Professional Documents
Culture Documents
COUNTY OF SCHENECDATY
~ against ~ AND
Respondents/Defendants.
Aqueduct Entertainment Company, LLC (AEC) and Richard Mays lodge this combined
Petition and Complaint––requesting declaratory and injunctive relief––to end the mounting and
irreparable injury they presently suffer as a result of the arbitrary, capricious, unauthorized, and
discriminatory actions taken against them by the New York State Division of Lottery (Lottery),
Governor David Paterson, Senate President Malcolm Smith, and Assembly Speaker Sheldon
Silver.
1. Under a procedure enacted by the New York State Legislature in 2007, the three
heads of New York State government, in January of this year, selected AEC from six competing
bidders to develop and operate a video lottery terminals facility at Aqueduct Racetrack in Queens
Borough. The contract award was unanimous and conditioned on AEC obtaining a video lottery
gaming license.
2. Nearly a year after the bidding process had commenced and AEC had been
selected, the Assembly Speaker changed the licensing rules. One change required all members
of AEC––even if they were passive investors who maintained negligible interests in the
company––to apply for a video lottery gaming license and submit highly detailed personal and
unilaterally imposed this condition and others solely on AEC, conjuring them out of thin air and
supplanting applicable video lottery gaming regulations. Indeed, the Speaker’s nonnegotiable
conditions were so far out of left field Lottery’s general counsel called them “arbitrary and
capricious.”
3. Then, as if singling out AEC for unauthorized licensing requirements was not
enough, the Speaker asked the Inspector General to investigate how he (the Speaker) came to
select AEC as the top bidder jointly with the Governor and Senate President. An investigation
ensued that relied entirely on media speculation and innuendo. Numerous subpoenas were
issued and news leaks were made to pressure the subpoena recipients. But absolutely no one
associated with AEC has been accused of any wrongdoing since they did nothing improper.
4. Nonetheless, Lottery got the hint from the Speaker’s less-than-subtle efforts to
derail AEC’s selection, and it summarily found the company “ineligible” for a video lottery
license. The agency claimed, which was true, that AEC had not submitted individual licensing
applications for former passive investors who no longer were part of the company and who, but
for the Speaker’s unauthorized condition, were not required by law to be licensed. That
“failure,” Lottery claimed, created an appearance that AEC was “concealing” something because
two unrelated investigations––one the Speaker instigated and one conducted by the U.S.
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those agencies (or anyone else) of what AEC allegedly was hiding or from whom AEC was
hiding it. In the end, Lottery never gave AEC an opportunity to address the media’s gossip
procedure not provided for in the 2007 video lottery gaming legislation––unilaterally “withdrew”
his support for AEC’s bid. Apparently, although it is by no means clear, since AEC’s selection
was no longer unanimous, the Governor took the Aqueduct contract from AEC and rebid it on
6. Neither Lottery nor the Governor provided AEC adequate notice of important
deadlines in the licensing process, made decisions free of bias and conflict, or afforded AEC an
opportunity to be heard on Lottery’s denial of its license application or the Governor’s single-
handed rescission of the Aqueduct contract. The irreparable injury AEC has suffered from
Respondents’ unlawful actions will be magnified exponentially when a new top bidder is
selected on August 3, 2010. Interestingly, the unauthorized licensing conditions the Speaker
specially imposed on AEC have been abandoned in the new bid process.
AEC (Count I), failing to follow administrative procedures (Count II), due process violations
(Count III), equal protection violations (Count IV), freedom of association violations (Count V),
and breaches of good-faith and fair dealing (Count VI). In support of this combined Petition and
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PARTIES
Entertainment Group, LLC. It is a limited liability company formed, headquartered, and doing
business in New York. AEC’s membership includes natural persons and business entities.
9. Former Arkansas Supreme Court Justice Richard Mays is a member of AEC and
business in New York. He sues in his official capacity as AEC’s Chairman and in his personal
10. The Honorable David Patterson is Governor of the State of New York. He is
11. The Honorable Malcolm Smith is a New York State Senator and serves as
12. The Honorable John Sampson is a New York State Senator and serves as
13. The Honorable Sheldon Silver is a New York State Assemblyman and serves as
14. The New York State Division of Lottery is part of the New York State
government. Among other things, Lottery oversees New York’s video lottery terminal facilities
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JURISDICTION AND VENUE
15. This Court has jurisdiction because it has original jurisdiction over special
proceedings, because all parties may be found here, and because the material events giving rise
16. This Court is the appropriate venue because Lottery is located here, because the
unlawful acts and omissions by Respondents that Petitioners challenge were committed here, and
because other material events giving rise to this dispute occurred here.
ADMINISTRATIVE PREQUISITES
17. AEC was not required to exhaust administrative remedies before bringing this
special proceeding because (a) this challenge is based on unconstitutional and extra-jurisdictional
actions; and (c) Respondents are the agency and officers to whom further administrative process
would have been taken, if one existed, and, therefore, would have been futile.
FACTUAL ALLEGATIONS
18. Video lottery terminals are lotteries permitted under the New York State
Constitution. The Court of Appeals has described the gaming machines in this way:
The video lottery is played using video lottery terminals, which are each
connected to a central system through the use of “site controller”––computers that
connect several VLTs both to each other and to the central system. In the most
common form of video lottery gaming, participants at individual VLTs play
against each other by purchasing electronic instant tickets from a finite pool. In
order to play, individuals place cash or other currency into the VLT to purchase
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an electronic instant ticket. The player then determines the “game identifier” and
the price of the electronic ticket to be purchased. The VLT receives the next
ticket from the site controller and displays the predetermined outcome––win or
loss. If the player wins, the VLT will print an ‘electronically coded instrument’
which can be used to play additional video lottery games or can be redeemed for
value.
