There He Goes Again: Stronach's $10 a Share Scheme

Frank (center) and friends

As readers of this blog know, I have no love for Frank Stronach, or for what he's done to racing. I've discussed some of his more egregious conduct here, here, here and here, just for starters.

Stronach is already the highest-paid executive in his adopted country of Canada, where he emigrated from his native Osterreich. Now Frank has come up with yet another approach to separating racing fans and would-be thoroughbred owners from their money. On December 28, 2011, companies controlled by Stronach filed six registration statements with the US Securities and Exchange Commission; each registration was for a separate corporation, each named for successful Stronach horses: Awesome Again, Red Bullet, Ghostzapper, Macho Uno, Perfect Sting and Ginger Punch. Each of the corporations proposes to sell $4,050,000 worth of $10 shares to the public. The balance of each corporation's total capitalization of $4,500,000 will be held by another Stronach entity called Golden Pegasus, giving Frank effective control of each company.

Each of the corporations will own 20 brand-new two-year-olds, which were purchased at auction last year by yet another Stronach company. The new corporations will have racing rights to the horses only for their two-year-old seasons and for their three-year-old year up until November, 2013, when the horses will be sold and the proceeds, if any, distributed to the shareholders. That's a very strange provision, since it puts enormous pressure on the trainers to produce early results, possibly at the expense of a horse's longer-term career. Also, a significant portion of good horses' earning come in their fourth and subsequent years, so shareholders won't get the full benefit of those earnings.

[All six registration statements are substantially the same, except for the identity of the horses. The one that I've reviewed thoroughly, and that I discuss in detail in this post, is for the Awesome Again Racing Corp. and is on file here.]

Frank's last ride in the market

Announcement of the Stronach offerings has drawn a bit of press interest, and was welcomed by industry chronicler Ray Paulick on his web site, which also quotes West Point Thoroughbreds chief Terry Finley as saying that Stronach's plan is good for racing. There's been a vigorous debate in the comments section of the Paulick piece.

I've read all the comments, and I've applied my law-trained eye to the SEC registration statement. Alas, there's only one conclusion I can draw: this is just one more Stronach scheme to separate those in the racing industry from their money and add that money to Frank's own obscene hoard.

Before turning to the specifics revealed by the SEC filings, a bit of disclosure. I'm racing manager of Castle Village Farm, a modest thoroughbred partnership operation based in New York. We communicate regularly with our partners by email, we host them at the barn and the training track every week, they're all welcome in the paddock and the winners circle on race days, we provide detailed monthly financial reports on our modest expenses, and we don't mark the horses up much when we buy them for resale to the partners. In other words, we, and some other small partnership operations, offer a real racetrack experience, at an affordable price, for someone who might want to get in the game with only $1,000 or so. But if heavy advertising and misguided press enthusiasm steer prospective owners to bottomless pits like Stronach's corporations, that'll deprive those of us who do offer real ownership experience the chance to introduce new partners to the game in a way that will encourage them to stay involved. Enough said.

Now for the details of the Stronach offering.

Each of the six new corporations is offering $4,050,000 at $10 a share, with a total target investment for each of $4,050,000. The offering is initially open for only 90 days from December 28, 2011, but each corporation has the option of extending the offering for another 90 days, into late June, 2012. If the target investment isn't subscribed by then, so the SEC filing states, all money will be returned to the prospective investors.

Each corporation owns 20 new two-year-olds, purchased last year at an average of $60,000 or so each. If the full amount of $4,500,000 is subscribed (including Stronach's own 10%), the $1.2 million or so in purchase prices will be paid back to a Stronach corporation.

The horses are currently in training at Stronach's Adena Springs complex in Florida. As of December 23, 2011, each new corporation is paying a Stronach entity some $150 a day for training and routine vet costs (there's a $100,000 reserve for "emergency" vet bills). That sounds way too high for training-center costs; $60-75 a day would be much more reasonable, even including routine vet work and farriers. Even when the horses move to trainers' barns at various racetracks, that sounds high, at least compared to what I know to be the actual trainer and vet charges in New York, which must be the most expensive locale in the US to train at. That $150 a day will be charged every day except when horses are on injury layups; then the charge drops to $60 a day, somewhat closer to reality. Although the SEC registration statement says that Golden Pegasus, the Stronach entity that collects the $150 a day, will return any profit above 10% to the shareholders, Golden Pegasus itself will be paying training bills to Adena Springs, another Stronach entity. That's called transfer pricing, hiding the profit in deals between various corporate subsidiaries. Shareholders shouldn't expect to see much in the way of a profit rebate from Golden Pegasus.

Initial expenses of the stock offering are estimated at about $200,000; naturally, one has to engage a big national law firm to do stuff like this. In Frank's case, that firm is Akerman Senterfitt, a politically-connected Florida-based operation. So, six times $200,000 equals well over a million. Not a bad few days' work for the lawyers and accountants.

