Paterson: VLT Selection Not Subpoena Target

Head of state lottery not certain AEG can meet conditions imposed by New York state.

New York state officials insist subpoenas issued to the state Lottery Division the week of Feb. 8 do not pertain to the selection of an Aqueduct casino operator, but are about an unrelated matter that will not pose an obstacle the gambling project going forward.

Meanwhile, the head of the Lottery Division, which regulates video lottery terminal casinos in the state, said it is still not certain Aqueduct Entertainment Group will be able to meet all the conditions imposed by the state when it was awarded the Aqueduct VLT deal.

“Well, given that one of the conditions is $300 million, no, I can’t be certain. I’m not sure anyone can be until we receive the money," Gordon Medenica, the lottery boss, said of the $300-million up-front payment promised by AEG as part of its deal to get the contract to operate 4,500 VLTs at Aqueduct.

The Paterson administration and AEG officials have insisted that four conditions imposed on the bidding group – at the demands of Assembly Speaker Sheldon Silver – will be met, and that AEG can make the $300-million franchise payment to the state before the 2010 fiscal year ends March 31.

The administration confirmed that the U.S. Attorney for the Southern District of New York issued subpoenas Feb. 9 for documents pertaining to New Direction Local Development Corp., a Queens-based charity that, according to its 2009 filing with the Internal Revenue Service, provides services “with respect to community, (to) preserve, renovate, rehabilitate, and beautify neighborhoods."

Beyond ties to various Democrats, including Senate President Malcolm Smith, the group also counts among its leaders Rev. Floyd Flake, who owns less than a 1% share in AEG. The charity has come under scrutiny in the media recently for questions over government funds it has received in recent years.

New York City television stations had reported federal prosecutors were looking into the bidding process that awarded the casino to AEG, a consortium of investors, that beat out four other bidding groups earlier in February. But Peter Kiernan, counsel to Gov. David Paterson, said Feb. 10 that prosecutors are looking at New Direction, not the casino deal.

“No investigatory agency has contacted the governor’s office about the selection of AEG to run VLTs at Aqueduct, and to the best of our knowledge, no such investigation into this selection exists," Kiernan said.

The U.S. attorney’s office did not comment.

The New York Times reported Feb. 11 that prosecutors also asked for documents relating to AEG. It attributed the claim to one unidentified source that had been briefed on the matter.

But Paterson the morning of Feb. 11 said his administration has been told the probe is not about the Aqueduct casino project. "It has nothing to do with the bid process, nothing at all,'' Paterson said on WOR radio.

Sources, all of which spoke on condition of anonymity, said Feb. 11 the subpoena issued to the Lottery Division specifically mentions documents pertaining to AEG. One state official believes the probe started out looking at the Queens charity group and ties it has to AEG; the agency might have such information because it vetted AEG and its officials during the bidding process.

But two sources with knowledge of the matter said federal prosecutors in recent days have expanded their probe beyond the Queens charity and are now taking at least an initial look at AEG and the casino bidding process. The Paterson administration insists there have been no indications the casino bidding process is in the sights of the U.S. Attorney's office.

On Feb. 10, Paterson defended the AEG selection on a Fox Business Network radio interview. He said the group was “strongly competitive" and that it had the second-highest bid and the second highest long-term benefit to the state – and presumably the racing industry, which shares in the casino proceeds -- with its proposal. Paterson again noted that he alone did not select AEG; Silver and Senate Democratic Conference Leader John Sampson both signed off on the deal.

Paterson noted that if AEG can’t comply with the conditions imposed on it within 30 days, “it will go to someone else."

Paterson has been criticized because a couple days after awarding the bid he met with Flake to get a feel for how the influential Democrat might lean in the governor’s race this year. Paterson is facing a possible primary fight this year.

The comments about AEG by the lottery director came following a meeting of a state board that oversees the New York Racing Association’s finances.

(At the meeting, NYRA president Charles Hayward again reiterated NYRA’s looming financial troubles, in part because the Aqueduct casino has not yet opened and the threatened shutdown of New York City Off-Track Betting Corp., which provides $4 million a month to NYRA. Hayward also said he expected Aqueduct and Belmont Park handle to fall 9% this year, while Saratoga will be off 5%. NYRA officials again said the entity will be insolvent sometime this summer.)

The Lottery Division, in private meetings last year, raised serious concerns about AEG’s abilities to run the Aqueduct casino. “I think the information you are referring to is very old," Medenica said. He said a pre-licensing vetting process ended with some AEG investors departing; he did not elaborate. He said questions about investors were “cleared up" by the time of the bid award.

Medenica said his confidence level in Las Vegas-based Navegante Group – the AEG casino operator – “is good and always has been."

The Lottery Division has begun the formal licensing work of AEG’s team, which includes criminal background checks; financial reviews, including personal income tax return examinations; and reviews of licensing information from other states. He said it is possible other AEG investors could end up not making it through the process, and left open the door to other partners possibly joining the team.

He said the agency is now awaiting AEG to comply with the requests for the various bits of background information.

“Who gets licensed on the list of key employees (and) key investors at this point in time could easily change by the time the casino opens, and certainly at any point in the future as investor groups come in and out of the venture," Medenica said.

Medenica said the state would not release the bids offered by the five different groups, saying the bidders had been promised by the government their financial information would not be made public.

"Is AEG qualified to run the casino? At the end of the day, yes," he said. "Were they the most qualified bidder? I am not the person to make that decision. We had a role to play and we played it."