19. Video lottery terminals are in use at eight locations in New York. The sites are
run by licensed operators and include Batvia Downs Casino in Batvia, Empire City Casino at
Yonkers Raceway in Yonkers, Fairgrounds Gaming & Raceway in Hamburg, Finger Lakes
Gaming & Racetrack in Farmington, Monticello Casino & Racetrack in Monticello, Saratoga
Gaming & Raceway in Saratoga Springs, Tioga Downs Casino in Nichols, and Vernon Downs
20. In 1955, the New York Racing Association (NYRA) was awarded the exclusive
franchise right to conduct racing and pari-mutuel betting at Aqueduct Racetrack. That right
included authorization to conduct video lottery gaming. In 2003, NYRA reached an agreement
with MGM-Mirage to install video lottery terminals at Aqueduct. But delays, including those
21. In 2008, after a settlement was reached with a bankrupt NYRA, the State issued a
solicitation to develop and operate video lottery gaming at Aqueduct. A company called
Delaware North was selected as the winning bidder by the Governor, Senate President, and
Assembly Speaker under a new procedure that had been enacted by the State Legislature in
February of 2007. See Tax Law § 1612-e. But the video lottery terminals facility was not built
because Delaware North failed to raise the $370 million it had pledged by the payment deadline.
22. So, on April 16, 2009, the State issued another solicitation to develop and operate
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23. The solicitation envisioned the installation of 4,525 video lottery terminals at
Aqueduct, which would require 243,132 square feet of renovation and expansion. The
solicitation also explained the State would enter into a thirty-year development agreement and
facility ground lease with the winning bidder. On information and belief, the State anticipated
earning no less $1 million a day through a profit-share once the Aqueduct video lottery terminals
were operational.
24. The solicitation provided, however, that, before the winning bidder was to be
See Exhibit 1, at 3 (emphasis added). Lottery’s “standards” are codified in the Video Lottery
Gaming regulations. See NYCRR Sections 2836–1 to 2836–24. On information and belief,
25. Pursuant to Tax Law § 1612-e, the solicitation further provided that the winning
bidder would be selected by a triumvirate of the Governor, the Senate Majority Leader, and the
Assembly Speaker:
The Vendor selected will be chosen by the unanimous agreement of the Governor,
Senate Majority Leader and Speaker of the Assembly, and will enter into the
MOU [memorandum of understanding] promptly thereafter.
See Exhibit 1, at 3. While the solicitation refers to the Senate Majority Leader, the statute refers
to the Temporary President of the Senate. The two, ordinarily, are one in the same; however, a
recent disaggregation of power in the Senate’s Democratic leadership split the positions. On
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information and belief, Senate President Malcolm Smith selected AEC as the winning bidder in
consultation with Democratic Majority Leader John Sampson, satisfying the statute and the
solicitation.
26. According to the solicitation, an MOU that was attached to the solicitation, see
Exhibit 2, obligated the winning bidder to pay $1 million to the State upon selection and, after
executing the MOU, to pay the full bid amount called a Licensing Fee:
As detailed in the MOU, the structure of the transaction will be as follows: upon
the parties entering into the MOU, the Vendor shall pay to the State the
nonrefundable License Fee. The parties then will enter into a development
agreement and a ground lease for the site of the [video license terminal] facility.
See Exhibit 1, at 2.
27. Six companies, including AEC, competed for the Aqueduct video lottery contract.
28. On January 29, 2010, Governor Patterson announced that “he and Legislative
Leaders [had] selected [AEC] to operate the video lottery terminals at Aqueduct Racetrack.” See
Exhibit 3. The selection of AEC by the three heads of the New York State government was
unanimous.
29. The Governor, shortly after announcing AEC’s selection, issued a press release
fully explaining that AEC’s well-rounded, community oriented bid was the best overall bid:
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The final selection was based on a broad range of criteria including speed of
payment, pay out over time, marketing/branding appeal, union support,
construction capacity, win per slot, gaming expertise, community support,
MWBE program, expansion plan, SEQRA footprint and lack of conditions on
meeting the above criteria.
[AEC] was at or near the top in most of these categories. AEG’s strengths
included: a proposal that provided the fastest construction of a new permanent
gaming facility with more VLTs at opening than other bidders; experienced
development, gaming and construction executives; a high and attainable “win per
day” estimate of $350; broad local support; full compliance with [Lottery’s] pre-
qualification license review, a statutorily required project labor agreement and the
State’s MWBE goals.
See Exhibit 4.
30. Community leaders hailed the selection of AEC as good for the Queens
community. In expressing her agreement with the top politicians’ unanimous choice,
Assemblywoman Audrey Pheffer said in a press release that AEC “is an organization that has
long ties to the Queens community and has a unique and vast knowledge of the needs of our
neighborhoods. The future of Aqueduct Racetrack is vital to our community.” Her sentiments
31. Then, four days after AEC was selected, on February 3, 2010, the Speaker of the
Assembly wrote the Governor to unilaterally impose four conditions on AEC’s selection and
licensing eligibility. See Exhibit 5. He said that AEC needed to meet those conditions in order
32. The Speaker’s conditions were not enacted by New York’s legislative bodies, not
founded in any preexisting law or regulation, not derived from past agency precedent, and not
based on any term of the Aqueduct solicitation or MOU. He just made them up. And he
commanded that AEC––and AEC alone––be held to a different standard from the five other
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bidders who had participated in the Aqueduct bidding process and from the eight video lottery