Overall, the SEC filings estimate that $1.2 million of the $4.05 million initial capital in each corporation will be used to pay for the horses, $1.8 million will go for the (inflated) training and vet costs, and $1.1 million for "administrative and legal" expenses. Good deal, apparently for the lawyers, since administrative expenses are minimal. The corporations' only employees are longtime Stronach horseman Jack Brothers, CEO of each of the six corporations, and CFO Lyle Strachan. Brothers is supposed to get $25,000 a year from each corporation, for a total of $150,000, and Strachan $16,667, for a total of $100,000. Mysteriously, the registration statements report that the corporations have begun charging $1,150 a day -- an annual total of $420,000 for each corporation. Care to explain the discrepancy, Frank?

Brothers, Strachan and others in the deal are already on a Stronach payroll, somewhere in the labyrinth of interlocking companies that Stronach controls. In addition, the horses assigned to the corporations were initially chosen by a "selection team" that included Adena Springs' house vet, Dr. Peter Kazakevicius, as well as two principals in the Kentucky-based Hidden Brook Farm. Interestingly, Jack Brothers and others associated with the new Stronach venture are also listed on Hidden Brook's web site. Conflict of interest anyone? And each corporation's Board of Directors is composed -- surprise! --almost entirely of veteran Stronach employees and cronies

The offering statements also say that the horses will race primarily at Stronach-owned tracks -- Santa Anita, Gulfstream and Maryland -- assuming that Stronach hasn't destroyed Maryland racing before the horses reach the starting gate. Is that the best way to maximize shareholder value, when the most prestigious, value-enhancing races are in New York and Kentucky?

As it must, the SEC registration statement cites a long list of risk factors. It starts off the list with the following instructive statement, which is actually a pretty good model for any racing partnership to adopt:

"Investing in thoroughbred racehorses is a speculative activity, and the most frequent financial outcome from ownership of a thoroughbred racehorse or an equity interest in a thoughbred racehorse is the partial or total loss of invested capital."


That's certainly true. On average, a racehorse in the US earns about half as much as its annual training, vet and other maintenance costs. And well over 90% of all racehorses lose money for their owners, even before taking into account the amount the owner paid to acquire the horse. The last time I looked, some two years ago, a horse racing in New York had to earn about $50,000 to break even. And that's without the high fees, administrative charges and other burdens that Stronach proposes to impose on his investors. Just the administrative costs alone would raise that number to something like $75,000 -- before taking into account the amounts paid initially for the horses. And since the investor gets only the horse's (usually abbreviated) two-year-old season and perhaps 80% of its three-year-old year, I'd be astonished if more than two or three at most of the 20 horses in each corporation end up paying their way.

Nothing in the offering document offers investors much of a racetrack experience, either. And Stronach has a track record here. Comments from embittered veterans of his previous partnership vehicle, Adena Springs Joint Ventures, complained in their comments on the Paulick Report that they had virtually no hands-on involvement with their horses. That stands in sharp contrast to the situation with most successful racing partnerships, that offer their partners much more of an up close and personal experience, including barn visits, hospitality at the track, regular updates on their horses, etc. So let's see: a near-guaranteed loss of money, plus no direct involvement with your horse: sure sounds like a winning formula to me. But presumably the shareholders can get win photos, if they pay for them.

Supporters of the Stronach proposal have compared it to racing clubs in Japan, which are structured along similar, if not quite so rapacious, lines, or to the fan ownership of shares in the effectively not-for-profit Green Bay Packers. But there are key differences. Japanese purses are far higher than in the US, costs are lower, and a greater percentage of horses actually pay for themselves. And the Packers are the kind of community institution that inspires fan loyalty; can anyone say that about Frank Stronach and a group of 20 anonymous horses?

Speaking of those horses, I had a quick look through the list of yearlings attached to the Awesome Again Racing Corp. offering statement. Looks like the list is heavy with precociousness and speed orientation, which at least is consistent with the emphasis on racing at two and three. And not too many of Stronach's own sires are represented. Of the 20 horses, whose purchase price averaged just over $60,000, three were bought for more than $100,000 each, and a majority cost less than $50,000. That's not generally regarded as the most likely point in the market to find a big horse.

Lots more detail available in the SEC files, but that's enough to scare me off. And I'm even one of the few who made a profit vis-a-vis Stronach; I got in and out of his now-worthless Magna Entertainment Corp. stock a few years ago with a profit of all of $100. Thanks for small favors, Frank, but, as George Bush once lamentably tried to say, fool me once, shame on you; fool me twice, shame on me.

Does the Queen want to buy a few shares?

Hong Kong 3: Drug Rules and Horse Care

When it comes to drug use, Hong Kong is one of the strictest racing jurisdictions in the world. No medications are allowed. Period. And some drugs -- Lasix, for example -- can't even be used in training.

