At their June 26, 2014 meeting, the Indiana Horse Racing Commission (IHRC) will conduct a hearing on the registration application for the Indiana Horsemen's Benevolent and Protective Association (INHBPA) to receive slot funds as a registered horsemen's association for 2014. The hearing on the INHBPA registration was originally scheduled for October 26, 2013; however, this hearing was postponed pending an investigation into alleged misuses of funds in the benevolence programs as raised by INHBPA board member Kim Hobson who was elected to the INHBPA board in the fall of 2012.
Indiana Breeder & Owner Protection, Inc. (IBOP), through the use of public records and available public information, has attempted over the last 20 months to either verify or deny certain claims that have been made by horsemen regarding expenditures of benevolence funds at the INHBPA even prior to Ms. Hobson's complaint. IBOP's goal was to separate fact from fiction with available public records. Ms. Hobson's claims of misuse of funds, as an INHBPA board member, greatly accelerated our process considering the IHRC conducted their own six-month investigation. Overall, its IBOP's belief that benevolence funds for backside workers (medical care, dental care, etc. and other support services including childcare) are greatly needed to enhance their lives, and should not be prevented from getting to those in need on the backside. However, after the conclusion of the IHRC's investigation, we see many questions that still remained unanswered that need to be answered by the IHRC. This article will raise some of those issues, but first a little background on the subject.
Background
The legislation that authorized slot machines at Indiana's two horse racing tracks was initially passed in the spring of 2007 with the first revenues to horse racing beginning in mid-2008. While the bulk of slot revenues to horse racing are allocated for purse contributions and for breed development funding, horsemen's associations were eligible to receive three separate revenue streams authorized by HB 1835: 1) "equine promotion or welfare" 2) "backside benevolence," and 3) for necessary operations of a horsemen's association. This initial legislation also required that, "A horsemen's association shall expend the amounts distributed to the horsemen's association under subsection (b)(1) (equine promotion or welfare) through (b)(2) (backside benevolence) for a purpose promoting the equine industry or equine welfare or for a benevolent purpose that the horsemen's association determines is in the best interests of horse racing in Indiana for the breed represented by the horsemen's association."
The slot legislation gave oversight of the allocation to horse racing to the Indiana Horse Racing Commission (IHRC) with what we are going to call the 'best interests of horse racing' standard. More specifically, the standard created by the legislature was and is as follows, "Money distributed under this section may not be expended unless the expenditure is for a purpose authorized in this section and is either for a purpose promoting the equine industry or equine welfare or is for a benevolent purpose that is in the best interests of horse racing in Indiana or the necessary expenditures for the operations of the horsemen's association required to implement and fulfill the purposes of this section. The Indiana horse racing commission may review any expenditure of money distributed under this section to ensure that the requirements of this section are satisfied. The Indiana horse racing commission shall adopt rules concerning the review and oversight of money distributed under this section and shall adopt rules concerning the enforcement of this section."
Based upon the last sentence above, the slot legislation also gave the IHRC the ability to create administrative rules, which carry the rule of law in Indiana, to further their oversight. The slot legislation required that horsemen's associations, "register with the Indiana horse racing commission" and "annually file a report with the Indiana horse racing commission concerning the use of the money." In mid-2008, the IHRC established a number of administrative rules regarding the registration application process including '71 IAC 13-1-3 Information to be submitted with a registration.' This administrative rule which was modified in 2012 when what is now subsection (5) was added and in 2013 when subsection (3) was added now reads as follows:
71 IAC 13-1-3 Information to be submitted with a registration
Authority: IC 4-31-3-9; IC 4-35-7-12
Affected: IC 4-31; IC 4-35
Sec. 3. In addition to the information described in section 2(b) of this rule, the registration of a horsemen's association to
receive monies allocated pursuant to IC 4-35-7-12 shall include, but not be limited to, the following information:
(1) A proposed budget for the calendar year (or, in the case of a registration under section 1(c) of this rule, the calendar years) to which the registration applies that separately identifies general categories for the expenditure of funds anticipated to be paid by the permit holders to the horsemen's association for:
(A) equine promotion or welfare pursuant to IC 4-35-7-12(b)(1);
(B) backside benevolence pursuant to IC 4-35-7-12(b)(2); and
(C) the purposes provided for in IC 4-35-7-12(f) in the amount provided for by IC 4-35-7-12(d)(1)(A)(ii) and IC 4-35-7-12(d)(1)(A)(iii), IC 4-35-7-12(d)(2)(C)(ii), or IC 4-35-7-12(d)(3)(A)(ii).
(2) A specific description of the accounting, auditing, internal control, and reporting procedures that will be maintained by the horsemen's association with respect to the three (3) separate accounts required by section 8(a)(7) of this rule during the calendar year for which payments will be made, as well as the name and contact information of the individuals responsible for each function.
(3) A certification by the board of directors of the horsemen's association that the expenditures from funds paid by the permit
holders for (1)(A) and (1)(B), above [subdivision (1)(A) and (1)(B)], are in the best interests of horse racing in Indiana for
the breed represented by the horsemen's association.
(4) A conflict of interest policy approved by the commission that has been executed by all of the officers, directors, and employees of the horsemen's association.
(5) Certification by an officer of the horsemen's association that no monies distributed pursuant to IC 4-35-7-12 have been used in either the current year or will be used from the budget year for either:
(A) a contribution to a candidate or committee; or
(B) lobbying, as defined in IC 2-7-1-9.