33. The Speaker’s conditions exceeded his limited authority under Tax Law § 1612-e.
AEC and its membership had no notice prior to winning the bid that they would be subject to his
nonnegotiable conditions. The four conditions changed the licensing rules midway through the
34. The Speaker’s third condition required that “all investors, at any level, partners,
directors, managers, contract holders, consultants, principals and other selected employees must
obtain a license from” Lottery. See Exhibit 5. This requirement, which was never subject to any
rulemaking process and had never been applied to any bidder in the state, contravened and
35. The regulations applicable to limited liability companies like AEC only require
“[p]rincipal of a video lottery gaming agent means[,] if a limited liability company, each of its
members.” But only managing members of a limited liability company are required under
Each person who is a principal of a video lottery gaming agent or the operator of a
video lottery gaming facility on behalf of such an agent is required to be licensed
by the division. A video lottery gaming agent principal application and disclosure
form shall be filed with the division.... [W]here the video lottery gaming agent
principal is other than a natural person, each person(s) exercising control as
principals over the video lottery gaming agent principal applicant.
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In other words, only the members “exercising control” over the entities that are members of AEC
are required to have a license. The Speaker, however, required every member of AEC to have a
36. A day after receiving the Speaker’s letter laying out his conditions, the Governor
issued a press release explaining exactly why AEC was selected as the winning bidder:
[AEC] has both the financial viability and ability to pay the required upfront
licensing fee. [AEC] complied with every request made during the review process
and addressed satisfactorily all matters related to licensability. [AEC’s]
compensation to the State, both in the short term and the long term put it near the
top or at the top compared to other bidders. Further, [AEC’s] gaming operator,
Navegante, has a verifiable record for establishing successful gaming operations.
[AEC’s] plan fits well within the very diverse and middle class community that
exists around Aqueduct and its approach to operations will attract local
community members to the site in the largest numbers and create local jobs for
people in the surrounding area. [AEC’s] commitment to diversity and inclusion
was also an important consideration in choosing it to operate at Aqueduct.
All information about the bidders and their bids was presented to all involved
parties as we weighed this selection. After a lengthy evaluation process, I can
only assume that the other leaders made their decision, as I did, because [AEC]
offered the bid that received both unanimous support and is good for New York.
See Exhibit 6. The Governor did not address the conditions the Speaker made just for AEC.
37. But William Murray, Lottery’s Deputy General Counsel, did. He openly stated in
a meeting with AEC that the Speaker’s conditions were “arbitrary and capricious” and would
slow down the licensing process. He assured AEC that Lottery did not intend to strictly enforce
38. In light of the Deputy General Counsel’s statement and the knowledge that the
Speaker’s conditions were targeted at specific members of AEC and not the company as a whole,
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it decided to take the path of least resistance and comply. It informed its members, on February
9, 2010, that the licensing rules had unexpectedly changed and that each of them––no matter
whether they were passive investors who were not key operations personnel and who only
maintained negligible percentages of the company––had to submit to probity and apply for an
individual video lottery gaming license. AEC gave them copies of the license application.
39. The application is forty-five pages long. See Exhibit 7. Ostensibly, it focuses on
the applicant, but it actually requires personal information about the applicant and the applicant's
spouse (and former spouses), children (and step-children), in-laws (and former in-laws), siblings,
and the siblings’ spouses. The applicant must provide a current picture, a fingerprint card, and
tax returns for the last five years (for the applicant and spouse, if separate filers). In addition, the
license application seeks detailed information for the last ten years about the applicant’s
residences, work history, corporate governance positions, and participation in any civil or
criminal proceedings. Finally, the application requests highly detailed financial information
about the applicant’s, spouse’s, and dependent children’s current business ownership interests,
securities and real estate holdings, cash on hand, retirement benefits, mortgages and other
40. Some members of AEC balked at turning over such extensive and sensitive
materials to Lottery because the agency is notorious for leaking confidential information. So,
they––two of whom were public figures locally and nationally––made very personal judgments
about whether the potential financial gain from their negligible percentages in AEC was worth
losing control over their private family and financial information. Several decided, quite
reasonably, that it was not worth it and withdrew from the company over the ensuing weeks.
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The Speaker Initiates an Investigation
41. Then, the Speaker did a curious thing. Two weeks after voting to select AEC as
the top bidder, he, in a letter dated February 11, 2010, asked the New York State Inspector
General to investigate how he, the Governor, and the Senate President came to unanimously
I am respectfully requesting that the Office of the State Inspector General ...
[c]onduct a review of the process and procedures used by [Lottery] and other
relevant state agencies involved in the evaluation of bids and in the making of
recommendations for the selection of such operator, and determine which bidders
were recommended pursuant to such process.
See Exhibit 8.
42. His request was odd for a several reasons. First, Lottery had made no
recommendations for the selection of one bidder over another, which the Speaker knew before
requesting the probe. Second, the only bidders evaluated by Lottery and the three politicians
were the six that had bid, which the Speaker also already knew. Third, Lottery’s evaluations of
the bids were not binding on the selection triumvirate, which the Speaker absolutely knew.
Fourth and finally, as New York State Senator Joseph Addabbo observed, the process the
Speaker wanted investigated mirrored the process in 2008 when the Speaker, himself, helped
pick Delaware North as the winning bidder for the Aqueduct contract:
The process used in that selection was the same used this year. There was
controversy then, as there is now, about the use of that previous process….