At the same time, Hong Kong is among the most transparent jurisdictions regarding the physical condition of horses entered in races. The Hong Kong Jockey Club's web site has a link to complete veterinary information for every horse entered in every race, and in far more detail than is available to US bettors. For example, a look at Sunday's upcoming card at Sha Tin shows reports on which horses showed up lame after a race, which had fevers, which showed mucus or traces of blood in the trachea, which ones had fractured bones, which ones had suspensory injuries, and much more. I'm not sure whether all that information would actually help a bettor, though I find it valuable in explaining layoff lines, but it can't hurt.

Hong Kong, of course, has many inherent advantages over the US when it comes to regulating drugs. As I mentioned in the first of these posts, the Hong Kong Jockey Club is racing's sole regulator, enforcer, operator, and virtually sole employer. All the vets work for the Jockey Club, as do all the grooms. No trainers with private vets to make everyone suspicious. That makes things a lot easier to police. And the HKJC's drug testing lab, with a professional staff of 40, is a match for just about any of the labs in the US. Given the small number of racing days, Hong Kong almost certainly tests a higher proportion of horses than any US jurisdiction. It's not just the winners and a few random horses from each race that are tested, but also any horse that, in the opinion of the stewards, fails to perform to expectations.

Another advantage Hong Kong has in being able to ensure clean racing is that it screens horses before they can be imported into the jurisdiction. Once a member of the Jockey Club wins the annual lottery giving him or her the right to import a horse, that owner has to secure the Jockey Club's approval for the actual import. That screening process keeps out unsound horses and tends to insure a homogeneous, competitive supply of horses in the barns.

A further advantage is that older horses have a guaranteed retirement option; they don't have to be held together with drugs and tape while they slide down the claiming ladder. The Jockey Club requires each owner to post a HK$40,000 (US$5,000) deposit when the owner imports a horse. If the owner can arrange a confirmed retirement placing for the horse, the deposit is refunded. If not, the Jockey Club adds some of its own funds and itself arranges for retraining of the horse and finding a new career for it in China. In some cases, the Jockey Club will pay as much as another HK$80,000 on top of the owner's deposit. It's a great plan, and not just because it has the ancillary effect of reducing drug use in older horses. The US could do well to emulate such a plan, with mandatory contributions toward retirement by each thoroughbred's breeder and each subsequent owner.

Still, even with all these advantages, Hong Kong race horses aren't paragons of health. The incidence of actual bleeding during or immediately after a race is very high by world standards -- 4.6 per 1,000 runners. That compares to 2.0 per thousand in the US before widespread use of Lasix and only 0.7 per thousand currently. Dr. Brian Stewart of the Hong Kong Jockey Club attributes the high rate primarily to pollution and high humidity in an urban training environment. And, interestingly, there's less bleeding at the evening meetings at Happy Valley, when temperatures and humidity tend to be lower. Horses also tend to lose weight on the van trip over to Happy Valley from their barns at Sha Tin. I can understand that; I'm sure I lose weight just through stress and fear every time I take a long taxi ride in Hong Kong. Dr. Stewart's full report on bleeding at Hong Kong tracks can be found here.

Some of the pollution problem -- and Hong Kong is certainly a lot more polluted than New York, Chicago or Los Angeles, thanks both to too many cars on the road and to industrial pollution blowing over from China -- may be alleviated in a couple of years when the Jockey Club opens its Conghua training center in China, about three hours' drive from Hong Kong. The training center will have room for 400 horses, allowing them to be rotated out of the crowded racetrack training environment at Sha Tin, and will have a mile and a quarter turf course, a six-furlong uphill turf gallop and two synthetic training tracks, as well as swimming pools and turn-out paddocks. I can feel the envy of those who train even at Fair Hill or Saratoga, much less Belmont and Aqueduct.  In any event, getting horses out of Hong Kong for a part of each season should help the bleeding problem.

Part of the opposition to Lasix on the part of the Hong Kong Jockey Club is based on their vets' firm belief that Lasix is a masking agent for some other drugs. That's a belief that most US equine vets strongly reject; the US lab chiefs say that their testing has advanced to the point where Lasix is no longer effective in hiding other drug use. That's a scientific argument that I don't have the knowledge to have an opinion on, and one, I suspect, that will remain unresolved.

Could the US go to a racing environment that's as drug-free as Hong Kong's? Should it? After all, Hong Kong has an incidence of serious bleeding that's more than six times as high as that in the US. But those are questions for another day. For now, with only one or two more trips to the racetrack left before we return to New York, I'm just content to enjoy the high-quality racing and the spectacular customer service in Hong Kong.

See you at Aqueduct.

Hong Kong 2: The Race Track Experience

The beer garden at Happy Valley

Critics, consultants and industry insiders in US horse racing agonize over how to make race-going a fan-friendly, exciting experience, one that newcomers will enjoy and want to repeat. In Hong Kong, they've figured out how to do that. True, the circumstances are different, and Hong Kong racing doesn't face the kind of competition from other spectator sports and gambling options that tracks in the US face, but, nonetheless, perhaps there's something to be learned from looking at how it's done elsewhere.