(6) Any other information requested by the commission or its executive director.
(Indiana Horse Racing Commission; 71 IAC 13-1-3; emergency rule filed Jul 11, 2008, 2:13 p.m.: 20080723-IR-071080595ERA; emergency rule filed Sep 10, 2012, 2:01 p.m.: 20120912-IR-071120525ERA; emergency rule filed Apr 4, 2013, 1:05 p.m.:20130410-IR-071130134ERA)
Within this administrative rule, there are two specific subsections that will be mentioned and scrutinized as part of this article. Subsection (4) requires each "of the officers, directors, and employees" to sign a commission-approved Conflict of Interest Policy which has been in this administrative rule since 2008. More on that part of the rule later. The other subsection that requires a little background is subsection (3) which was added in the spring of 2013 at the specific request of Chairman William Diener. Effectively, subsection (3) requires that each board member attest by a signed affidavit that equine promotion or welfare funds and that backside benevolence funds were being spent "in the best interests of horse racing." The fact that Chairman Diener initiated this aspect of the INHBPA's compliance cannot be understated. Here's exactly what he said at the February 22, 2013 IHRC meeting:
CHAIRMAN DIENER: "This commission is not in the business of micromanaging horsemen's associations and how they operate, but we felt that or I felt -- I'm the proponent of this rule. I felt that it was important that the Board of Directors of the association, when they submit their applications, certify that their proposed budgets meet the same statutory standard. I view this proposed rule as simply a housekeeping matter, but it also deals with the integrity of monies associated, particularly state directed monies associated with pari-mutuel wagering. That's the basis for my recommendation that the Commission consider this proposed emergency rule. And I will open this up for any questions, discussions, what have you, from my fellow Commissioners." (Official Transcript, IHRC Meeting February 22, 2013, Page 51, Line 12 through Page 52, Line 4)
Two other commissioners (Schaeffer and Schenkel) agreed that it was a good idea and the emergency rule passed unanimously. Given the approval, each board member of a prospective horsemen's association would be required to sign an affidavit to be included with the 2014 registration application submitted to the IHRC for review. The INHBPA submitted their registration application without Ms. Hobson's signed affidavit. In preparation for the hearing on the 2014 INHBPA application slated for October 29, 2013, the IHRC Executive Director Joe Gorajec issued his report on the INHBPA registration application on October 18, 2013, which can be found at the follow link: http://freepdfhosting.com/d20df21eea.pdf. What you'll see is that Mr. Gorajec's opinion was that the registration application contained "no substantive deficiencies" and didn't mention that Ms. Hobson did not sign the required statement that the INHBPA was spending the slot funds in accordance with the 'best interest' standard. The absence of her statement is a deficiency in the INHBPA is especially curious given Chairman Diener's insistence of the importance of having such a requirement. On the surface, it appears as if Mr. Gorajec was willing to overlook this fact.
Subsequent to Mr. Gorajec's report on the INHBPA application, on October 25, 2013, Ms. Hobson sent a letter to Chairman Diener which was her explanation as to why she could not sign the affidavit that the slot funds were being spent within a 'best interest' standard. On June 24, 2014, the IHRC released this letter and some supporting documents as part of the agenda for their June 26th hearing on the application. Ms. Hobson's letter can be found on pages 9 through 14 at the following link on the IHRC website: http://www.in.gov/hrc/files/IHRC_Packet_6-26-14_Agenda_Item_5.pdf. Essentially, Ms. Hobson's belief is that she would be committing perjury by signing such an affidavit. While she makes some specific claims on the misuse of benevolence funds, as a point of continuing to delve into the background on this subject, she points out that she cannot sign the affidavit because "the benevolence board acts as an organization separate from (IN)HBPA."
A copy of the document Ms. Hobson refused to sign can be found at the following link: http://freepdfhosting.com/ad791fb60d.pdf. Given Ms. Hobson's allegations, Chairman Diener made the decision that the October 29, 2013 hearing on the HBPA application would be postponed pending an investigation.
In fact, the slot revenues for backside benevolence do not flow to the INHBPA, they flow to the Indiana Horsemen's Benevolent and Protection Association Benefit Trust (Benefit Trust) which is a completely separate organization from the INHBPA. The INHBPA is set up as a non-profit 501(c)(6) organization with the Benefit Trust being a non-profit 501(c)(4) organization with a completely separate board from the INHBPA. While the INHBPA board is an elected board, the Benefit Trust board is an appointed board whose members are appointed by the INHBPA President. A few of those appointed to the Benefit Trust board serve in a dual capacity also on the INHBPA board. In their 2013 registration application, which covers the activities INHBPA activities from January 1, 2011 to June 30, 2012, the INHBPA indicates that, "The officers of the Trust are Randy Klopp, President, and F. Steve Stults, Benevolence Director." Also, in this registration application, the INHBPA incorporated by reference the "amended by-laws of the Trust" from their "2009 Application for Registration."