Rumors of “the political fix” ran rampant in the local area. Yet no call for a
special investigation or media attack was evident then when the selection took
place a couple years ago.
See Exhibit 9. These observations show the Speaker had no good or legitimate reason to request
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Lottery Finds AEC Ineligible for a License
43. On top of the Speaker’s baseless probe and unlawful criteria, Peter Kiernan,
Counsel to the Governor, told AEC on March 5, 2010, that all its members’ license applications
had to be submitted within four days on March 9th. Failure to meet the sudden deadline, he
44. In point of fact, at the time of his letter, all members of AEC who were “required
to be licensed as part of the application” had already submitted applications. See NYCRR
Section 2836-4.3. The only outstanding applications were from former members, who, but-for
the Speaker’s third condition, would not have been required by law to apply for a license, even if
45. These former members had been passive investors who never had any control
over AEC. They were not key operating personnel or managing members of AEC’s principals.
And, before they had withdrawn, they collectively never owned more than three percent of the
company. When they were members of AEC, the regulations would not have required them to
submit to probity. More importantly, after they had withdrawn their interests in AEC, they
became former AEC members whose personal and financial information no longer was relevant
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46. AEC gave Lottery notice of the nonmaterial changes in its membership on March
8, 2010, which were triggered by the Speaker’s requirement of probity from all investors. See
Exhibit 11. An amendment to a license application is permissible under NYCRR Section 2836-
It shall be the continuing duty of each applicant or licensee to promptly file with
the division a written amendment to the application explaining any new or
changed facts or circumstances whenever any material or significant new or
changed facts or circumstances occur with respect to any matter set forth in the
application or other papers relating thereto. Any applicant or licensee may be
permitted by the division to file any other amendment to his or her application at
any time prior to final action thereon by the division. The failure of an applicant
or licensee to comply with this Part shall be grounds for rejection of the
application or for suspension or revocation of a license.
47. When the March 9th deadline arrived, AEC had already submitted the individual
licensing applications of its members who remained. Of course, it did not (and could not) submit
license applications for its former members––individuals who no longer wanted to be involved in
48. On March 11, 2010, despite AEC’s timely submission of the remaining individual
license applications, Lottery’s Deputy Director, the official who had assured AEC the Speaker’s
“arbitrary and capricious” criteria would not be strictly enforced, informed AEC it was ineligible
for a video lottery license because it had not submitted its former members’ license applications:
[Lottery] has determined that [AEC] is not eligible for a video lottery license....
The determination is based on [AEC’s] failure to comply with the March 9, 2010
deadline for submitting video lottery license applications in time for the Lottery to
complete background reviews by March 31, 2010.
The Lottery rejects [AEC’s] claim that certain individuals and entities (including,
but not limited to, Floyd Flake and Empowerment Development Corporation)
should have been excused from the application requirement because they were
withdrawing from, or were being dropped by, [AEC]. Such belated removals
could not be accepted during the ongoing federal and State investigations into
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[AEC’s] selection, since they would have created the appearance that [AEC] was
being allowed to conceal relevant material information.
49. AEC pointed out the absurdity of Lottery’s ineligibility determination in a letter
written the same day as the announcement of the license denial. Lottery, in making its decision,
had disregarded the appropriateness of AEC’s license application amendments. The agency had
unlawfully required applications from former members who had withdrawn and who had never
been required by law to submit applications. The mere existence of investigations by other
agencies with their own subpoena power could not justify an outright denial of AEC’s license by
Lottery. Finally, Lottery had assumed without any evidence or information from AEC that the
former members’ license applications were, in fact, relevant and material to the investigations by
other agencies. In the end, Lottery disregarded all of AEC’s valid complaints.
50. The Governor, relying entirely on Lottery’s finding that AEC was unlicenseable
and making no independent review of the correctness of that finding, immediately issued a press
The Division of the Lottery has concluded that it cannot issue a gaming license to
[AEC]. Therefore, the State has officially withdrawn its support for [AEC] to
develop and operate a video lottery terminal [ ] facility at Aqueduct Race Track.
51. The Governor’s knee-jerk response was irregular, at best. It is unclear what
authority he relied on to nullify a unanimous selection of AEC by three duly elected officials
simply taking back his individual vote with no consultation with or unanimity of the Senate
President or Assembly Speaker. The statute under which the Governor derived his power to
participate in the selection process does not provide for reneging on his vote once it is cast. See
Tax Law § 1612-e (“The video lottery gaming operator selected to operate a video lottery
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terminal facility at Aqueduct will be subject to a memorandum of understanding between the
governor, temporary president of the senate and the speaker of the assembly.”).
52. On information and belief, neither the Senate President nor the Assembly Speaker
53. On May 11, 2010, Lottery issued a new solicitation for the development and
operation of a video lottery terminals facility at the Aqueduct Racetrack. See Exhibit 14.
54. The bidding closed on June 29, 2010, with only three bidders. Two of those
bidders, SL Green and Penn National, lost to AEC during the prior solicitation.
55. Interestingly, the new solicitation does not include the condition the Speaker
imposed on AEC that each member of the bidder apply for a license. The new solicitation
exempts passive investors––individuals who own one percent or less of a limited liability
company––from the licensing application process. Section 1.3 of the new solicitation describes
For a privately held company, any entity or individual with beneficial ownership
of more than 1% of the company; [and]
For a private equity or similar investment firm, every principal, key manager,
officer, partner, general partner, limited partner and/or member of the boards of
the firm itself. Also, within the firm’s specific fund making the investment in the
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overall bidder consortium, any individual or entity with an investment that
comprises more than 1% of the invested capital of that fund.
