Investigations

When gamblers bet at the chirping, neon-glowing machines that stretch across Kentucky’s gambling parlors, they depend on a state commission to ensure they’re winning — or losing — fair and square.

The commission that oversees gambling depends on a consulting firm for advice about ensuring these systems, known as “historical horse racing” terminals, run legally and accurately. But when it comes to testing machines, records show the state’s regulatory commission let the tracks themselves fund and oversee the consultant’s work.

From 2012 to 2017, a consultant hired by the Kentucky Horse Racing Commission tested gaming machines at three gambling parlors associated with race tracks. But the horse racing commission was largely out of the loop from there: Keeneland, Ellis Park, Kentucky Downs and two machine manufacturers paid more than $845,000 for testing services with virtually no direct oversight from the horse racing commission, according to a review by the office of the Auditor of Public Accounts.

The commission didn’t even have copies of the invoices from New Jersey-based Gaming Laboratories International until it gathered them for the auditor.

The horse racing commission also asked the tracks to pay about $26,000 for the cost of the consultant’s work drafting new regulatory restrictions. The auditor’s office said he couldn’t find any law that allowed that arrangement.

Michael Fagan, a former assistant U.S. Attorney in the Eastern District of Missouri, said the relationship between the tracks and the state regulators appears problematic.

“Most people who thought it through would recognize this is not a way to run a railroad, so to speak,” said Fagan, who specialized in gambling cases. “The industry that is supposed to be regulated is buying its own regulator.”

Representatives of Ellis Park and Kentucky Downs declined to comment because ownership and management of both parks have changed since the payments in question. Keeneland did not respond to requests for comment. Churchill Downs operates historical horse racing systems, but it uses a different contractor for testing services and was not included in the auditor’s review.

Steve May, the Kentucky Horse Racing Commission’s director of pari-mutuel wagering and compliance, refused to be interviewed by the Kentucky Center for Investigative Reporting. He said in an email that the commission has addressed concerns raised by the auditor.

Kevin Mullally, vice president of government relations for Gaming Laboratories International, said in an emailed statement that the auditor’s report alleges no wrongdoing by his firm, “because there has not been any.”

“The race tracks have had no influence over GLI’s regulatory consulting work or compliance testing work, nor has there ever been an attempt to do so,” Mullally said.

He added that the issue raised in the auditor’s October letter is “over one year old” and he thought it had been resolved.

According to the auditor’s review, GLI raised concerns about the horse racing commission’s regulatory structure. In an internal memo, the commission acknowledged that its consultant recommended an analysis of its own regulatory structure — “to ensure they are providing the oversight necessary to ensure the integrity of the [historical horse racing] system.”

Commission’s Decisions ‘Out Of The Ordinary’

The terminals look like Las Vegas-style slots with themes including patriotism, monkeys or murder mysteries, but state officials have concluded they can be considered “pari-mutuel wagering.”

The machines are powered by old horse race data and gamblers bet in a pool against each other instead of against the house. Players can use horse race data to influence their winning odds, though many simply let the machine do the work and wish for good luck.

Only race tracks are allowed to host the machines, which the Kentucky Horse Racing Commission governs just as its charged with regulating live horse races.

In total, the commission handed the race tracks and manufacturers the responsibility for nearly $900,000 in payments to GLI. Most of those payments were for testing: a legal arrangement, according to the auditor’s office.

The auditor’s office reviewed the horse racing commission’s contract with GLI after its office received what it called “concerns.” Chris Hunt, general counsel for the state auditor’s office, called the commission’s actions “out of the ordinary.”

“The commission here kind of stepped aside and had the vendors work directly with the race tracks,” Hunt said.

In a letter released in October, Auditor of Public Accounts Mike Harmon said the issues began with the contract itself. The horse racing commission “circumvented the procurement process” when, in 2015, it renewed Gaming Laboratories International’s contract for three years instead of one, as the original agreement required.

The state should have overseen the work associated with that contract, Harmon said, even if it wasn’t paying the consultant’s bills.

Asking the tracks to pay for their own regulations also raised questions for Harmon.

Auditor of

“We find no authority in state statute or administrative regulation for the Commission to pass the costs of drafting regulatory language for testing requirements down to the tracks,” Harmon wrote.

It is unclear what that language might say. The commission denied a records request from KyCIR for the proposal because those regulations still haven’t been enacted, and are considered a draft.