In a public records request to the IHRC, IBOP asked specifically for these amended by-laws of the Benefit Trust. This document can be found at: http://freepdfhosting.com/00ca50d4ec.pdf. What we found was rather astonishing. The Benefit Trust was originally established in 1996, and according to the fulfillment of our public records request, and has not been amended since. Why this is astonishing is that "The fund is to be funded exclusively from the purses awarded at the Track." At the time, the "track" was only Hoosier Park. Assuming that what the IHRC provided us is complete, the Benefit Trust by-laws were never amended to receive any revenues from Indiana Downs (now Indiana Grand) or to even receive one penny of slot funds! Yet, since late 2008, the IHRC has authorized millions of slot funds to flow into this trust which is not under control of the elected HBPA Board.
The IHRC's Re-Evaluation of the INHBPA Registration Application
After a six month investigation, Executive Director Gorajec released his reevaluation of the 2014 registration application for the INHBPA. But, before we get to any portion of this report, we want to provide a little more context to Mr. Gorajec's past thinking regarding prior INHBPA registration applications. This, of course, is prior to Ms. Hobson's complaint. Here's his summary from the last two completed hearings on INHBPA registration applications:
From the 2012 hearing on the INHBPA's 2013 Registration Application:
MR. GORAJEC: "The only thing I'll add is that Mike Brown (INHBPA Executive Director) said something about that he believes that the Association has been good stewards of the money, and I really think they have. I think they've done an outstanding job. I think the benevolence program is really a great program. There's so much in there. I think from listening to Steve (Former INHBPA Benevolence Director F. Steven Stults) talk and some others, if it's not a model for other states, it really should be. So I think they've done an excellent job." (Official Transcript, IHRC Meeting October 12, 2012, Page 81, Line 81 through Page 82, Line 7)
From the 2011 hearing on the INHBPA's 2012 Registration Application:
MR. GORAJEC: "Madam Chairman, fellow Commissioners, the application from the Indiana HBPA, I think it's extremely well done. I think they do an excellent job. I think that the programs that they put in place, if they're not a model for other thoroughbred tracks in other states, they probably should be. I think they've done an outstanding job, and I think they should be commended for that." (Official Transcript, IHRC Meeting November 1, 2011, Page 145, Lines 13 through 20)
Mr. Gorajec's reevaluation of his own report on the INHBPA registration application for 2014 can be found at: http://www.in.gov/hrc/files/HBPA_REEVALUATION.pdf.
IHRC Requirements Regarding Complaints
On July 1, 2013, a law passed by the Indiana Legislature went into effect that required the IHRC to "develop internal procedures for accepting, recording, investigating, and resolving complaints from licensees and the general public;" and post those results on the IHRC's website. What came as a surprise to many Indiana legislators was that the IHRC had no such policy regarding complaints. If Mr. Gorajec's reevaluation of the INHBPA application is the resolution of Ms. Hobson's complaint, then each and every one of our Indiana legislators needs to understand just what Mr. Gorajec believes to be in the best interests of horse racing in Indiana by reading it. Of course, IBOP will make certain that this happens.
In our view, Mr. Gorajec's report demonstrates the IHRC's inability, or perhaps even a lack of interest, to supervise the slot funds, let alone micromanage, in an effective manner. The report attempts to rationalize behavior that should never have happened, glosses over issues, and attempts to manufacture excuses. Mr. Gorajec actually recommends the denial of the INHBPA registration application; however, provides the INHBPA with the opportunity to file a supplement to the original application to correct the "deficiencies identified." The real deficiency is that if the corrective action steps outlined are necessary for the INHBPA to be approved to receive slot funds in 2014, these deficiencies were already in existence and in need of correction in 2013, 2012, 2011, 2010, 2009 as well. Mr. Gorajec's report is also deficient in explaining (glossing over) a number of issues. We feel his reevaluation should be denied by the commissioners on June 26th and the investigation should be turned over to the Indiana Inspector General's office. Mr. Gorajec's reevaluation report is essentially a report of the IHRC staff's own ability, or lack there of, to truly know what was being done with the slot funds allocated to the Benefit Trust.
More On The Benefit Trust
Mr. Gorajec's reevaluation points out the majority of the slot funds goes to the Benefit Trust. In 2013, that amount was $633,686.22 plus historically, the IHRC has allowed additional transfers each year from the INHBPA's administrative account to the Benefit Trust. All these funds are under the control of an appointed board, and not under the supervision of the board the horsemen elected to represent them. The composition of this board is rather interesting as the Benefit Trust board has historically been populated with individuals that couldn't get elected to the INHBPA board, couldn't get reelected to a position on the INHBPA board, or were not even eligible to run for an INHBPA board position. At the end of 2012, Jerry Carden was listed as the President of the Benefit Trust. Mr. Carden ran for an HBPA board position in the fall of 2012. Out of the 10 individuals running for a board position as an owner, Mr. Carden finished in the bottom three. Terry Meek lost his reelection bid to the HBPA board in 2012 by a wide margin, yet Mr. Meek continued as an appointed director for the Benefit Trust. The draft results of the 2012 INHBPA election results can be found at the following link: http://freepdfhosting.com/08a68e63b4.pdf.