See Exhibit 14. Undoubtedly, the State scrapped the Speakers’ third condition because it was
unworkable. As one aide to the Governor observed, “We’re going to have to have something in
that goes to the spirit of what the speaker wants, but it’s got to be one that’s actually practical
and feasible.” “New Rules for Aqueduct Racino,” N.Y. Daily News (Mar. 15, 2010). On
information and belief, the Speaker did not object to the new conditions that replaced the ones he
56. Under the rules of the new solicitation, the former members of AEC who
withdrew would have been exempt now (as they were then) from submitting licensing
applications since none of them maintained more than a one percent membership interest in
AEC.
57. In fact, under the new solicitation rules, AEC’s former members would have been
“immaterial” to the company’s membership composition, which would have allowed them to
withdraw from the company without notice to or permission from Lottery. Section 1.21 of the
new solicitation permits changes to the composition and ownership of the bidder without notice
to Lottery if such changes constitute less than five percent of the equitable ownership interests or
if the changes involve an individual who is not a principal or serving in a key role:
If a Vendor makes any material change in the composition of the members of the
team identified in the Vendor’s Proposal or in the ownership of any entity
included in the Vendor’s Proposal prior to approval of the MOU or after a license
is awarded, the Lottery’s Licensing unit must be notified in writing at the time the
change occurs or is identified pursuant to 21 NYCRR 2836-16.
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58. This new rule recognizes that changes––both material and immaterial––are
inevitable during such a review process and have occurred in the licensing processes for each of
COUNT I
(Illegal Imposition of Ultra Vires Licensing Rules)
60. Article III of the State Constitution grants the Senate and the Assembly legislative
power, while Article IV grants the Governor executive power. The New York Court of Appeals
has held that these separate grants of power imply that these branches of government necessarily
exercise power only within their given spheres of authority. The Legislature is limited to
promulgating law and policy for the State; the Executive is limited to implementing and
61. Article III of the State Constitution vests no legislative power in a single member
of the Senate or the Assembly. Nor does it vest legislative power in any executive agency. In
this particular instance, Lottery’s powers are limited to those enumerated in the regulations for
62. The licensing conditions unilaterally and singly imposed by the Speaker on AEC
exceeded his power and authority as a New York State legislator. The Legislature did not
authorize the Speaker’s conditions and has not authorized, approved, or consented to them at any
time before, during, or after the Aqueduct bidding process commenced. Consequently, the
conditions were ultra vires, without lawful authority, and in violation of properly enacted law
and regulations.
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63. Lottery’s enforcement of the conditions unilaterally and singly imposed by the
Speaker on AEC exceeded the agency’s power and authority under the video lottery gaming
regulations and other applicable law. The Legislature did not authorize Lottery to enforce the
Speaker’s conditions and has not authorized, approved, or consented to Lottery enforcing the
conditions at any time before, during, or after the Aqueduct bidding process commenced.
Consequently enforcement of the Speaker’s conditions were ultra vires, without lawful authority,
64. Lottery exceeded its authority when it denied AEC’s license application for a
reason other than the ones enumerated in NYCRR Section 2836-3.14. That regulation lists
permissible reasons Lottery can deny a license application. They include an applicant’s criminal
history, financial instability, involvement in fraud or deceit that affects public confidence in
Lottery, or a refusal to cooperate in the licensing process. Absent from that list is the reason
Lottery denied AEC application: the possible appearance that AEC was hiding something from
other investigating agencies through the withdrawal of inconsequential members from the
company. On information and belief, Lottery has never denied a video lottery gaming license
for that reason. It has not done so in the past and cannot do so now because the enabling
legislation, from which Lottery derives its power, does not authorize it.
65. Tax Law § 1612-e vests no power in a single member of the video lottery operator
selection triumvirate of the Governor, Senate President, and Assembly Speaker. The selection
had to be unanimous, and AEC’s was. The statute provides no mechanism for any single
support.”
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66. The ultra vires actions of the Speaker, Lottery, and the Governor had no rational
basis and were arbitrary, capricious, and an abuse of discretion. They substantially and
irreparably injured Petitioners by requiring them to comply with illegal rules that, ultimately,
COUNT II
(Failure to Follow Agency Procedure)
68. Throughout AEC’s license application process, Lottery deviated from its own
procedures in materially significant ways that violated agency policies, practices, and
regulations.
69. Lottery’s first deviation from established procedure was enforcing the Speaker’s
requirement that each of AEC’s members submit to probity. Under NYCRR Section 2836–
4.2(b)(3), for limited liability companies like AEC, Lottery was only authorized to require
Lottery’s actions were an unwarranted break from its policies, practices, and procedures in
reviewing the license applications of the other eight video lottery operators in New York.
70. The second procedural deviation was Lottery’s refusal to permit AEC to make
nonmaterial amendments to its license application that reflected the withdrawal from the
company of passive investors. Under NYCRR Section 2836-3.11, the amendments were
permissible at any time with due notice; had no effect on AEC’s management, financing, or
operations capabilities; and would have facilitated Lottery’s completion of the application
process by the March 31, 2010 deadline, which the Counsel to the Governor was concerned with
missing.
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71. Lottery claimed that AEC’s members’ withdrawal was too late, indicating that the
agency had set a time limit for when amendments to the license application could be made.
