At the end of May, amidst a series of alleged scandals and controversies, Governor Andrew Cuomo and the leaders of the New York state legislature “took over” the New York Racing Association (“NYRA”), the private nonprofit corporation that controls operations at the state’s three major horse racing venues: Aqueduct Race Track in Queens, Belmont on Long Island and Saratoga at Saratoga Springs. As if the takeover of the almost 60 year old racing association wouldn’t have been high profile enough, it comes just before the famed Belmont Stakes Race scheduled for June 9. The Belmont is the third leg of horse racings’ prestigious “Triple Crown” of races, along with the Kentucky Derby and the Preakness. The last time a horse won all three legs of the Triple Crown was 1978 – 35 years ago – but racehorse “I’ll Have Another” has won the first two legs, and is the celebrity favorite in the Belmont.
The NYRA has been the subject of at least 3 ongoing public controversies including allegations concerning unacceptable working and living conditions for backstretch employees, a series of equine deaths and allegations of illegal horse drugging and an audit raising concerns that the Aqueduct track and casino may have underpaid bettors by as much as $8.5 million. Each of the 3 controversies was significant. For example the horse injury and fatality problem began as casino funds began to increase race purses, and resulted in a dramatic increase this race season in race “horse breakdowns” and fatalities, as well as injuries to jockeys. The problem resulted in a rate of 10.2 breakdowns and/or fatalities per 1,000 starts, which is double the average national rate for thoroughbred horse races. But the allegations of underpaying on wagers was the most serious and highest profile controversy.
The underpayment scandal arose from a statutory change in what is called the “take out” rate, that is the amount the track can keep from the bets, on some races. In 2008, legislation was enacted that increased the “take out” rate for tracks on certain complicated bets (wagers that involved picking winners in multiple races, or multiple winners in a single race) from 25% to 26%, with the increased rate to go back to 25% on September 15, 2010. Allegedly, the NYRA failed to readjust the rate effective in September of 2010, and allegedly some top management officials in the Association knew all about it. The scandal lead to the NYRA firing its President, Charles Hayword, and its general counsel Patrick Kehoe, both of whom deny any wrongdoing. But the firings didn’t satisfy state officials.
NY Governor Andrew Cuomo and the state’s legislative leaders demanded that the NYRA Board be replaced by one controlled by the state and the operation be reorganized. Because the NYRA is a private, not for profit corporation, the state does not have direct control of the organization or its governance. In fact, a number of years ago former Governor George Pataki tried to exercise control over the group and failed. But the state is not without influence because the state has contracted with the NYRA to run the major race track operations in the state. The NYRA has had that franchise by contract since 1955, and its current agreement does not expire until 2033.
To exercise maximum influence over NYRA, the Governor, through the State Lottery Commission, withheld casino revenues from Aqueduct Casino, worth about $3 million a month. It took almost no time at all for the NYRA Board to sign on to the state plan. Under the plan the NYRA Board will contract from 25 members to 17, with 7 members and the Chairman to be appointed by the Governor, and 4 more members appointed by the legislature. This new NYRA Reorganization Board will run operations and make substantive changes to race track operations for the next 3 years, after which a new association controlled board presumably will be put in place.
Cuomo made his position clear: the takeover was necessary to restore public trust in horse racing and gaming, and he wasn’t about to compromise. At one point he was quoted as telling the sitting NYRA Board members that his takeover would happen one way or the other; the NYRA Board could go along, or they could fight it out in court and undergo a more comprehensive investigation and greater public scrutiny. They decided, quickly, to take the first option.
But what if they hadn’t? Just as a matter of interest and curiosity some of my nonprofit clients and nonprofit board members of clients have asked what would have happened if the NYRA hadn’t acquiesced, and the state hadn’t had a $3 million dollar a month hammer?
Nonprofit corporations in New York are formed under the New York State Not-for-Profit Corporation Law (n-PCL), and the state does have considerable regulatory and reporting authority over nonprofits. Nonprofits, of course, have various business advantages, primarily tax advantages, because they are limited to certain public interest purposes and cannot be formed for the purposes of pecuniary profit or financial gain. But nonprofits must comply with the provisions of the N-PCL.
The New York Attorney General has the primary statutory responsibility to regulate nonprofit organization conduct and enforce the provisions of the N-PCL, including requirements regarding formation, reporting, operation, and amendments and dissolution and distributions of assets. The Attorney General is authorized to bring legal actions to remove nonprofit directors and officers for cause [N-CPL Sections 112(a)(4), 706(d) and 714(c)]. He is also authorized to bring actions against directors and officers for breach of fiduciary duties including mismanagement and waste of nonprofit corporate assets [N-CPL 720], and to bring actions to prevent or set aside any unlawful conveyance, assignment or transfer of assets [N-PCL 720(a)(2) and (3)].
So every nonprofit has to comply with the filing, reporting and operation provisions of New York’s Not-for-Profit Corporation Law, and every board member and officers has requirement “discharge the duties of their respective positions in good faith and with the degree of diligence, care and skill which ordinarily prudent [persons] would exercise…” (N-PCL 717].