In our view, one of the failures, and this failure began with the IHRC's first approval in 2008, is that the IHRC has allowed the majority of slot funds to by-pass those elected to the INHBPA board. Certain individuals on the Benefit Trust board were never required to complete the Conflict of Interest Policy required of each elected INHBPA board member or the required affidavit that the slot funds through the Benefit Trust were being spent according to the 'best interests' standard. When Chairman Diener pushed for the addition of this affidavit, he did not include the requirement for members of the Benefit Trust board which is a significant oversight on his part. One of Mr. Gorajec's corrective action step recommendations is that each member of the Benefit Trust now be required to provide their signatures to a Conflict of Interest Policy and 'best interests' affidavit. This is tantamount to closing the barn door after the horse has already bolted. The Benefit Trust was treated by the IHRC as a registered horsemen's association eligible to received slot funds for backside benevolence, yet the Benefit Trust as a separate organization from the INHBPA was never required to comply with all of the IHRC's requirements to do so.
Mr. Gorajec's reevaluation states, "The Trust, however, must also be held accountable to the IHBPA Board. The Trust was
established as a separate entity for tax purposes." While the INHBPA has been lauded over the years for its structure of their benevolence program, which includes having the Benefit Trust set up as a 501(c)(4) non-profit organization, the INHBPA is also structured as a non-profit, but as a 501(c)(6) organization. This brings into question whether or not the Benefit Trust was even necessary given that the INHBPA was already a not-for-profit business association. In support of that thought, Mr. Gorajec's belief was that the structure of the benevolence program at the IHBPA should be a national standard, yet this structure was not even the standard for all of horse racing in Indiana. Both the Indiana Standardbred Association and the Quarter Horse Racing Association of Indiana receive similar slot revenues for their backside benevolence programs. However, neither has set up a 501(c)(4) organization to receive and to administer their backside benevolence funds. Their backside benevolence funds simply flow through their non-profit 501(c)(6) organizations under the control of their elected boards. We neither have seen nor heard of these organizations having issues with their non-profit status.
The fact that slot funds flow to a 501(c)(4) organization actually creates, in the eyes of the Internal Revenue Service (IRS), a higher set of standards for use of the funds as they relate to anyone with substantial influence within the organization or their family members. What Mr. Gorajec's reevaluation actually points out, in our opinion, is a number of violations by the Benefit Trust for what's called excess benefit transactions with what Mr. Gorajec describes as "insiders." The excess benefit transactions are those that provide more benefit to an insider and their family members beyond their contributions to the actual organization. A good primer on this subject can be read at: http://www.nonprofitlawreport.com/guide/excess-benefit/.
In fact, we are not the first to raise the issue of the Benefit Trust possibly violating IRS guidelines. Here's what former Director of Benevolence F. Steven Stults said at the IHRC hearing on the INHBPA's 2013 registration application while responding to a question as to why the Benefit Trust terminated their scholarship program after 2012:
MR. STULTS: "It was found by our auditors that scholarship monies were being received by the families, children, grandchildren, of some of our current and past officers and that, in fact, is a violation. We looked at the total program, thought it would be best to at least at this time terminate that program until we found out if we can do it and how we can do it right. Our auditors picked up and reported to us that that might be violation. We didn't receive any notification from IRS we have violated, but we don't want to step into that arena." (Official Transcript, IHRC Meeting October 12, 2012, Page 80, Line 12 through 23)
Mr. Stults admitted to the Benefit Trust's violation of IRS regulations that, in fact, is clear. Mr. Gorajec now reveals that $10,000 of the approximate $30,000 of scholarships awarded in 2010 through 2012 went to "four relatives of IHBPA Directors, Trustees, or employees." (Footnote 5, Page 4) The subject of scholarships recipients and who authorized the issuance of the scholarship checks is one issue that needs some sunlight that we'll cover a little later in the article. Based upon information we received from the IHRC via a public records, there are some significant unanswered questions regarding this scholarship program that the IHRC should be answering.
Required 'Prohibited Conflict of Interest Policy'
As mentioned in 71 IAC 13-1-3(3), a required part of a horsemen's association registration application must include, " A conflict of interest policy approved by the commission that has been executed by all of the officers, directors, and employees of the horsemen's association." The INHBPA registration application outlines the years in which the INHBPA board members signed the commission- approved statement, some dating back to 2008. Mr. Gorajec's reevaluation points out that:
"A pertinent part of this policy in Article III beneath a heading titled “Prohibited Conflicts of Interest” reads as follows:
2. The direction, payment or other transfer of Horsemen’s Association funds(either directly or indirectly) for the use (personal or otherwise) of any relative of an officer, director of (sic) employee of that Horsemen’s Association." (Page 6)
That's a pretty straight forward, plain English statement that defines just what the IHRC considers to be in the best interests of horse racing. Given the scope of these funds and the potential moral hazards involved, the commission prohibited relatives of key people within the INHBPA from receiving benevolence funds either directly or indirectly through the receipt of services. Mr. Gorajec rationalizes that this very plain statement doesn't mean what it says by saying in a footnote, also on page 6 of his reevaluation, "Pursuant to this section, no relative of any board member would be eligible to receive any benevolence money. However, Paragraph 1 of the Prohibited Conflicts of Interest policy provides that a board member is eligible for any benevolence available to any other member. The spirit of this exception likely applies to the family members of board members and the Conflict of Interest policy should be amended to so reflect."