72. On information and belief, when individual investors pose an obstacle to the
licensure of the entity that will operate the video lottery terminals facility, Lottery’s preferred
policy and practice is to allow those individuals to withdraw from the entity. Consistent with
that policy and practice, on at least two occasions during AEC’s licensing-application process,
Lottery permitted or ordered withdrawals of AEC members. For example, Lottery’s Deputy
Director confirmed the forced withdrawal of three AEC investors and indicated that the company
Lottery concludes that AEG, Clairvest, and any other person or entity acting by or
on behalf of AEG or Clairvest (i) do not intend to make any payment directly or
indirectly to Karl O’Farrell, Andrew Goodell, or Aqueduct Community
Enterprise, (ii) will, in any legal proceeding by or on behalf of such persons
seeking payments by or on behalf of AEG or Clairvest, raise a defense based on
material misrepresentations made to AEG and Clairvest, and (iii) will not make
any payment directly or indirectly to such persons pursuant to a settlement
agreement unless approved by the Lottery.
….
Assuming that it is correct, the only remaining requirements are that (i) the video
lottery license application submitted by Greenstar be completed by the submission
of individual license applications by Messrs. Roman, Kornfeld, LoCurto, Tully,
and Segal, and (ii) the Lottery’s review of the pending application submitted by
Mr. Levine and the expected applications by Messrs. Roman, Kornfeld, LoCurto,
Tully, and Segal does not uncover disqualifying information. If those
requirements are satisfied, the Lottery will conclude that AEG has a suitable
background to be granted a license for the operation of a video lottery facility at
Aqueduct racetrack.
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73. In addition, on information and belief, during the licensing of the eight other
video lottery operators in New York, Lottery permitted and ordered withdrawals similar to that
74. Even the Speaker expected that his conditions, which were not known or required
at the beginning of the selection process, would affect the makeup of AEC’s investors and cause
provided that Lottery must review changes to AEC’s membership and, then, let the Governor,
[T]hroughout the final approval process, all changes in the proposal including but
not limited to partners, consultants, investors at any level, management,
development or principal employees, and contracts must be reviewed by [Lottery]
and approved by the three leaders prior to the conclusion of the approval process.
See Exhibit 5. No rational basis existed for Lottery’s denial of AEC’s nonmaterial license
application amendments. It was an illegal departure from established policy, practice, and
procedure.
75. Lottery’s third failure to follow procedure was requiring probity from the former
members, who essentially had become disinterested third parties when they withdrew. AEC’s
former members no longer held any stake in the company, having no financial or influential
interest in it. Lottery’s licensing authority encompasses only “owners” of a video lottery gaming
facility and “principals” of a video lottery gaming agent. See NYCRR Section 2836-4.2. Former
members of a company are not “owners” or “principals” since they are not stakeholders in the
video lottery gaming facility or agent. Consequently, they do not come within Lottery’s
regulatory purview and could not be required to submit licensing applications in support of
AEC’s application. Cf. NYCRR Section 2836-4.3 (“No video lottery gaming agent license shall
be issued ... unless the applicant, and each person required to be licensed as part of the
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application, provides all information, documentation and assurances required to establish its
disinterested third parties refused to submit to an intrusive licensing review was a profound
76. Lottery’s final deviation from procedure was refusing to allow AEC an
opportunity to cure the alleged “failure” to submit license applications for its former members.
Under Section 2836-3.15(c), AEC was entitled to submit curative evidence to Lottery before it
determined finally, as it did, that AEC was forever ineligible for a video lottery gaming license:
[A]ny person whose application has been denied ... may reapply upon submission
of sufficient evidence demonstrating that the factual circumstances upon which
the denial was based have been cured to the satisfaction of the division.
This procedure was not followed and AEC could not show it could not by law or contract compel
or coerce its former members into submitting to probity or show that the former members’
77. AEC attempted, through its attorneys, to challenge Lottery’s decision in a letter to
Lottery and the Governor on the day Lottery found AEC unlicenseable. But the agency and the
78. Each of Lottery’s deviations from, and failure to follow, its normal procedures
was without rational basis, was arbitrary and capricious, and was an abuse of discretion.
79. Lottery’s acts and omissions irreparably harmed AEC by causing the denial of its
application for a video lottery gaming license and, ultimately, costing it the Aqueduct contract.
COUNT III
(Due Process Violation)
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81. In processing AEC’s video lottery license, Lottery abandoned several licensing
policies, practices, and procedures without adequate notice; imposed on AEC unreasonable
deadlines without adequate notice to submit each of its members’ video lottery gaming license
applications and to make any amendments to the license applications; relied on––to AEC’s
and denied AEC an opportunity to cure alleged deficiencies in its license application. These acts
and omissions violated AEC’s right to due process under the State Constitution.
82. Midway through the licensing process and, therefore, without adequate notice,
Lottery supplanted its regular policies, practices, and procedures with ad hoc and unauthorized
policies, practices, and procedures: (i) Lottery required each of AEC’s members to submit
licensing applications, rather than just its managing members; (ii) Lottery insisted that
nonmembers who had no interest in AEC submit to probity in support of AEC’s license
application; (iii) Lottery set a new, unspecified time limit for amending license applications,
when its rules permit such amendments “at any time” with notice; and (iv) the agency denied
AEC’s license for a reason not previously listed in the regulations as a permissible reason for
rejecting an application. None of these agency actions were subject to a rulemaking procedure
with a period of time to comment. Consequently, AEC was not given adequate notice of
Governor on AEC to submit license applications for all of its members and certain former
members. Given the length of the application, the number of people involved, and the breadth of
the information requested in the application, four days to comply was unreasonable and
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insufficient notice that AEC would be penalized with denial of its license application if it failed
to comply.
