In 1997, the Nevada Legislature outlawed giving cash rebates to bettors who participated in pari-mutuel wagering on horse races.
With such incentives no longer available, high-rolling horseplayers went looking for a better deal.
Some found it at Racing Services Inc., the Fargo-based company under investigation by state and federal authorities. Last week, records from the state racing commission showed the company owes North Dakota at least $5.5 million in back taxes.
Racing Services' growth -- from handling just under
$9 million in bets in 1998 to more than $214 million last year -- largely has been due to an incentive program that rewards big bettors for their business.
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The practice, often referred to as rebating, is controversial in national racing circles. So, too, is RSI, which has faced scrutiny from the industry for its past business methods.
Yet the success of luring high rollers with rebates has so impressed the chairman of the California Horse Racing Board that he favors changing California law to allow the practice.
"They provide a significant amount of handle -- RSI in particular -- and I'd like to see us compete with them," Roger Licht said.
RSI, which operates from a nondescript brick office building at 901 28th St. S.W., got its start in 1989, when the North Dakota Legislature approved interstate off-track betting, or OTB.
At simulcast OTB sites such as the Winner's Circle in Fargo, customers can bet on and watch races in other states, such as the Belmont Stakes or Kentucky Derby.
RSI is the only licensed simulcast operator in the state. It supplies the satellite linkup, mostly for horse and dog racing, at 10 sites in North Dakota, several in South Dakota, three in Idaho and one in Oregon.
The company also operates simulcast sites in Mexico under the name International Wagering and Entertainment Systems. RSI recently opened two sites in Venezuela and plans to open three more there next week, vice president Raymundo Diaz said.
About 30 people work for RSI's hubs in the United States and Mexico, while another 150 to 200 work for the charities and license holders that operate RSI-serviced simulcast sites, Diaz said.
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Under North Dakota's account wagering law, bettors can set up accounts with licensed charitable gambling organizations and place bets by phone or through other electronic means.
Two such organizations operate simulcast sites in Fargo.
The Fair Circuit Horse Racing Association, which provides equipment for live horse racing in North Dakota, runs the Winner's Circle on Main Avenue.
Team Makers, which raises funds for athletic scholarships to North Dakota State University, runs a simulcast site at The Bowler on University Avenue.
Both organizations also are licensed to take bets at the RSI building.
A guaranteed return
When Nevada outlawed rebating in 1998, many of that state's high rollers set up accounts at offshore betting sites, which can offer bigger payouts by avoiding taxes and horsemen's fees, Diaz said."And the players who elected to integrate themselves into a U.S. racing program, some of them came to Racing Services and others went to Indian reservations," he said.
Those who came to North Dakota instead of going offshore wanted the security of dealing with a U.S.-based company, Diaz said.
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RSI's incentive program likely played a role, as well.
The program consists of an arrangement between the bettors and the charity in which the charity is guaranteed a percentage of the profit, Diaz said.
At RSI headquarters in Fargo, a handful of bettors wager "an enormous amount of money," RSI director of tote operations Michael Cichy told a state legislative committee in March.
In August 2000, RSI founder Susan Bala told the Daily Racing Form that six bettors participated in the incentive program, providing approximately 45 percent of RSI's total handle, or bets. In 2000, that would have been about $68 million.
In return, the bettors receive a percentage of the wagers back after fees and taxes are taken out.
Because race tracks charge different rates for their simulcast signals, the margin of return varies, Diaz said, declining to offer a range. The Daily Racing Form reported that rebate amounts typically range from 7 percent to 10 percent.
The money returned to the bettor usually goes back into his account and is played again, Diaz said.
"In reality, what the player does is churns those dollars. They get reinvested into the system," he said.
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"What the misperception is, a lot of people think they bring a million dollars in and it's just scandalous.''
Some of the professional gamblers who do business at RSI have moved to North Dakota, Diaz said. Others hire a local "player-partner" to help them set up a betting strategy and physically enter the bets at one of RSI's five wagering stations.
One of the stations, known as the Green Room, is a corner office filled with TV monitors, computers and other elaborate equipment.
Industry views vary
Whether referred to as an incentive, marketing plan or rebate, programs such as RSI's have been hotly debated in the racing industry.
Mike Vukcevich, deputy director of the New Jersey Racing Commission, said rebates can hurt live horse-racing tracks if the bets are placed in a jurisdiction outside the state.
When a person from New Jersey places his bet elsewhere because he knows he'll receive a rebate, New Jersey tracks can't compete, Vukcevich said.