Now, that's how you rationalize your own incompetence and the lack of supervision of the benevolence funds paid to the Benefit Trust. Again, the members of the board of the Benefit Trust never submitted a signed Conflicts of Interest Policy when acting as members of that board, and only if they served a dual role as being a board member of the INHBPA. Mr. Gorajec further proves that the IHRC lacked control over the benevolence funds by recommending as a corrective action step that, "Each Benevolence Trust trustee shall file a conflict of interest form and registration certification." (Page 9)
Mr. Gorajec, in his reevaluation, characterizes Ms. Hobson complaint in the following manner, "The complaint made some specific allegations of questionable expenditures but also included several vague, second-hand allegations that proved to be unfounded, untrue, or lacked sufficient information necessary for investigation." (Page 2) We see this statement as very misleading. Much of Ms. Hobson's complaint revolves around benefits being received by relatives of Randy Klopp and Lisa Stephens, who the INHBPA considered to be the administrative assistant for both the INHBPA and the Benefit Trust until her promotion to Benevolence Trust Administrator on January 1, 2013 after the resignation of F. Steven Stults as the Benevolence Director. According to the records received from the IHRC, Mr. Klopp signed the commission approved Conflict of Interest Policy in 2008. Even though Ms. Stephens has been employed by the Benefit Trust and the INHBPA for years, she never signed a Conflict of Interest Policy until June 18, 2014, after IBOP filed a public records request for her signed copy.
Below are the issues that we see in the context of Mr. Klopp and Ms. Stephens and the relationship with their positions with the Benefit Trust.
INHBPA Scholarship Program
The following link will take you to the documentation, which is specific to the INHBPA Scholarship Program, we received from the IHRC through a public records request for the 2013 INHBPA registration which covers the INHBPA activities from January 1, 2011 through June 30, 2012. We are providing this link to demonstrate the claims made in the following section of this article: http://freepdfhosting.com/04381a4613.pdf.
In the filing of the registration application for 2013, the 'Accounting, Audit, Internal Control, and Reporting Procedures for the Benefit Trusts, under Trust Officers and Staff, indicates that Steve Stults is the Benevolence Director and Lisa Stephens as the Administrative Assistant for the Benefit Trust. Lisa Stephens was identified in Mr. Gorajec's report as being an "Insider." (Also, identified as an "Insider" was Randy Klopp as the President of Benefit Trust.) In this procedures statement, under Cash Disbursements, the following appears, "Vendor setup and maintenance is the QuickBooks accounting system is performed by the Benevolence Director (Stults). Hash Accountant is restricted from vendor setup and maintenance in the QuickBooks account system." The 'Hash Accountant' is one of the accountants from the CPA firm used by the INHBPA. So, only Mr. Stults could add vendors (payees) to the books of the Benefit Trust, yet in the procedures for adding vendors into QuickBooks in the INHBPA's administrative account and the equine promotion or welfare account, a senior partner at Hash CPA Group, LLC was required to add vendors. This strange inconsistency in procedure is not explained in the INHBPA registration application. In addition, the procedures for the Benefit Trust state that, "All benevolence requests are processed by the Administrative Assistant (Stephens) for approval by the Benevolence Director (Stults) following the Trust's benevolence guidelines."
In our public records request, we noticed the August 18, 2011 approved minutes for the INHBPA board meeting. One of the agenda items was "Scholarship Requests." This is verbatim from those approved minutes, "Three requests have been received. Randy Klopp made a motion to approve requests for the Lauer family, West family and Huber family. Joe Davis 2nd. Motion carried." The Lauer family is Mike & Penny Lauer, both INHBPA board members with Penny Lauer having served on the Benefit Trust board in the year in which a $2,500 scholarship was awarded to her daughter(Check #'s 3410 issued on September 13, 2011 & #3437 issued on September 20, 2011). The Huber family is that of Dale Huber who served as a director on the Benefit Trust both the years his daughter received a scholarship (Check #3411 issued on September 13, 2011 and a subsequent check in 2012). Both of those transactions were reported to the IRS on the Benefit Trust 2011 tax return under 'Grants or Assistance to Benefiting Interested Persons.'
What we found interesting is that while the meeting minutes indicated three scholarship requests, two additional $2,500 scholarships were awarded to Debra Hawkins, sister of Lisa Stephens, and Megan Larimore, daughter of Lisa Stephens, to attend the Alabama School of Sleep Medicine and Technology. These $2,500 checks were issued as #3380 and #3381 on September 6, 2011. Neither of these transaction were reported to the IRS as benefitting interested persons as seen with the Lauer and Huber scholarships. Also, all 2011 scholarship checks, except for one for the benefit of Rebecca Heniser to attend Nova Southeastern University, appear to have been written to the individuals directly or to a family member rather than the educational institution as required under the Benefit Trust requirements.
In a follow up records request to the IHRC, IBOP received the scholarship applications for both Debra Hawkins and Megan Larimore. Ms. Hawkins, whose scholarship application was dated September 4, 2011, indicates that her intended career is to be a polysomnographic technologist by attending the Alabama School of Sleep Medicine and Technology. When addressing Ms. Hawkins eligibility for benevolence funds, Mr. Gorajec's report states, "Ms. Hawkins also was (and still is) employed full time at the Grant County Sheriff’s Department." Yet, there is no mention of this scholarship in the reevaluation. Just two days after this scholarship application was signed, a check was released to Ms. Hawkins. Ms. Larimore's scholarship application, which was dated September 1, 2011, indicates her intended career as a sleep technician. Mr. Gorajec's reevaluation has no mention of this scholarship whatsoever.
