MGM MIRAGE’s New York deal faces more delays

By Liz Benston (contact)

Thursday, Feb. 19, 2004 | 11:18 a.m.

It's been 10 months since MGM MIRAGE received a contract from a New York racetrack operator that would have created one of the country's largest racetrack casinos, or racinos. But the casino giant is still far from introducing slot machines at the track, financial documents issued this week show.

In the company's annual report, MGM MIRAGE said its contract to operate slots at the Aqueduct Race Track in Queens "is subject to a definitive agreement, regulatory approvals and certain legislative changes by the State of New York."

The statement was the first on the matter by the company since December, when the New York Racing Association, which operates the track, admitted to a tax fraud scheme by track clerks and entered into a deferred prosecution agreement with the U.S. Attorney in New York.

MGM MIRAGE halted construction of the slot machine casino in August over concerns that racing association officials would be indicted following the resolution of a three-year investigation into criminal activity by racetrack clerks. Federal prosecutors in December charged two former racing association officials and four former track clerks with conspiring in a 20-year scheme to evade taxes on $19 million in bets. Under the federal deal, the association will avoid prosecution by paying $3 million in fines and agreeing to reforms. The indictment will be dismissed provided the association hasn't violated the terms of the agreement.

In December, MGM MIRAGE Chief Executive Officer Terry Lanni said the company was "pleased that the U.S. attorney's investigation of NYRA has been resolved and that NYRA is now able to proceed with VLT operations at Aqueduct."

MGM MIRAGE has not resumed construction on the casino, which is estimated to cost at least $100 million.

The New York Racing Association is a nonprofit corporation with a state franchise to operate the Aqueduct, Belmont Park and Saratoga horse tracks in New York.

MGM MIRAGE declined to comment on the deal beyond Lanni's statement and its annual report.

The New York Racing Association must first jump two significant legislative hurdles before it can offer slot machines, said Patrick Kehoe, the association's senior vice president and general counsel.

The New York Racing Association's state franchise, due to expire Dec. 31, 2007, last year received a 10-year extension by the state Legislature provided that the organization had slot machines in operation by March 1. With the deadline fast approaching, the association is lobbying to get another extension, Kehoe said. The 2007 expiration date doesn't leave enough time for the association to be able to pay back the $100 million-plus it is borrowing from MGM MIRAGE to develop and build the casino, he said.

The association also needs legislative approval to restructure its organization so that it is able to keep some of its profits and therefore repay the loan, he said. As a nonprofit, all of its earnings now go to a state agency at the end of the year in the form of a franchise fee.

A state agency also needs to sign off on an environmental review process required of all major state development projects.

MGM MIRAGE still hasn't signed a final management contract with the racing association because of all the uncertainties related to the project, Kehoe said.

Kehoe said he is still "optimistic" that the track will be able to receive all necessary approvals and open the racino as planned by the end of the year.

According to a New York source close to the deal, who declined to be named, New Jersey casino regulators have expressed concern about the fact that MGM MIRAGE, which is licensed in New Jersey and whose New York racino would compete with Atlantic City properties, is doing business with an organization that has been indicted.

MGM MIRAGE this month agreed to buy Wembley plc, a London-based dog track company whose executives were indicted on charges of paying a law firm tied to a Rhode Island legislator to help facilitate the legalization of slot machines at tracks in Rhode Island. MGM MIRAGE has said it will acquire the company, which owns a lucrative racino in Rhode Island, free and clear of liabilities.

Director of New Jersey's Division of Gaming Enforcement Thomas N. Auriemma said regulators have met with representatives of MGM MIRAGE to discuss the deals with the New York Racing Association and with Wembley. He declined to discuss specifics of those talks.

Separately, MGM MIRAGE said in its annual report that it has earmarked about $300 million in cash for capital expenditures this year, not including the anticipated development of a permanent casino in Detroit to replace its MGM Grand Detroit. The company also expects to spend another $490 million or so on its proposed Wembley acquisition.