"It's very simple: If I have $100 to bet, am I going to bet somewhere I get the $100 back, or am I going to bet somewhere where I get the $100 back plus $8 in a rebate?" he said.
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New York, with annual handle of $3 billion, also prohibits rebating. The State Racing and Wagering Board denied an application to change that a few years ago, said Bill Nader, senior vice president of the New York Racing Association.
RSI buys signals year-round from the New York tracks, which include Belmont Park, Saratoga and Aqueduct.
The NYRA is "somewhat comfortable" with rebates, provided its tracks and horsemen are properly compensated, Nader said.
"We realize that rebates incentivize higher handle," he said. "And, if done properly, it can be a win-win situation."
The Nevada Gaming Commission also is considering whether to bring back rebates. Only a handful of states don't allow rebating.
Licht, chairman of the California Horse Racing Board, heard Bala talk about RSI's incentive program during an industry conference last year.
"Susan Bala is known to be very smart, very knowledgeable about the game, and found a niche where she's been able to attract very large players through her system," Licht said.
"She was very forthright in discussing her business," he said. "It's her position that she's providing incremental handle through people who otherwise would not be drawn to the horse races.
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"Whether or not that's true, I don't know."
Mystery man
Most of RSI's high rollers came from Nevada, but the company's biggest customer, who uses RSI's Green Room in Fargo, is a player new to the industry, Diaz said.
For privacy reasons, RSI officials won't divulge the bettor's name, but a few years ago all of horse racing was intrigued by the mystery man, according to articles and letters to the editor in the Daily Racing Form.
In March 2000, officials at Gulfstream Park near Miami said RSI was giving the bettor an unfair advantage. Gulfstream officials claimed RSI provided him with a direct computer link into the machine that registers bets and computes odds and payoffs. They complained the link allowed the high roller to place dozens of bets just seconds before race time, while using a complex software program to pick the most profitable bets.
Three California race tracks threatened to stop simulcasting races to North Dakota if the bettor was allowed to continue using the link.
RSI severed the link at Gulfstream's request. Officials who studied the bettor's link to the system, including racing industry officials and the North Dakota attorney general's office, found that it complied with racing regulations.
Today, RSI is embroiled in another skirmish. The company recently sent a letter to the National Horsemen's Benevolent and Protective Association defending itself against a report that said RSI pirated simulcast signals at 24 betting shops in Juarez, Mexico, according to published reports.
RSI initially said it believed it had a misunderstanding with the simulcast provider, and if there was a misunderstanding, it was in good faith, according to www.bloodhorse.com .
In the latest letter, RSI's lawyers said the report contained "numerous inaccuracies" and requested a meeting with the HPBA in September to discuss the matter, the Web site reported.
Setting RSI apart
Diaz said RSI's international business, like its business at home, is linked to live racing. By statute, a percentage of the proceeds in Venezuela must be used to build a live track, he said.
Diaz said it's unfortunate that RSI is sometimes compared to offshore rebate shops that give little, if anything, back to racing.
RSI has returned more than $25 million to the state, and that revenue has made possible the construction of the North Dakota Horse Park in Fargo, Bala has said. The park opens for racing on Aug. 22.
RSI "pays horsemen's fees and taxes, and it has for 15 years, and has proven to be the financial support of the racing industry in the state of North Dakota," Diaz said.
But now, the company is under investigation for falling into arrears on its state taxes, an annual contribution that has grown considerably with the company's expansion.
In 1998, North Dakota's 10 simulcast horse racing sites took in about $9 million in handle.
Over the next three years, handle grew to $88.6 million in 1999, $151.9 million in 2000 and $168.1 million in 2001.
RSI originally reported $172.1 million in handle in 2002, but the company recently corrected that amount to $214.5 million in an amended report to the state Racing Commission. RSI also amended its handle for Jan. 1 to April 30 of this year from $55.5 million to $112.1 million.
Last week, North Dakota Attorney General Wayne Stenehjem acknowledged his office is investigating RSI. U.S. Attorney Drew Wrigley said his office also is investigating RSI.
The company's new chief operating officer and president, Ken Maloney, said RSI will work with state and federal investigators to resolve the issue.
"In a regulated industry, especially like ours, the system requires that all business activities be trackable, auditable, and do it in a very straightforward approach," Maloney said.
As the simulcast industry becomes more competitive, North Dakota may have to change its regulations to maintain an edge, Diaz said.
"If we don't get the support of the industry to see ... the benefits of our activity over the last several years, and think this is going to go on automatic pilot, I think the state is going to lose this market," he said.
Readers can reach Forum reporter Mike Nowatzki at (701) 241-5528
