Anne M. Eberhardt

Report: NYRA Bettors Overcharged $7.4 Million

Inspector General's report says NYRA continued higher takeout rate.

More than two years after being asked by regulators to look into the 2010 and 2011 takeout scandal at the New York Racing Association, a state investigative agency has concluded that key executives of the racing corporation were derelict in their duties to halt a practice that cost bettors more than $7 million.

The probe by the state Inspector General's office also pointed criticism to everyone from the then-NYRA's board to the regulatory agency that oversaw racing at the time.

New York State Inspector General Catherine Leahy Scott, in a report that largely tracked findings already revealed about the episode, said NYRA failed to follow state law that called on NYRA to drop temporarily higher takeout rates in September 2010. She also said the state's chief racing regulatory body, the former Racing and Wagering Board, which has since become part of a new agency called the Gaming Commission, failed to "calendar" when the takeout rate should have changed to help avoid bettors from being overcharged.

The mistake was not caught, as reported at the time, until an unrelated review by auditors at the state comptroller's office. From September 2010 through December 2011, NYRA collected nearly $7.4 million in higher takeout fees than it was legally permitted.

The episode cost NYRA executives their job, including former President Charles Hayward, and helped provide ammunition for the Gov. Andrew Cuomo administration to have the state take over the operations of NYRA, chiefly by having a new board selected with a majority appointed by Cuomo and state legislators. That "reorganization" period, as it is called, expires in 2015, though no one knows yet in what form NYRA will emerge from the state control phase.

The inspector general's report blamed the takeout problem on "weak financial controls," and lack of oversight by the NYRA board, as well as "inattention" to the takeout law, and its required changes, by NYRA officials.

IG officials say the inspector general's investigation did not produce a referral to prosecutors, as happens with some of her cases, for possible probes of criminal violations in the NYRA takeout scandal.

Scott said NYRA has since agreed to a number of financial controls to keep such problems from occurring again.

"Patrons of New York's gaming industry must feel secure and trust that those operating horse racing in our state are doing so competently and within the parameters of the law. Unfortunately, what occurred undermined that trust because NYRA took earnings away from bettors that were rightfully theirs," Scott said in a statement with the report's release on August 25.

NYRA continued charging a 26% takeout rate on certain exotic wagers, even though the law had a sunset in 2010 when the rate was supposed to drop to 25%. In April 2012, the Franchise Oversight Board, a state panel that monitors NYRA finances, turned over the findings into the matter by a state agency that regulates the racing industryknown at the time as the Racing and Wagering Boardto Scott and her agency to investigate.

Of the $7.4 million overcharged to bettors, NYRA was able to refund $611,000 to its patrons who made wagers during the period on-track and at off-track betting entities.

The inspector general's report said Hayward and Patrick Kehoe, NYRA's then-counsel, missed chances to correct the error during the period by what the report called "inexcusable attention to the legislation and dereliction of their duties as executives at NYRA." Hayward and Kehoe both lost their NYRA jobs in May 2012.

The report said there was evidence Hayward and Kehoe should have been aware that the takeout rate level was a problem from a couple of warning signs, including a letter from "an avid bettor" that ended up with Hayward.

The inspector general's report singled out the "previous" NYRA board for a share of the blame. The current NYRA board includes a number of holdovers from that previous board.

In a written response, Hayward said the IG's report "at long last'' confirms what he maintained two years ago: that the takeout episode was the result of human error, not an intentional maneuver to raise additional funds for NYRA. He noted that the inspector general had plenty of blame to go around for the problem and that NYRA, while he was president and chief executive officer, "did the right thing and provided refunds to as many bettors as it could locate or confirm who were affected by the higher takeout level.

"As NYRA's then-CEO, I accepted responsibility from day one. I am proud of the achievements of the dedicated and experienced team with whom I worked and of everything we did to advance the sport of thoroughbred horse racing," added Hayward, who today is publisher of the Thoroughbred Racing Commentary website.

Dr. David Skorton, NYRA's current board chairman, said in a statement after the release of the inspector general's report that NYRA is a "far different organization" than it was before the state moved in two years ago and reorganize the racing giant.

Besides hiring a number of new top executives and putting in place "sweeping changes" to track the inspector general's recommendations, Skorton said the current board and managers "share a steadfast commitment to greater transparency, compliance and accountability."

In the report, Skorton and NYRA is quoted as agreeing with the findings of the inspector general's investigation and stating that a number of internal controls have already been instituted to prevent such mistakes from happening again.

The inspector general's report also noted that everyone from NYRA's external auditor, totalisator company and lobbyist, as well as NYRA's internal auditing department, shared some responsibility for the episode.

The inspector general said NYRA has since instituted internal changes, such as having its law and finance departments keep track of state laws pertaining to takeouts and other racing provisions and if and when they have expiration dates assigned to them. It said NYRA's board has also agreed to changes to reduce the chance of another such financial scandal, including more "robust" reviews of NYRA's staff and outside auditors.