Empire Exposed by IG Report

- I didn't really expect much from the Inspector General's The Report to the Governor on the Integrity of Those Seeking to Operate the Racetracks At Aqueduct, Belmont Park and Saratoga. (Big PDF document, but a pretty quick load). I certainly didn't expect such a long name! And as expected, it contains a lot of detail which may or may not be relevant to the situation at hand. It rehashes NYRA's indictment and all of the lawsuits and judgments involving the various bidders, their partners and officers. It mentions Gary Contessa's drug suspensions (not updated for the latest), a rebate shop partner of Woodbine investigated for child pornography, and a NYRA board member sued by shareholders of Barnes and Noble for backdating stock options. It is critical of all four bidders, and adds up to a big mess. So Spitzer put on his Corruption Buster helmet and issued a statement which said:

The IG's report released today illustrates why racing is one of the most heavily regulated industries in the nation. History has shown that the large amounts of cash at stake in racing pose risks for illegal activities including money laundering at rebate shops, tax schemes and race fixing.

Oh, but thank goodness we have the all-knowing Governor of Goodness to save us from this evil industry! "Indeed, this is why I required an integrity review in the first place," he reminds us.

But the report also contained detailed investigations of matters that I frankly doubted it would. There are in-depth reports on the political conflicts of interest regarding all the bidders (save Capital Play); even the ones involving Richard Fields and the Governor himself. And no, Jared Abbruzzese and Empire did not get off the hook because he's severed his ties from the company. There are four pages devoted to Abbruzzese's connections to Joe Bruno, largely referencing newspaper articles previously linked to here. (The IG could have saved some time had she done her searching here!)

And, most surprisingly to me, the report not only addressed the question of the origins and intentions of Empire Racing, it did so in extensive detail. In fact, the section of the report addressing the connection between Friends of New York and Empire is the only one that Inspector General Kristine Hamann farmed out to a private company to write. Thacher Associates is a New York-based security firm, comprised of experienced, highly qualified fraud detection and risk-management experts armed with state-of-the-art electronic intelligence and information retrieval systems. The conclusion of the report has had immediate consequences, prompting the prompt withdrawal of the New York Thoroughbred Horsemen's Association (NYTHA) from Empire Racing. Thacher wrote:

For the present, the weight of the evidence supports the conclusion that Empire was not created by New York horsemen for the benefit of New York horse racing. If Empire were to be awarded the franchise, the horsemen would likely lose control to the investors representing out-of-state horse racing interests, namely Canadian-based Magna...and Woodbine, and Kentucky-based Churchill Downs.

Thacher reveals that a Memorandum of Understanding (MOU), dated August 2006, 'requires Empire to retain the services of OperationsCo, a joint venture owned 50% by DNC, 25% by Churchill, and 25% by Magna, to provide management services with respect to the Racing Franchise.' (DNC is presumably Delaware North, though they're not referenced by those initials elsewhere in the report; they do specialize in hospitality services.)

In addition, Empire agreed to the formation of a second company, referred to as DistributionCo, in which they would be a 50% partner with Magna and Churchill (25% each).

'Churchill and/or Magna will be designated as DistributionCo's exclusive agent for "licensing and distributing the Content Rights to all domestic and international distribution channels."'

Now, this was previously reported in Empire's revised franchise bid, by which time DistributionCo had become the real life TrackNet Media (and we now know more about the seeds of that venture, apparently planted long before it's formation and perhaps for an entirely different purpose than stated).

But while Empire revealed in that document that Churchill and Magna would control the simulcast signal, it did not provide the exact financial arrangement. Thacher does:

Initially, Empire will receive 100% of DistributionCo's earnings until a threshold is reached, and afterwards Empire will be entitled to 50% of the earnings and Churchill and Magna will be entitled to receive 25% each.

At some point, Empire was going to be giving away half of the simulcast revenue to TrackNet Media. There may (or may not) be more giveaways in the various agreements with Empire's investors; but we don't know, because Empire released only the signature pages for the subscription agreements with Magna, Delaware North, and Scientific Games.

Even more damning in my opinion are the findings regarding Empire's predecessor organization Friends of New York Racing (FNYR), and the circumstances under which many investors of the latter, billed as a non-partisan group, went on to bid for the franchise as Empire. The report discusses the stormy Albany Law School conference last August, when Charles Hayward confronted FNYR chief Tim Smith, demanded to know just when Smith had invested in Empire, and accused him of using Friends to pave the way for Empire. In response, Smith wrote a letter claiming that 'around the first three months of 2006, as FNYR was winding down, "the concept of a New York industry-centric bidding group, including the horsemen's association, began to take shape.'

But, according to Thacher, a full two years beforehand, Smith, at the time under consideration to be the new CEO of NYRA, told Neil Getnick, the federal monitor assigned to the association, about plans to 'privatize NYRA by a broad coalition of businesses, including Churchill Downs, Scientific Games and Woodbine..' Smith was dropped from consideration for the job when Getnick told NYRA's Steve Duncker about the conversation.

And in August 2005, still a full year before Smith's explicit denial, according to the report he approached New York Thoroughbred Breeders (NYTB) president Barry Ostrager on behalf of FNYR and told him of plans to take NYRA private and asked for his endorsement. Ostrager turned him down. The report continues:

Over time, Ostrager formed the opinion that Smith's investors were a coalition of "carpet baggers and opportunists." In Ostrager's view, Smith's non-profit group was ostensibly making non-partisan, bidder-neutral recommendations on NYRA's future as a public service. However, Ostrager believed that Smith's non-profit group had a hidden agenda to personally profit from the fruits of their labor. FNYR was not interested in advancing the public interest. Instead, Ostrager felt FNYR's undisclosed objective was to promot its backers' financial self-interest, and everything it did was to further this undisclosed objective.

Smith of course had more luck with the NYTHA. At the March meeting which he addressed (an event that Hayward specifically cited as proof of Smith's and FNYR's duplicity), it is Gary Contessa's recollection that Smith mentioned that an investment of $50,000 would "probably get back $1 million." The board ultimately agreed to endorse Empire in return for a 3% stake; it was later disclosed that two board members, including West Point Thoroughbred president Terry Finley, already had financial stakes.

Empire later exaggerated NYTHA's financial involvement; the questionnaire that Empire completed for the Ad Hoc Committee stated that the organization had invested $123,098. In fact, they had invested nothing, only their endorsement.

Now, they are not invested in any way.

"From the horsemen's perspective, we believed it was necessary to re-establish our independence as an organization so that we can represent our membership in the best interests of itself and racing," [NYTHA President Richard] Violette said.
.....
Asked whether NYTHA's board felt that Empire failed to represent horsemen's interests, Violette said "there wasn't any one issue" that led to the decision. [Daily Racing Form]

As recently as this past April, Empire was still insisting, to the Rifkin committee, that it was formed by New York horsemen for New York horsemen. Now, with that lie having been exposed, the New York horsemen are gone. And it's Tim Smith who is portrayed as the original mastermind behind the plan, with help from Abbruzzese and Robin Palatino, Empire's original Managing Members (the latter was one of four investors to reduce their stakes below the level at which they would have had to submit to the IG report). 'Smith told an acquaintance that he would not take the fall for what had happened,' Thacher reports. And of the former NTRA commissioner, the report concludes rather ominously: 'In time it may become clear what Smith was talking about.'