84. Lottery, ultimately, found AEC ineligible for a video lottery gaming license based
on news reports of federal and state probes that Lottery mischaracterized as looking “into
[AEC’s] selection.” Actually, the U.S. Attorney’s investigation did not concern AEC’s selection
at all. On information and belief, the investigation concerned the acquisition of certain real
estate by public officials who were not members of AEC, except for one.
85. The Inspector General’s probe, which was instigated at the insistence of the
Assembly Speaker, concerns Lottery and the procedures it used to evaluate the six bids from
which the Speaker, the Governor, and the Senate President selected AEC as the winner. It is
based entirely on media speculation and innuendo. A memorandum of law filed by the Inspector
General in opposition to a motion to quash cites to one newspaper article after another as
“evidence” justifying the scope of its subpoena. See Exhibit 16. That filing, however, is barren
of concrete evidence against AEC and its members because they did nothing wrong.
86. No member of AEC has been accused of any improper or criminal act or of
refusing to cooperate in the investigation. The Governor, for his part, rejected the media’s
sensationalism as baseless and reminded everyone that his was but one of three required votes.
87. The information that Lottery claims AEC possibly was concealing by not
speculated, to the investigations by other agencies. The video lottery gaming application is very
specific. Materials that might have been produced by AEC’s former members in their
applications would shed no light on the appropriateness of Lottery’s bid evaluation process (the
state probe) or on the real estate acquisitions by individuals and entities that were never part of
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AEC, save one person (the federal probe). Moreover, both the Inspector General and the U.S.
Attorney enjoy the power of subpoena. They do not require Lottery’s license applications to
88. Public opinion gathered through news reports provides no rational basis for
agency action. The New York Supreme Court pointed out in Matter of G.J. & S. Pizza, Inc. v.
McLaughlin, 78 A.D.2d 653 (App. Div., 2nd Dept. 1980), what should have been obvious to
Based so far as the record reveals, solely on the concerns expressed by residents
and community leaders and without any factual data contravening petitioner’s
presentation, the [liquor license] application has been rejected. Denial of a license
on the speculation that it will be operated in violation of the law is impermissible.
The likelihood of future violation can furnish a basis for denial only when there
are facts in the record to which rationally support doing so.... It should also be
pointed out that the Court of Appeals in Circus Disco [v. New York State Liquor
Auth., 51 N.Y.2d 24,] was confronted with a decision-making process by the
authority similar to the one in the instant matter. There, as here, public opinion
strongly opposed the issuance of a license to a particular applicant. Letters of
protest were received and considered by the authority. And the adverse public
opinion in Circus Disco, as in the case at bar, was given weight and affected the
authority’s final determination. This was condemned by the Court of Appeals,
holding that “While it is not always inappropriate for the authority to receive the
views of others, the authority cannot deny an application without a reason other
than the recommendation or views thus expressed.”
Id. (citations omitted). In this case, Lottery’s reliance on public opinion denied AEC a fair,
regular, predictable, and transparent administrative process. Mere speculation that something
89. Lottery drew a final conclusion about AEC before the investigators did. That
unsubstantiated news reports and guesses as to what other agencies’ investigations might
uncover or might find relevant and material is improper. That determination, necessarily, was
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90. The agency made no independent findings of fact, only a final determination
accuracy of the media innuendo and the extent to which AEC and any of its members might be
involved in any alleged wrongdoing or might have information relevant and material to the
ongoing investigations. After Lottery made its decision, it did not afford AEC an opportunity to
show that its former members, as nonmanaging members, were not required to apply for video
lottery license applications or show that AEC could not compel those individuals to submit to
probity against their will and, thus, should not be held responsible for their very personal and
91. Finally, Lottery’s determination that AEC is forever ineligible for a license was
too harsh a punishment for the compliance failure the agency cited. There were less severe
alternatives available to Lottery that it should have, but did not, consider. For example, as it had
already done once, Lottery could have permanently barred the future involvement of the former
members in AEC in any manner. See Exhibit 15. Then, at least, the punishment would be on the
92. Lottery’s actions had no rational basis and were arbitrary, capricious, and an
abuse of discretion. Moreover, the State had no compelling public interest in meting out the
93. Because Lottery denied AEC due process by failing to give it adequate notice of
rule changes and short deadlines, relying on public opinion as report in the news without giving
AEC an opportunity to address the speculation, and not considering a less severe punishment
than permanent ineligibility, Respondents have suffered substantial and irreparable injury,
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having lost the exclusive right to develop and operate the video lottery terminals facility at
Aqueduct Racetrack.
COUNT IV
(Equal Protection Violations)
95. Lottery denied AEC equal protection under New York law by treating AEC
differently from similarly situated bidders in the Aqueduct Racetrack bidding process and from
previous video lottery gaming license applicants who were granted licenses.
96. Lottery refused to permit AEC to amend its licensing application to reflect the
withdrawal of some, but not all former members. On information and belief, Lottery has
previously permitted other video lottery gaming license applicants to abandon members who
frustrated licensure.
97. On information and belief, each of the eight video lottery gaming operators in
New York made changes to their membership structure during their license application
processes. Lottery did not find any of the present operators ineligible for a license due to a
99. On information and belief, some of the present video lottery gaming operators
were licensed because they changed their ownership structure per the instruction of Lottery by
100. Because Lottery has treated AEC differently from other bidders and other video
lottery gaming operators, it has unfairly subjected AEC to a more rigorous license application
process. It enforced the Speaker’s conditions against AEC alone. It also refused to allow AEC’s
29
former members to withdraw, unlike members of other Aqueduct bidders and other video lottery
gaming operators in New York. Lottery’s actions had no rational basis and were arbitrary,
101. The changes made to the new Aqueduct solicitation and reissued by the State on
May 11, 2010, dispense with the Speaker’s condition that all members submit to probity and
allows immaterial membership amendments to occur without notice to Lottery. The rule changes
in the new solicitation underscore the unequal treatment to which Respondents subjected AEC.