May, the horse racing commission’s compliance director, said in response to emailed questions that the regulations dealt with technical requirements.

Former commission employees made the decision to pass consulting costs to the tracks, he said.

“So I do not know why this decision was made,” May said.

The consulting work occurred in 2015, and May became compliance director the following year. The current executive director, Marc Guilfoil, has worked at the commission for decades and ordered the tracks to make the payments, records show.

An email from 2015 shows Guilfoil emailed the three tracks and asked them to promptly pay the roughly $26,000 tab for drafting new regulations.

“As you will recall, we spoke to you at the end of 2014 about contracting with GLI to provide consulting services on the regulation of historical horse race wagering, including drafting technical standards and revising our regulatory scheme,” Guilfoil said in the email. “We informed you that GLI had estimated approximately $25,000 for the contract and that the cost would be assessed to each track approved to offer [historical horse racing]. Please find the attached invoice from GLI.”

Guilfoil did not respond to requests for comment.

May said that, in response to the auditor’s letter, the commission has set up a quarterly schedule to review invoices and other information required by the contract. He said the commission reimbursed the tracks for consulting costs, as Harmon suggested.

But KyCIR requested proof of that reimbursement in January — and still hasn’t received copies of the checks. The horse racing commission first said it didn’t have the records, referring reporters to the Finance and Administration Cabinet. But that cabinet said it didn’t have any records, either.

Hunt, the attorney at the auditor’s office, was surprised to hear that.

“That sounds bizarre to me, frankly,” Hunt said.

KyCIR then asked the commission if it had any documentation of the payment. The racing commission provided KyCIR with check numbers, but said it had no copies.

No Legislative Action Yet

It’s common for entities being regulated to work closely with the state on rules that govern their work, said Noel Isama, a senior policy analyst for the Sunlight Foundation, a national nonprofit organization advocating for open government. But he said governments should avoid the potential for the industry to dictate its own rules.

“The whole idea of regulation sometimes is to help an industry stop from being the worst version of themselves or stop them from being overzealous or too enthusiastic about their own interest and causing further harm,” Isama said.

The state legislature has yet to weigh in. The horse racing commission directly legalized the machines in 2010 by creating administrative regulations for them.

That year, the race tracks and the Kentucky Department of Revenue sought confirmation from a Franklin County Court judge that the machines were legal. The Family Foundation, a conservative advocacy group that opposes gambling, challenged the state.

During the years the court battle raged on, thousands of the terminals cropped up in gambling parlors associated with horse racing tracks around the state, raking in millions for the racing industry.

Judge Thomas Wingate ruled in the state’s favor in 2018. The Family Foundation is appealing.

Rep. Adam Koenig, a Republican from Erlanger, said the lack of legislative action makes it harder to determine whose responsibility it is to ensure the gambling machines run legally.

“Given the lack of direction in the statutes, it is hard for me to complain about anything else in the (auditor’s) letter that the horse racing commission is doing,” said Koenig, who is chair of the House Standing Committee on Licensing, Occupations and Administrative Regulations, which oversees racing matters.

“The Auditor is doing his job in looking out for the Commonwealth and the taxpayers, but short of any direction from the Legislature, the horse racing commission is doing the best they can.”

One bill, co-sponsored by Koenig in 2017, would have authorized the commission to charge the industry an annual licensing fee to pay for administrative costs. It also would have required machine makers, distributors or race tracks to pay for testing services.

The bill never made it to a House vote.

Koenig said the Family Foundation’s powerful lobbying has blocked efforts from him and other legislators to establish legislative ground rules for the machines.

The Family Foundation’s attorney, Stan Cave, said the foundation opposed such legislation because it would have interfered with its court battle — and “legalized the corrupting practice of interested private parties paying hundreds of thousands of dollars to a regulatory agency’s consultant.”

State Sen. Julie Raque Adams, a Republican from Louisville, said the commission’s arrangement with Gaming Laboratories International raises red flags and warrants a critical look from lawmakers. Adams is on the Senate Licensing, Occupations and Administrative Regulations Committee that oversees racing issues.

“Things can be skewed depending on who is paying for it,” Adams said. “I think we need to dig in a little deeper and see what kind of information we’re getting back. Is it truly holistic in its approach or does it weigh in favor of the tracks?”