This is the second of three reports based on several visits to each of the Hong Kong race tracks. Yesterday's dealt with the economics of Hong Kong racing. Tomorrow's will deal with care of horses, medication rules, and equine retirement.


Happy Valley

The urban racetrack is an unprepossessing species in America. Aqueduct, Hawthorne, Pimlico. Blighted neighborhoods, wind whistling through near-empty stands, a few thousand patrons whose median age is deceased.

Not so in Hong Kong. Happy Valley, the in-town racecourse that runs on Wednesday evenings, is close to the center of the city, a short walk from a major subway stop, in an upscale neighborhood, with the track surrounded by expensive high-rises. And going to the races, with 30,000 or more fellow racing fans, is fun.

As for the track itself, think Aqueduct on steroids. No, not that kind of steroids; Hong Kong has just about the tightest drug rules in the world. But take an urban race track with a mid-week meeting, fill it with 30,000 or more people, build the stands 8 stories high, surround the track with skyscraper apartment buildings, throw in a beer garden for the expatriates, and you have Happy Valley. It's Hong Kong's second track, home to mid-week night racing, mostly for average-quality horses, and with few of the top-quality stakes that are mostly run at the other Hong Kong track, Sha Tin, out in the New Territories.

While visiting Hong Kong, we've seen both extremes of the accommodations at Happy Valley. Thanks to Bill Nader and Anny Kwan, we enjoyed the luxury of the Hong Kong Jockey Club's executive box high up in the members' stand (aka club house, but in fact so much more), with a serious buffet and excellent wine. The huge members' stand has a wide variety of restaurants, lounges and viewing areas; ours was but one of many. And on another visit, we paid our HK$10 (about US$1.25) grandstand admission and watched the races from the commotion of the stretch-side beer garden, where a fully costumed Santa Claus was standing at the rail yelling his heart out for Number 5, and from the balcony just off the food court on the second floor. Two nights of good, competitive racing, with full fields -- Hong Kong averages 12.4 horses per race, compared to just under 8 at most of the major US tracks -- and lots of good betting opportunities.

The betting menu at the Hong Kong tracks is a bit more extensive than at most US tracks. All races offer win and place (i.e., 1st, 2nd or 3rd) betting, plus quiniellas and "place quiniellas" (pick any two of the top 3 horses) and trifectas (called "tierce" in Hong Kong). No exacta or superfecta betting, but quiniella-type bets on the top 3 in any order ("trio") and the top 4 in any order ("First 4"). The biggest single-race pool (which is typically the exacta pool in the US) is the trio.

Rolling doubles and Pick 3 bets are also available, with consolation payoffs if you hit the first leg (or first two in the Pick 3) and finish second in the last leg. The big high-payoff exotics are the double trio (hit the trio in two consecutive races) and, especially, the triple trio (hit it in three consecutive races). The latter builds up a jackpot, much like the Pick Six at US tracks. It's not easy to get the three top finishers three races in a row, when the average field size is more than 12; as of the end of Tuesday's race card, the Triple Trio jackpot was over HK$14 million (almost US$2 million). There's also a Pick Six, which pays off if you get either the first or second-place horse in six consecutive races, with a bonus for getting all six winners; that bonus, as of Tuesday, was over HK$10 million.

The Happy Valley walking ring is on the apron, rather than behind the track, allowing lots of grandstand patrons -- at least those who aren't enthralled by the beer garden festivities -- to get a last look before placing their bets. In contrast to Sha Tin, though, the HK$10 racetrackers don't have the chance for seats on the finish line; that's clubhouse, or, in HK parlance, members' stand, territory.

Down the stretch at Sha Tin

Sha Tin

If Happy Valley is Aqueduct on steroids, then Sha Tin, out in the New Territories north of Kowloon, is a combination of Belmont, Churchill Downs and Santa Anita, done better. Mountains in the background, a la Santa Anita, stands eight stories high, a la Churchill, and a dedicated race track train, a la Belmont (though the one to Sha Tin was a lot more crowded, even on a relatively off day). The Sha Tin facility holds 80,000 or more, with excellent unreserved seating and remarkable restaurant facilities for those willing to pay a bit more. The high-rise stands offer great views of the track from the balconies, and the infield tote board is long enough to show lots more payoff and pool data than is typical at most US tracks.

For Hong Kong's big racing day, the Cathay Pacific Hong Kong International Races on December 11th, we watched from the "Champions' Circle," set up for the day with a lavish buffet, lots of TV monitors, and easy access to the balconies facing the track and the walking ring behind the stands. A spectacular day of racing, from which American race track executives could learn. Take care of your foreign visitors, make a show of awarding the trophies, and, perhaps most impressive, have lots of helpful, friendly customer-service folks all over the track to help out the once-a-year visitors and, perhaps, turn them into regular racegoers.