Both Ms. Hawkins' and Ms. Larimore's scholarship applications have the initials 'FSS' hand-written in the lower right-hand corner which would seem to indicate the approval of F. Steven Stults the Benevolence Director. Both applications also have 'pd. 9-6-11 RAR' which would seem to indicate a notation from Hash account Ryan Roberts. From our initial public records request, we were provided with information that the INHBPA next board meeting after August 18th was held on December 15, 2011, which raises the question, who approved the two scholarships for Ms. Hawkins and Ms. Larimore? In our second public records request regarding scholarships we asked for "A copy of the meeting minutes provided to the IHRC by the Indiana HBPA and/or Indiana HBPA Benefit Trust at which both Debra Hawkins and Megan Larimore were approved for the above-mentioned scholarships." The response from IHRC General Counsel Lea Ellingwood was, "If you provide a date of the meeting at which the scholarships were awarded, we will be happy to check our records to see if we have those minutes and will provide them to you." Perhaps an explanation will be offered at the IHRC's hearing on June 26th, but we find that possibility to be unlikely. What should also be disclosed is whether or not any of the scholarships were actually used to truly pay for educational expenses as checks appear to have been written directly to Ms. Hawkins and Ms. Larimore.
Information from our second public records request regarding the INHBPA's Scholarship Program, which includes the requirements for qualification and the two applications mentioned above, can be found at the following link: http://freepdfhosting.com/51b6bb1192.pdf. What you will see is that one of the requirements is a "Copy of acceptance letter (or, if continuing education, a letter or verification) from the pre-college, vocational school, college or university where you will attend." The information we received from the IHRC did not included any type of acceptance letter or verification in support of Ms. Hawkins' or Ms. Larimore's application as required, at the time, by the Benefit Trust.
Benevolence Trust Eligibility Requirements
For years, the INHBPA has submitted to the IHRC as part of their registration applications to receive slot funds what were supposed to be the eligibility requirements for an individual to receive benevolence benefits. Yet, for years, they have been doing quite the opposite of what they have suggested they were applying as eligibility requirements. This has been known anecdotally for years by horsemen, and is now confirmed by the IHRC's investigation. Mr. Gorajec attempts to once again rationalize the failures of the IHRC staff to supervise these funds by stating, "The fact that the IHBPA is not enforcing its eligibility requirements does not necessarily mean that its actions are contrary to the best interest of racing." (Footnote 4, Page 3) Even if that were true, which we don't believe it to be, wouldn't providing false information in their registration application regarding supposed eligibility requirements be beyond the scope of the 'best interests' of horse racing? We'll see how each individual commissioner reacts to Mr. Gorajec's skewed logic at the hearing on June 26th.
In his reevaluation, Mr. Gorajec includes the 2011 Indiana HBPA Benefit Trust Benevolence Benefits Guidelines as 'Attachment A' which are pages 11-12 of the report. The reevaluation points out, via recommended corrective actions, that hardly a single eligibility requirement submitted to the IHRC was actually being followed. So, whether it was a requirement to be "employed full-time by an eligible trainer" AND perform "substantial work in the Indiana thoroughbred racing industry," or whether it was the income limitations or that fact that all insurance benefits had to be exhausted, the Benefit Trust seemed to only be using the fact the someone had an IHRC license as their only qualification. And, IHRC licenses are very easy to get if someone is willing to sign the application as your employer.
In the reevaluation, and responding to Ms. Hobson's complaint, Mr. Gorajec indicates on page 3 that "at least six" of Mr. Klopp's relatives (was it six or was there more?) worked for him and received a total of $55,280.89 in benevolence funds in 2010 through 2012. The description of this amount was that Mr. Klopp's family members "were very active participants in the benevolence program." Since Mr. Klopp was the INHBPA President from 2005 through 2012, and slot revenues for benevolence were only first released in late 2008 for the first time, the statement that "Most of Mr. Klopp's relatives had no previous IHRC licensing prior to 2009" seems quite coincidental. This is especially true when information we received from a public records request indicated that most of Mr. Klopp's relatives didn't seek IHRC licensing in 2013 after his term as President of the INHBPA expired in 2012.
The reevaluation also states, "Mr. Klopp employed several non-relatives, many of whom were full-time employees." So, what does several actually mean? Merriam Webster defines several as "more than two, but not very many." IBOP filed a public records request for all 2012 license applications signed by Mr. Klopp as the employer. What we found was that the total was way beyond 'several' which we reported to IHRC Director of Security Terry Richwine on January 30, 2014. Part of the INHBPA's supposed eligibility requirements to receive benevolence benefits is either a signed trainer affidavit or to be on the trainers "badge list," which having a badge list is also a commission requirement per their administrative rules. Here's an excerpt from an email from IBOP Vice-President Jim Hartman to Mr. Richwine:
"Subsequent to my October, 2012, conversation with Mr. Brown outlined in my statement, I filed a series of public records requests to determine if any IHRC records could shed some light on this allegation. One of those requests was for "Copies of the submission(s) to the commission of the name, occupation, and license number as required by 71 IAC 5.5-3-3(a)(4), including any changes, submitted by Randy Klopp during and/or for calendar years 2012, 2011, and 2010." 71 IAC 5.5-3-3(a)(4) makes a trainer responsible for "Providing a list to the commission of the trainer's employees on association grounds and any other are under the jurisdiction of the commission.........The commission shall be notified by the trainer, in writing, within twenty-four (24) hours of any change." Generically called a 'badge list,' the fulfillment of the public records request included the file attached labeled with the term used by the IHRC 'Trainer's Stable Roster.'
