STATE OF NEW YORKRACING AND WAGERING BOARD
INTERIM REPORT
INTO THE MATTER OFINCORRECT TAKEOUT RATESAT THE
NEW YORK RACING ASSOCIATION, INC.
Audits and Investigations Unit April 26, 2012
NYRA Takeout-Interim Report April 26, 20121Executive SummaryThis is an interim report into the matter of incorrect takeout rates at the New York RacingAssociation, Inc. (NYRA) in effect from September 15, 2010 to December 21, 2011. The Boardhas decided to issue this report prior to the conclusion of its review because of the seriousness of the findings contained herein.The regulatory framework over pari-mutuel wagering in general and NYRA in particularis complex. The Franchise Oversight Board, Racing and Wagering Board, Office of the StateComptroller and Department of Taxation and Finance all have specific responsibilitiesenumerated in the Racing, Pari-Mutuel Wagering and Breeding Law (Racing Law).The Racing Law allows racetracks to set takeouts, subject to Board approval, withinprescribed ranges. Chapter 115 of the Laws of 2008 (Chapter 115) prescribed new ranges for
NYRA’s takeout rates, effectively increasing the minimum rates. The Chapter 115 rates expired
on September 15, 2010. NYRA did not change the rates at the time of expiration which resultedin the exotic rate being 1% above the legally permissible rate. In December 2011 the Board
became aware that NYRA’s exotic takeout rate was 1% above the limit authorized by the Racing
Law. According to NYRA, the total dollar amount of the additional 1% withheld by NYRA onon-track wagers was $1,125,925. The total dollar amount of the additional 1% withheld byracetracks and off-track betting sites betting on NYRA was $7,361,722 for a total of $8,487,647inappropriately withheld from bettors. NYRA has reported that it
made an “inadvertent error”and a “mistake”.
The Board commenced an investigation into the matter. The purpose of the investigationwas to determine why NYRA did not change the takeout rates when they expired on September15, 2010. It was also to determine why the issue was not detected by the relevant parties whomay have been in a position to do so, including this Board.
The Board’s review thus far has found the following:
Based on a review of NYRA’s emails, several NYRA per
sonnel, including CEO CharlesHayward, were notified and/or were aware that the exotic takeout rate had expired.NYRA may not have lowered the rates due to perceived political and financial reasons.In an email dated September 1, 2010 NYRA Vice-President Liz Bracken informed aNYRA Manager
that, “takeout legislation sunsets middle of September, but I have notheard that we intend to lower takeouts.”
The email was subsequently forwarded to twoother NYRA employees.Mr. Hayward was notified via email by a concerned bettor on September 28, 2010 thatthe law had sunset and the rates had expired. Mr. Hayward notified the bettor that he was
referring the issue to NYRA’s General Counsel Patrick Kehoe.
NYRA Takeout-Interim Report April 26, 20122In August 2011 (almost a year after the rates had expired) the Daily Racing Form (DRF)publisher and columnist Steve Crist passed along an email from a DRF reader indicatingthe rates had expired and were outside the parameters of the Racing Law. Mr. Haywardemailed Mr. Crist on August 1, 2011 confirming that the reader was correct and requestedthat Mr. Crist keep the information confidential. Mr. Crist agreed.As part of its 2010 financial statement audit, NYRA provided the incorrect exotic takeoutrate to its independent auditor, UHY, LLP. NYRA personnel reported to UHY that therewere no statutory changes in takeouts for 2010. UHY attempted to verify the rates withstatute. However, UHY verified the inappropriate 26% exotic rate by reconciling it to theexpired section of statute containing the 26% exotic rate instead of the effective sectionof statute containing the 15-25% range.
United Tote, NYRA’s totalisator provider, failed to verify takeouts with the Racing Law
and instead relied on information provided by NYRA.The Board requires annual independent aud
its of NYRA’s tote system (provided by
United Tote) which includes the verification of correct takeout rates. Berry, Dunn,McNeil & Parker (BDMP) performed the audit covering the period October 1, 2009
–
September 30, 2010. BDMP stated that it did not verify the takeout rates with statute.PriceWaterhouseCoopers (PWC) performed the audit for the period January 1, 2011
–
September 30, 2011. The Board found that PWC attempted to verify the takeout rates andidentified the correct statutory range of 15-25% but failed to note that the exotic rate wasin excess of the limit.NYRA has not properly updated its internal controls on file with the FOB and did notfollow its system of internal controls on file with the FOB as required by law.
NYRA’s former integrity
counsel Getnick & Getnick has written to the Board indicating
that it has documents responsive to the Board’s investigation but cannot provide them
due to attorney-client privilege. NYRA has permitted the Board to review part of whatNYRA asserts is the o
nly document responsive to the Board’s request. NYRA’s current
integrity counsel was to obtain verification that the referenced report is the onlyresponsive document. This remains an open question.
NYRA’s current integrity counsel, Jonathan Sack of
Morvillo, Abramowitz, Grand,Iason, Anello & Bohrer, P.C. has publically reported that he has reviewed the takeout
matter and the evidence suggests that there is “no indication of intentional wrongdoing”,“no one was trying to deceive anyone” and that “it does
not appear that anyone saw the
mistake and perpetuated it.”
In August 2010, the Office of the State Comptroller (OSC) was engaged in “real
-
time”monitoring of NYRA’s financial condition. OSC found that “NYRA’s cash flow
projections continue to be prepared accurately, based on valid assumptions that have been
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