Customer service is generally more friendly in Hong Kong than, say, in New York, but the Hong Kong Jockey Club puts a lot of time and effort into service, both at the track and in maintaining contact with its customers. Even by Hong Kong standards, it does well. Whether at the betting windows in the Champions Circle or at the (somewhat primitive-feeling) betting machines in the grandstand, there was always a mutuels information person within reach for the confused tourist. Try finding either of those (the friendly information person or the tourist) at Aqueduct in February.

And the information available to the serious bettor is significantly more complete at the Hong Kong tracks than in the US. The Jockey Club web site and most of the newspapers' racing sections include reports on horses that have bled in workouts or races and on horses that turned up lame or with other injuries. That contrasts with the general lack of explanation for a layoff that's found in the Daily Racing Form or track programs in the US. Equipment changes and  additions are also more comprehensively reported. In the US, the only equipment generally reported in the Form are blinkers and front bandages. In Hong Kong, there's also notification of, among other things, shadow rolls, figure-eight nosebands, the horse's weight (not just the assigned jockey weight) and a fair number of other equipment issues that may or may not make a difference, but certainly project an air of complete transparency.

The Form doesn't show as many prior races as in the US, and there's no precise equivalent of Beyer Speed Figures or the Ragozin or Thorograph Sheets for figure players, but in all other respects, the information provided to the Hong Kong bettor (at least the English-speaking variety; I can't comment on what's available in Chinese, but it certainly looked co-extensive with the English version) seems more thorough and complete than in the US.

As for medication notes, that's easy. None allowed. More on that tomorrow.

Hong Kong 1. Where Even the Owners Make Money

Sha Tin Racecourse on a busy day

Through a combination of fortuitous circumstances, my wife and I are lucky enough to be spending a month in Hong Kong, visiting our daughter, who works here, grading our law school exams far from the pleas of worried students, and, not so incidentally, checking out the Hong Kong racing scene.

Thanks to the kindness of Hong Kong Jockey Club Executive Director of Racing Bill Nader, formerly chief operating officer of NYRA, and Bill's assistant, Anny Kwan, we've enjoyed the best accommodations that Sha Tin and Happy Valley race courses have to offer, and we've also just wandered around in the grandstand at each track, absorbing the ambiance of being a regular racing fan.

So, for those who haven't had the chance to see Hong Kong racing in person, here are three blog postings on our experience, and how the Hong Kong scene compares with American racing. Today's post covers the economics of racing in Hong Kong; subsequent posts will deal with the experience of racegoing at the Sha Tin and Happy Valley tracks and with the medication and related issues.

First, the money.

Hong Kong has 83 racing days a season, typically a weekend day at the sprawling Sha Tin track in the New Territories north of Hong Kong proper, and a Wednesday night meet at close-in Happy Valley on Hong Kong island. For those 83 days, total handle is roughly HK$1 billion (US$128 million)per racecard; HK$81.9 billion for the most recent fiscal year. Counting betting on soccer and the lottery, both of which also flow through the HKJC coffers, total annual handle for the HKJC is upwards of HK$130 billion (US$ 17 billion).

Yesterday's 10-race card at Sha Tin -- a typical race day with mostly what would be mid-level claiming and allowances races in the US and a couple of high-level allowance/small stakes as the features (albeit with a purse of US$175,000 on the "small" stakes) -- drew 26,580 to the track, which felt comfortably busy, but by no means crowded, and attracted total handle of HK$ 1,113,121,195 (US$142 million). Of that, roughly 10% is typically bet on-track, with the rest on the HKJC's phone and computer networks and in the 100-plus OTB storefronts. No matter; all the takeout from each wagering platform flows through to the HKJC.

Takeout averages 18.5%, marginally less than the US average, but in the same general range as most US tracks. That produces net revenue of nearly HK$24 billion, of which nearly two-thirds goes to the Hong Kong government in the form of taxes. The remaining one-third is split roughly equally between money for operations and purses on the one hand and charitable contributions on the other, making the Jockey Club by far the most important philanthropist in Hong Kong. Some idea of the scope of HKJC's charitable efforts can be seen here. And the most recent annual report of the HKJC is available here.

Unlike US horse racing, the HKJC has an effective monopoly on legal gambling in its jurisdiction. The nearest casinos are in Macao, an hour away by high-speed ferry. And those casinos, while glitzy, are no match for the better gambling palaces in Las Vegas, Atlantic City, or even for establishments like Foxwood's in Connecticut, all of which siphon off money from US tracks. The HKJC also runs Hong Kong's lottery, although total lottery handle is less than a quarter of what's bet on the ponies. And the HKJC has, since 2003, enjoyed a monopoly on sports betting -- principally on overseas soccer -- that previously flowed to illegal bookmakers. Moreover, there are few organized sporting event in Hong Kong to divert attention away from the races; no pro football or basketball, no college sports with crazed alums tailgating before the big game, etc. Not even any standardbreds pulling silly little carts (aka harness racing). The thoroughbreds are just about the only game in town.

