. IRG was never charged with a crime in that investigation.

IRG was one of a number of offshore betting locations that rose to prominence in the last decade by offering gamblers significant rebates on their handle. According to the company’s financial documents, the cash-back awards averaged 12 percent of handle during 2004.

In 2006, Youbet said that it had begun to allow gamblers to use computerized robotic wagering systems at IRG. The systems, which rely on rebates to turn a profit, generate a wide variety of bets through sophisticated algorithms and typically send those wagers into the bet-processing system seconds prior to a race going off.

Late in 2006, one of the computerized systems malfunctioned and sent in $40,000 worth of pick three bets into a pool at Calder Race Course. The bets were in a denomination of $31.74. After the glitch, Calder asked Youbet to prevent the robotic system from wagering into its pools until the malfunction could be fixed.

In 2004, prior to Youbet’s acquisition, IRG had $215 million in handle. Complete financial figures for 2005 are not available, but in 2006, the company took $299 million in bets. In 2007, IRG lost the signals from tracks owned by Churchill Downs Inc. and Magna Entertainment for most of the year, and its handle is expected to be sharply lower when the company releases its earnings later this year.

The problems associated with IRG had earlier taken a toll on the company when Chuck Champion, the chief executive of Youbet since 2002, resigned late in November, even as the investigation was ongoing. Champion had pushed for Youbet to make racing-related acquisitions, including the purchase of United Tote, a bet-processing company, late in 2005.