North Dakota bet firm rose, then quickly fell

In 1990, Racing Services Inc. barely registered on racing's radar screen. That year, the small North Dakota offtrack betting operator took in $28,000 in bets.

Fast-forward to 2002. Racing Services ended the year with total handle in excess of $220 million, a sizable chunk of the $15 billion national betting market, especially for an operator with only 10 sites in sparsely populated North Dakota.

That extraordinary run - which was made possible by the recruitment of a handful of heavy bettors who received rebates on their handle - came to an extraordinary end on Thursday when the state attorney general announced that the state was effectively taking over the company after it failed to pay $6.5 million in taxes and became the target of both state and federal investigations.

Susan Bala, the founder and sole stockholder of RSI, has been barred from the business she created, although she technically will still own the company. Wayne Drewes, a Fargo accountant, was appointed the state's receiver on Thursday, and he will be in charge of RSI for the "indefinite" future, according to the state attorney general, Wayne Stenehjem.

Racing Services's problems stem from the discovery earlier this year that the company had failed to report $98.5 million in handle to the state racing commission during a six-month period from late 2002 to early 2003. After the underreporting was discovered, state regulators launched an investigation. Shortly thereafter the U.S. attorney's office also launched a federal investigation, which is utilizing both the FBI and IRS.

Both Stenehjem and the U.S. attorney in charge of the federal investigation, Drew Wrigley, declined to answer any questions this week regarding the investigations, which are both ongoing. But several racing officials with knowledge of the investigation said that the probe was focusing on RSI's recent forays into the international wagering market.

In early 2001, RSI bought a Mexican company called Edensa that operates several OTB's near the U.S. border. The operations eventually began importing simulcast races from the United States and commingling the bets into U.S. pools.

According to one person with knowledge of the investigation, RSI began to recruit new players to wager from a site in Nuevo Laredo, Mexico, after buying Edensa. In 2002, a new group of the players was given a lucrative rebate that would have been impossible to grant in North Dakota, where tax rates are higher than in Mexico, the person said.

Investigators are now looking more closely at the Mexico operation to see if it is related to the underreported handle, officials said.

At the same time that RSI was building up its Mexico business, the company also began competing with a signal brokerage company, Stevenson and Associates, to sell simulcast signals to wagering sites in Central and South America and the Caribbean. The situation rapidly turned messy, and earlier this year, RSI filed a suit against Stevenson claiming that the company was violating antitrust laws. Stevenson's attorneys have denied the charges.

The scrutiny accompanying the investigations has already sent one of RSI's biggest players - an unidentified gambler who has already been audited by the state attorney general's office and who was the target of an earlier investigation by the Thoroughbred Racing and Protective Bureau - out of the state, according to Stenehjem. The gambler was said to have bet $160 million in 2002. Earlier this year, North Dakota legislators passed a controversial tax break to keep the bettor in the state.

Stenehjem said on Thursday that his office has been in contact with the bettor's California-based "business manager," and that the state hopes to bring the gambler back to RSI under the state-appointed receiver.

The departure of the big bettor may have been the final nail in the coffin for RSI. Stenehjem said on Thursday that the company "has quite serious financial problems," and without the bettor's handle over the past month, those problems were obviously exacerbated.

"We don't know if the money is there," Stenehjem said, referring to the company's unpaid tax bill. "We suspect it isn't."