(Please Note: The above mentioned file can be seen at: http://freepdfhosting.com/9ee86b73a0.pdf .
The 'Trainer's Stable Roster' even reminds the licensed trainer of his or her responsibilities in maintaining "with the commission" an up-to-date roster as required by 71 IAC 5.5-3-3(a)(4). In 2012, what Mr. Klopp submitted to the IRHC as his roster for the entire year was the first two pages of the attached file that included four grooms and an assistant trainer. Even after pointing this out to Ms. Ellingwood that she had supplied me with a 2012 groom's license application for Mimi Gilbert which was signed by Mr. Klopp as her employer, I was assured that there were no other records at the IHRC responsive to my records request. Based upon Ms. Gilbert's application alone, which was signed on August 25, 2012, it appeared as if Mr. Klopp was not required to comply or did not comply with the requirements of 71 IAC 5.5-3-3(a)(4). After all, the commission could not provide a stable roster beyond early April, 2012.
The satisfaction of another public records request for all license applications signed by Mr. Klopp as the employer in 2012 sheds even more light on what should have been Mr. Klopp's stable roster submitted to the commission. The five individuals Mr. Klopp did submit on his stable roster, which was dated April 3, 2012, were subsequently licensed between April 4th and April 9th. What was never reported to the commission as part of Mr. Klopp's stable roster was another 18 grooms licenses that he signed off as employer during 2012. A total of 22 grooms is an inordinate number by any measurement. After the initial four reported, none of the following 18 'employees' were reported to the commission. Some appear as legitimate backside workers, like Akeem Brown (4/5/2012) who had worked for Mr. Klopp in 2011 and 2010 as well as exercise riders Victor de Leon (4/4/2012) and David Borunda (4/25/2012). Others, not so much.
Also, licensed as a groom was Mr. Klopp's 67 year-old mother and subject of the anonymous tip we received as have received benevolence funds, Karen Abner (4/13/2012). How many 67 year old mothers do you see working as a groom on the backside of a race track? Mr. Klopp signed for a grooms license for, the lack of a better term, his step-nephew, Tyler Abner who is also the subject of the anonymous tip we received misidentified as a "nephew." Mr. Klopp signed Tyler Abner's grooms license on 4/3/2012 which is the same day that Mr. Klopp signed and submitted his stable roster to the IHRC, yet Tyler Abner was absent from that roster. Tyler Abner also admits to being employed with the US Air Force from February, 2012 to September, 2012. In addition, Mr. Klopp signed as the employer for his step-brother, Donnie Abner (4/13/2012) who admits to being the owner of a carpet cleaning and water restoration business since 2000.
Others who were licensed as grooms under Mr. Klopp's employ were: Shannon Wyatt (step-sister 4/24/2012); what appear to be Mr. Klopp's relations on his mother's side Jerry Halveland (5/12/2012), Gary Halveland (5/12/2012), Halveland is Karen Abner's maiden name, and Melinda Hauri (4/24/20120 also with a maiden name of Halveland. I've been told, but cannot verify, that Daryn Klau (7/28/2012) is a nephew as well.
Outside of what appears to be family relations, Mr. Klopp signed as employer for the groom's licenses for the Cooper family, Darel & Luanna both on 5/18/2012, then their son, David on 5/19/2012. On April 30, 2012, he even signed as employer for the groom's license for Lindsay Larimore who is the daughter of Lisa Stephens who, at the time, was the HBPA secretary and now oversees the HBPA Benevolence Trust. All totaled by May 20, 2012, Mr. Klopp employed an astonishing 19 grooms!" (End of Email Excerpt)
Our apologies to anyone we may have incorrectly mischaracterized as a family member of Mr. Klopp or their relationship within his extended family, but the number might be more than six family relationships, and the total number of groom's licenses were well beyond "several." What we also found through this public records request was that after May 20th, Mr. Klopp signed as employer for three other grooms, one of which included a groom's license for Mimi Gilbert on August 25, 2012. While this is a story for another day, part of the submission from Ms. Hobson to the IHRC was a recording purportedly to be Mimi Gilbert explaining why there was a certain need for urgency with her groom's license as it related to benevolence benefits. Our guess is that this recording will not be raised voluntarily by the IHRC staff at any time during the June 26, 2014 hearing. This recording is not mentioned in Mr. Gorajec's reevaluation.
There were a few other interesting facts pulled from the 2012 groom licenses that Mr. Klopp signed. The IHRC Multi-Purpose License Application requires, at least for some people, a prospective licensee is required to "Give the following information relative to your current employer," which are the date employed, the name of employer, and his or her address. There were a number of license applications that had no employer information included whatsoever, including the license application for his mother and his step-brother. Perhaps the IHRC should explain these incomplete applications as well.