102. Because Lottery denied AEC equal protection under the law, AEC suffered
substantial and irreparable injury because it lost a valuable financial opportunity in developing
and operating the video lottery terminals facility at the Aqueduct Racetrack.
COUNT V
(Freedom of Association Violations)
immaterial to its management and financial stability––violated AEC’s and its members’ right to
105. AEC and its members have a right to govern and determine the company’s
membership and their relationship to each other. Implicit in the right to freely associate is the
right not to associate. AEC members had the right to withdraw from the company for whatever
reason and at any time in accordance with AEC’s operating agreement, the New York Limited
Liability Company Act, and the State Constitution. And AEC could not compel their
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106. Lottery infringed on AEC’s right to govern and determine its membership when it
determined that the former members, despite withdrawing, still had to submit to probity if AEC
was to be licensed. There was no rational basis for such infringement, which was arbitrary,
capricious, and an abuse of discretion. No compelling state interest was served in denying AEC
and its former members’ the right to freely disassociate through withdrawal from the company.
107. Because Lottery infringed on AEC’s and its members’ freedom of association,
AEC lost a valuable financial opportunity to develop and operate the video lottery terminal
facility at the Aqueduct Racetrack and has been harmed substantially and irreparably.
COUNT VI
(Breach of Good Faith and Fair Dealing)
109. AEC was selected to develop and operate video lottery gaming at Aqueduct
Racetrack.
110. When AEC agreed to the selection, it entered into an agreement-in-principle with
the Governor, Senate President, Speaker of the Assembly, and the State as expressed in the bid
111. Implicit in the Bid Agreement was the parties’ agreement to deal fairly with each
112. The Bid Agreement expressly states that the bid-award and the video lottery
licensing processes would comply at all times––from bid submission to final execution of the
MOU––with New York law and regulations. See Exhibit 1, at 3; Exhibit 2, at 2 & 26–27.
113. AEC fulfilled its obligations under the terms of the Bid Agreement.
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114. But Respondents, through conscious and deliberate acts and omissions, have
repeatedly failed and refused to discharge their obligations. Respondents’ acts and omissions
have frustrated the purpose of the Bid Agreement and disappointed Petitioners’ expectations
115. Throughout the bid award and licensing processes, Respondents have imposed
conditions and licensing criteria on AEC that improperly supplant existing law and regulations;
deviated significantly from numerous policies, practices, and procedures of Lottery; failed to
give Petitioners adequate notice of deadlines essential to the terms of, and obligations under, the
Bid Agreement; and treated AEC differently from similarly situated Aqueduct bidders and video
lottery license operators. This intentional and malicious conduct was not in good faith or fair
dealing.
in order to derail AEC’s selection and embarrass its members. The investigation was a dirty
trick that allowed Respondents to “justify” denying AEC a video lottery gaming license and
117. Respondents’ breaches of good-faith and fair dealing have deprived Petitioners of
the benefits of the Bid Agreement, including becoming the developer and operator of the video
118. Respondents’ material breaches of the Bid Agreement have caused AEC to suffer
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RELIEF REQUESTED
injunctive relief, based on the allegations made in this Petition, and issue an Order and
Judgment:
A. Finding that Lottery’s determination that AEC was ineligible for a video
lottery gaming license had no rational basis, was arbitrary and capricious, and was an
abuse of discretion;
Lottery’s determination that AEC was permanently ineligible for a video lottery gaming
license was unlawful, ultra vires, in excess of lawful authority, without effect, and void;
AEC without the consent or approval of the State Legislature were unlawful, ultra vires,
rulemaking process that enforce the Speaker’s conditions; set a time limit for when an
additional statutory reason for denying a license application; and abandon the right to
cure application deficiencies were unlawful, ultra vires, in excess of lawful authority,
E. Finding that Lottery violated AEC’s right to due process by failing to give
AEC adequate notice of deadlines to submit its members’ video lottery gaming license
applications and to amend its own license application; relying on public opinion found in
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public opinion and to cure alleged license application deficiencies; and failing to consider
an alternative, less severe punishment than permanent license ineligibility for alleged
application deficiencies;
protection by treating it differently from similarly situated bidders and from successful
G. Finding that Lottery violated AEC’s and its members’ right to freedom of
deal fairly and in good faith with each other by failing to conduct the bid process under
Complaint;
process for the development and operation of the Aqueduct Racetrack video lottery
K. Restoring AEC to the position of the winning bidder for the development
and operation of the Aqueduct Racetrack video lottery terminals facility; and
application process for AEC with the membership it had on March 11, 2010, and that
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Lottery complete the process in compliance with applicable law and regulations and
N. Granting such further and other relief the Court deems just, proper, or
_______________________________________
Daryl Davis
Latif Doman (pro hac vice application to be filed)
35
STATE OF NEW YORK INDIVIDUAL VERIFICATION
ss.:
Richard Mays, being duly sworn, deposes and says that he is a Petitioner in this action, and that
LLC, and has read the foregoing Verified Petition and Complaint and knows the contents thereof
and that the same is true to his own knowledge, except as to the matters therein stated to be
alleged upon information and belief, and as to those matters he believes them to be true.
__________________________________
on behalf of
aka
_____________________________________
Notary Public
36