State scraps Aqueduct casino deal

A deal to open a casino at Aqueduct is dead again.

New York Gov. David Paterson said in a statement issued Thursday that the state's lottery "has concluded that it cannot issue a gaming license to Aqueduct Entertainment Group," the sprawling partnership whose selection in late January by state government leaders to operate the casino sparked criticism and controversy. As a result, the process of selecting the operator is going to be reopened, Paterson said, a development that will almost certainly add further delays to a process that has been ongoing for nearly nine years.

"The Executive Branch advocates that the selection of the Aqueduct [slot-machine] franchisee be done pursuant to an expedited, transparent, apolitical, and publicly accountable procurement process," the statement said.

In a statement, AEG's attorney, Barry Berke, indicated that the group would sue the state if it was not given an opportunity to address the lottery's concerns.

"The state's decision to withdraw Aqueduct Entertainment Group's designation is both arbitrary and capricious," Berke said. "In the event that AEG is not given an opportunity to address the issues raised by the lottery, and the decision to reverse the prior selection of AEG as the successful bidder is not reconsidered, AEG intends to pursue all available remedies."

An official at the lottery who spoke on the condition of anonymity said that the lottery division did not want to issue AEG a license because the structure of its partnership underwent continual changes since the group submitted its bid last May, including several changes just prior to a deadline to submit background materials on the partners on Tuesday. The official would not name the individuals that the division believed were problematic to license.

"Throughout the process, they continued to make significant changes," the official said. "They continued to demonstrate a pattern of involving unqualified individuals and entities."

The scuttling of the deal is yet another blow to the New York Racing Association, which is counting on revenues from the casino to plug holes in its operating budget and subsidize purses for horsemen. NYRA officials have said that the association will run out of cash this summer because of delays in getting the casino up and running. The association included revenues from the casino in its 2010 budget.

Dan Silver, a NYRA spokesman, said the association would have no comment.

Rick Violette, president of the New York Thoroughbred Horsemen's Association, said the controversy surrounding the selection had made it unlikely that the casino would ever get off the ground with AEG as the operator. As a result, the latest development could be good news for the racing industry if the government quickly selects a new operator, Violette said.

"If we can move forward immediately to the second or third choice and get the ball moving, then this is a good day," Violette said. "Prolonging the agony solves no problems, and delays are literally killing our industry."

It was unclear Thursday how the state would proceed in order to select a new operator, but Assemblyman J. Gary Pretlow, chairman of the Assembly's Committee on Racing and Wagering, said the state should simply select its second choice among the five groups that had submitted bids for the project.

"The process was flawed from its inception, and I still think that," Pretlow said.

"We definitely shouldn't start all over. You're just going to get more of the same."

The casino at Aqueduct has been approved for 4,500 slot machines. Gambling analysts have estimated that the casino will be the most lucrative on the East Coast, generating $600 million in net revenue per year. The operator will receive 31 percent of those revenues, plus an 8 percent allotment to market the casino, and it will not be responsible for buying and maintaining the slot machines, an obligation that will be borne by the state lottery. Seven percent of the revenue is earmarked for NYRA and 6 1/2 percent for Thoroughbred purses.

This is the second time that a deal to operate the casino has been scuttled. In 2008, the state selected Delaware North to operate the casino, but the deal fell apart early in 2009 when Delaware North reneged on a promise to provide the state with a $370 million upfront licensing fee. The company blamed the collapse of the credit markets for its inability to come up with the money.

Casinos were authorized for nine racetracks in New York in 2001. Aqueduct is the only approved track without a casino, and is also the only location in which the selection of a casino operator was left to the state.

Aqueduct Entertainment Group was selected by Paterson, Assembly Speaker Sheldon Silver, and Senate Democratic Conference Leader John Sampson under a process approved by the state legislature several years ago reserving the choice to the state governor and the leaders of the state's two legislative bodies.

The selection of AEG immediately generated controversy because of the group's political connections, which included the Rev. Floyd Flake, the senior pastor of the Greater Allen A.M.E. Cathedral whose endorsement is considered valuable to politicians.

Paterson met with Flake three days after making the selection, inviting speculation that the selection included a quid pro quo that would lead to Flake endorsing Paterson's gubernatorial bid, which Paterson has since abandoned due to unrelated scandals affecting his office. Flake relinquished his 0.55 percent share in AEG this week. In addition, Jay Z, the hip-hop mogul, dropped out of the group Tuesday.

Following the Flake meeting, Silver called for the state's inspector general to investigate the selection process, and in response, Paterson released all of the documents that bidders had submitted to the state. The documents did not include any rankings or rationale for the decision to select the group.

The other bidders included a partnership of SL Green Realty and Hard Rock Casinos; Delaware North; a partnership of Peebles Development and MGM Grand; and Penn National Gaming Inc.