Like Keeneland, NYRA and the Oak Tree Racing Association, the Hong Kong Jockey Club is effectively a self-perpetuating not-for-profit corporation. It has no shareholders, and is governed by a self-selected leadership, presumably with the tacit approval of the government. Unlike Keeneland, NYRA and Oak Tree, however, the HKJC is the entire show as regards racing. It puts on the races, owns the facilities, employs just about everyone in the business except for horse owners and trainers (even the grooms and hotwalkers are HKJC employees), runs the vast network of OTBs and phone and online wagering, and, perhaps most important of all, is its own regulator, setting the rules, running the testing laboratory and meting out punishments. A bit lacking in checks and balances and in due process, at least to American eyes? Perhaps, but it works.

Total purses in the 2010-11 racing season were HK$785 million; just about US$100 million. The total number of starters for the 83 racing days was 9,502, and the average horse based in Hong Kong made 7.4 starts during the year -- also comparable with the US -- so earnings per start, a key measure of owners' financial health, was HK$82,600, or roughly US$10,500, and the average earnings per horse were HK$611,000, or US$ 78,300.

According to Bill Nader -- I wasn't able to verify these numbers independently, but I have no reason to doubt them -- the all-in cost of keeping a horse in training in Hong Kong is about US$45,000. Once again, that's comparable to training and vet costs at New York race tracks. Factoring in the jockeys' and trainers' commissions on purse money, that means that a horse based in Hong Kong probably needs to earn US$60,000 or so to break even. So, with actual purse money per horse averaging more than that, it appears that a majority of Hong Kong-based horses actually pay for themselves.

If only that were true in the US. According to the US Jockey Club's statistics, purse money for American horses comes to roughly 50% of the cost of maintaining our race horses in training, not counting the initial cost of breeding or purchasing the horses.

And owners aren't the only ones in the game who do well. For example, grooms, who are employed directly by the HKJC and assigned to trainers (no worries about the trainer missing a payroll or failing to pay his workers comp. premium) earn on the order of US$5,000 a month, plus a share of their horses' winnings, for caring for a maximum of three horses each. I know a fair number of US trainers who'd be happy with monthly earnings of that much, and few grooms in the US earn more than half that amount, usually for taking care of at least four horses. Not all grooms in Hong Kong may be driving Mercedes, but at least a few are.

And the Hong Kong government does very well from racing. Hong Kong is generally a low-tax jurisdiction; my daughter, who was paying something like 35% of her income in income and FICA taxes when she worked at CNN in Atlanta, now pays only 15%, the maximum personal tax rate in Hong Kong. But racing is the government's cash cow. Over 7% of total government revenue traces back to the HKJC, mostly in the form of very high taxes on betting handle; in addition, the HKJC pays a small tax in lieu of income tax on its annual surplus. The wagering taxes are so high, in fact, that the HKJC's annual report rails against the danger that the current rate of taxation might someday make Hong Kong gambling uncompetitive, compared to Macao and to unregulated internet gaming options.

In the long run, the demands of government may impinge on the financial success of Hong Kong racing. But that's true in the US as well, as financially strapped state governments look covetously at the slot-machine revenues that have been keeping so many race tracks afloat. In the short run, the Hong Kong Jockey Club's monopoly on legal gambling, combined with a public extremely fond of wagering -- according to Nader, 80% of adults in Hong Kong are HKJC customers, and roughly 20% are regulars -- presage a continuation of a racing business in which almost everyone, except, of course, the poor bettor, wins. So far this year, business at the track is up about 10% over last year, so the sun isn't showing any sign of setting soon.

Next: the Hong Kong race track experience.

Terrorists on the Backstretch?

Six New York-based trainers have sued the Department of Homeland Security over its refusal to grant seasonal work visas to backstretch workers. The lawsuit, filed October 7th in Federal Court in Brooklyn, in the court district that includes Belmont and Aqueduct race tracks, claims that the government's refusal to renew the temporary visas means that it will rapidly become impossible for trainers to find enough workers to take care of the horses currently in their barns, much less care for any new arrivals.

The story is mis-reported here in the Daily News. Contrary to what the News says, the lawsuit was not filed by the NY Thoroughbred Horsemen's Association (disclosure: I'm a member of the NYTHA Board of Directors), but rather by six individual trainers. The lead plaintiff is Kiaran McLaughlin, and the other five who've joined in the lawsuit are Shug McGaughey, Bill Mott, Mike Hushion, John Kimmel and Bruce Brown (more disclosure: Bruce trains horses for my partnership group, Castle Village Farm). But NYTHA has discussed the issue and is certainly supporting the trainers' position.

For years, hot walkers and grooms from Mexico and other Latin American countries have been routinely approved for so-called H-2B visas. Those visas permit foreign workers to be employed in the US for temporary periods (usually a year or less, but sometimes as long as three years) if (1) the prospective employer can show that there are no US workers able and willing to do the work, and (2) the work is temporary in nature, which includes seasonal work, a one-time or intermittent need for extra workers, or a peak-load need for a defined period.

Nothwithstanding that racetrack work has become virtually year-round, Latino backstretch help has, until the last year, continued to be employed under these temporary visas. Most workers regularly went home to Mexico or elsewhere, reapplied for a new visa, and then came back to the track again.

But recently, la migra, aka the Immigration and Customs Enforcement division of the Department of Homeland Security, has decided that backstretch workers are not so temporary after all, and are therefore ineligible for the "temporary" H-2B visas. When visa approvals slowed down last year, trainers initially thought that it was just a case of bureaucratic ineptitude, possibly with a bit of terrorism phobia mixed in. But apparently the new government position represents a permanent policy shift. And, with no other readily available option for securing help, the trainers felt they had no option but to go to court.

Why won't a few of the millions of unemployed US citizens and legal residents take the jobs at the track? The pay is a bit above minimum wage, starting at around $300 a week. Not much, but then, as long as you don't have a family with you, you can get free housing in the run-down dorms on the backstretch. (Any day now, once the slot machine money starts rolling in, NYRA will build clean, modern high-rise dorms at Belmont and Saratoga, along the lines that Frank Stronach has built at Gulfstream and Palm Meadows. Meanwhile, even in the New York real estate market, the backstretch dorms aren't exactly luxury apartments.) And, in New York, anyway, you get free medical care, through the BEST Backstretch charity organization (yet more disclosure, I'm also a Director of BEST).

Of course, you have to get up around 4 am or so and be at the barn by 4:30. This is not fun in mid-February, in the cold and the dark. And, if your trainer is well-organized, you might get one day off a week; in return, you sometimes work late on a race day.

And, most important, you have to know what you're doing around a horse. Trainers don't, in general, make enough money to bear the cost of training neophytes. They want workers who know not to stand on the off side of a horse, who know how to pick hooves, put bandages on and tack up the horse. They want hot walkers who can hold onto the shank and keep a 1,200-pound animal under control, and then remember to rake the shedrow so the barn will impress the owners. A lot of it is dull, repetitive work, and there's not much of a career path; few grooms and hotwalkers move on to be assistant trainers or trainers in their own right.

So, more and more, trainers at most US tracks have come to depend on a steady flow of Mexican and other Latino workers, many of whom have grown up with horses, know what they're doing, and will work for long hours and low pay to improve the lot of their families back home. With the change in position by la migra, that employment pipeline is being closed, and the future of racing in New York, which appeared bright for the last few days after the announcement that the Aqueduct racino would open within weeks, is once more under a cloud.

I don't know nearly enough immigration law to have an opinion on the trainers' likelihood of success in the lawsuit, but it does seem to me a tough sell. The track jobs need year-round workers, but if US residents can't or won't do the work, who will? And trainers and horse owners, many of whom are losing money already, just aren't in a position to provide a drastic wage increase.

More on the economics of training and owning in upcoming posts.

Not Ready for Prime Time?

The powers that be at the New York Racing Association, not to mention nouveau uber-owner Mike Repole, have risen up to protest the Breeders Cup's decision to hold its 2012 edition at Santa Anita. Last Saturday, NYRA returned to the glory days of old with a "Super Saturday" card that included six graded stakes, five of them Grade 1s and the 6th, the Grade 2 Kelso, featuring Repole's local hero, Uncle Mo. Repole, who also had Stay Thirsty running in the Jockey Club Gold Cup, celebrated in the Belmont Room with 50 or 60 of his closest friends.

Compared to the average Saturday at Belmont, the results were more than satisfactory. Attendance, on a day when rain threatened all afternoon and finally arrived late in the day, was a solid, if not overwhelming, 10,481. And all-sources handle was a very healthy $16.7 million.

On the same day, Santa Anita, running its own Breeders Cup preview card, had four Grade 1 stakes in an 11-race card, featuring Bob Baffert's Game On Dude and the filly Blind Luck. On a sunny day in Southern California, Attendance was 16,013, and total handle was $11.7 million.

Santa Anita also bested the Belmont numbers in field size. On the East Coast, only 80 horses ran in the 11 races, an average field of 7.3; for the six graded stakes, the field size was a puny 5.8. On the West Coast, Santa Anita averaged 9.4 horses per race, even with an average of only 7.5 starters in the four stakes races.

A closer look at the figures for handle suggests that the "talent-centric" focus of NYRA -- attract the best horses and they will come, might have trumped the "track-centric" approach of Santa Anita. The latter is surely a more pleasant place to watch the races; even on a sunny day, Belmont is a too-big, rambling plant, with a track that's so big it's hard to see the runners on the backstretch, even with binoculars. And, because Belmont's main track is a mile and a half, hardly any races start in front of the grandstand. Everything up to a mile and an eighth on the main track starts on the backstretch.

But the money certainly flowed for the big races. Each of the five Grade 1 stakes at Belmont took in at least $1.6 million in handle on the various bets keyed to that race. And the Jockey Club Gold Cup drew $2.6 million, including $670,000 for the all-stakes Pick 4. In Santa Anita, in contrast, the per-race handle on the four Grade 1 stakes ranged from $1.1 million to $1.3 million.

But Super Saturday also showed why Belmont may not quite be in shape to deserve the Breeders Cup. As on many big days, the weather was atrocious. Not as bad, perhaps, as the rain-drenched Breeders Cup at Monmouth in 2007, but certainly not a fun day to be out in the fresh air. Field size was reduced by a number of scratches due to weather and track conditions, especially in the stakes races. Belmont, where the grandstand faces north, into the winter wind, has neither heating nor air conditioning. Back in a different era, plans were made to make at least some of the grandstand more weather-friendly, but those plans fell victim to NYRA's then-impending bankruptcy and to reported cronyism or worse in the awarding of contracts. As a result, Belmont is far less fan-friendly than Santa Anita, where one can usually count on the weather to be good, or even Churchill, whose mammoth plant has lots of room inside if the weather turns chilly or wet.

And, despite a relatively recent makeover that walled off the furthest reaches of the grandstand side and slapped some fresh paint around, much of Belmont still reminds one of a bus station in a Rust Belt city. NYRA has done what it could with the money it has, replacing outmoded television screens with up-to-date flat screens, and installing an absolutely terrific infield tote board cum video display. But that's just not enough.

What does Belmont need to qualify as a deserving host for future Breeders Cups? Not much. Start by tearing up the track and replacing it with a mile-and-an-eighth oval, like Churchill and Aqueduct, so more races will start and finish in front of the grandstand. Then tear down the existing grandstand and replace it with something that works for "crowds" of 10,000 in spring and fall but that's expandable for the Belmont Stakes and the Breeders Cup -- and make sure the new plant is weatherized. Oh, and add lights, as Churchill has done, so that, eventually, racing can join the rest of professional sports and stage its championships in the evening, when they might draw a decent television audience.

So, Mike Repole, if you want to see the Cup back at Belmont, all it would take is a few hundred million, give or take a few hundred million. Otherwise, NYRA's pitch for future BCs is reduced to "it's our turn."

How Much Cheating?

Big kerfuffle over at the Paulick Report on the just-released report from the Association of Racing Commissioners International (RCI) on drug test results from 2010. The report says that, of some 324,000-plus samples taken from horses last year, only 47 were found to contain Class 1 or 2 drugs -- those that have been determined to enhance performance and not to have any therapeutic use in horses, or in which the therapeutic effect is outweighed by the performance-enhancing potential.

Most of the commentators at Paulick's site think that the RCI report amounts to a whitewash. To a certain extent they have a point; the report specifically excludes Lasix, which has both therapeutic AND performance-enhancing effects. But the bulk of the criticism seems to be that, well, of course there aren't many positive tests, because the real cheaters are using brand-new designer drugs that can't even be tested for.It's a clever bit of logic; if you can't find the drug in the lab, that just proves that it's there.

I'm not a scientist. Don't even play one on TV. And I had enough trouble understanding all the scientific arguments at last June's "Summit" at Belmont, discussed here. But the extraordinarily low number of positive tests does seem to me to reinforce the impression that I get hanging out on the backstretch of NYRA tracks; most horsemen are serious about their craft and honest, following the rules as best they can. If Lasix is legal, why not use it, as it's clear that it helps a lot of horses run faster. By the way, kudos to trainer Kiaran McLaughlin, who, with the support of his Darley and Shadwell owners, is trying to go without Lasix for his new two-year-olds. Kiaran's giving up a powerful weapon, but he might gain some valuable knowledge if Lasix is eventually banned.

The state-by-state results in the RCI study are interesting. New York accounted for 15% of all the tests, but many fewer positives, with a positive-test score of only 0.011 percent. For the US as a whole, the rate was 0.49%. Only New Jersey had a lower positive rate than New York, with 0.08%.

At the other end of the spectrum, the positive rate in Minnesota was 3.26% and in Arizona it was 2.54%. Other states with more than  1% of tests returning positives were Colorado, Montana, Michigan, Nebraska, North Dakota (a stunning 7%, but a very small sample size), Ohio, Oklahoma and West Virginia.

Among the other major racing jurisdictions, California reported a positive rate of 0.25%, and Florida was at 0.84%. Kentucky appears to test far fewer horses than either New York or California, and reported that its rate for drug positives exceeded the national average at 0.75%. No surprise there for those who heed the rumors. Kentucky didn't even order a test of Life at Ten after last year's Breeders Cup debacle.

The RCI report doesn't name names and doesn't really address the problem of getting serious with those few trainers who do break the rules. At last report, Dick Dutrow and Patrick Biancone are still racing in New York. A simple, nationwide "three strikes and you're out" policy for Class 1 and 2 drug violations would be a really good idea.