What we would hope Mr. Gorajec would have put in his report was the total amount of benevolence received by Mr. Klopp's 22 grooms, yet his focus was only on the "at least six" family members. The horse racing industry has a right to know just how much of the backside benevolence funds from the Benefit Trust went to all of Mr. Klopp's employees. We would also hope that Mr. Gorajec would explain why Mr. Klopp wasn't required to comply with his stable roster requirements in 71 IAC71 IAC 5.5-3-3(a)(4) to maintain his license. Yet, we are not naïve enough to believe that Mr. Gorajec will admit that the IHRC didn't do their job in requiring him to do so. With that said, the IHRC should never be in a position to investigate their own actions or inactions. Such an investigation should fall to the Indiana Inspector General's Office which is designed specifically to investigate the actions or inactions of the State's administrative agencies. We see more inaction than action on both the history of supervising the benevolence funds and the Benefit Trust and with the subsequent reevaluation by Mr. Gorajec.
Part 2 of this article will be posted after the conclusion of the IHRC hearing on the INHBPA's application on June 26, 2014, but let this one sink in for a while.
Wednesday, June 25, 2014
Tuesday, June 3, 2014
Administrative Rule of the Month - 71 IAC 5.5-1-6 Consent to Search and Seizure
Disclaimer: The following is not intended to be legal advice, but simply Indiana Breeder & Owner Protection Inc.'s position on the subject. In that light, IBOP has quoted certain court cases germane to the subject yet provided no specific cites. Always consult and rely on your own legal counsel for your legal advice.
The Indiana Horse Racing Commission (IHRC) would have you believe that as a licensee you have no rights to privacy or protection from an unreasonable search and seizure. In specific locations, like on the grounds of a racetrack in Indiana with a permit to conduct pari-mutuel wagering, including barns, stables, stalls, tack rooms, or feed rooms, you generally don't have much of a right to privacy, nor should you expect such a right. The long-held view is that the threat of being searched is a reasonable attempt by an administrative agency to deter any illegal activity connected to pari-mutuel horse racing. However, the IHRC believes that their powers to search and to seize are extremely broad and somehow extend beyond the grounds of a racetrack to anywhere they choose, for whatever reason, and at any time of their choosing.
In fact, the IHRC includes the following required attestation on their Multi-Purpose License Application regarding searches, "I hereby acknowledge that I will be subject to the searches, either in my presence or absence, provided for in Indiana Code 4-31-13, as amended, and the Indiana Rules and Regulations that authorize personal inspections, inspections of any personal property, and inspections of premises and property related to my participation in a race meeting by persons authorized by the Indiana Horse Racing Commission" This statement references both Indiana statute (Indiana Code 4-31-14) and what we presume is the Indiana Administrative Code (Indiana Rules and Regulations). The IHRC, purposefully, uses phrases like "any personal property" which creates the illusion of an absolute authority any time, any place, especially when tied to "premises and property related to my participation in a race meeting." Could "premises and property" actually mean a person's home, farm, barns, etc. when the owner is not there ("either in my presence or absence")?
On that same license application, the IHRC has the following required attestation regarding seizure, "I further acknowledge that the Indiana Horse Racing Commission may seize any article or substance which is found in my possession or control or in a location under my control which may be forbidden or is against the applicable Indiana Rules and Regulations." The word "any" as in "any article or substance" is another absolute statement that brings into question if there are any limits to the IHRC's ability to search and seize property. What we find interesting about the seizure attestation in the application is that only the Indiana Rules and Regulations is mentioned and not Indiana Statute. That's because the words 'seize' or 'seizure' don't appear anywhere in IHRC's authorizing statute, just the word search. The phrase "a location under my control" is also a very broad and nebulous description.
The Association of Racing Commissioners International (ARCI) Multi-Jurisdictional Owner's Application, which is used by the IHRC, takes a different approach to search and seizure in its Affidavit of Licensure, "I consent to a search within the grounds of any racetrack or racing association of my person and property, including premises and vehicles that I have the right to (or do) occupy or control, and to the seizure of articles related to unlawful conduct." For owners, the consent to search is only "within the grounds" of a racetrack because the ARCI is taking a more legal and constitutional approach to the model rule than the IHRC does with Indiana's administrative rules. However, the affidavit also has an owner attest to compliance with all rules and regulations of the locations in which would include our July Administrative Rule of the Month. (The ARCI Multi-Jurisdictional Owner's Application can be found at: http://www.in.gov/hrc/files/2013_RCI_Multi_web_app.pdf)
The ability to search anywhere at any time and to 'seize' any property is a power that the IHRC has essentially granted itself. Given that one of the tenants upon which Indiana Breeder and Owner Protection, Inc. (IBOP) was founded is the protection against "infringement of constitutional and civil rights," we decided to make '71 IAC 5.5-1-6 Consent to search and seizure' (71 IAC 5-1-6 in the standardbred administrative rulebook) our July 2014 Administrative Rule of the Month. In our view, the IHRC has stepped well beyond their authorizing statute with their 'search and seizure' administrative rules. As you read 71 IAC 5.5-1-6, which is copied below, keep this question in mind, what are limits to the search and seizure authority that the IHRC has placed upon itself? For definition purposes, a search is the examination of something that a person would normally consider private and seizure is the actual taking of a person's property.
71 IAC 5.5-1-6 Consent to search and seizure
Authority: IC 4-31-6-2
Affected: IC 4-31-13-4
Sec. 6. By acceptance of a license or by engaging in activities that require a license by the commission, a licensee consents to search and inspection by the commission or its agents and to the seizure of any prohibited medication, controlled substances,
paraphernalia, or devices in violation of state or federal law or these rules. Any seized drugs, medication, or other materials may be forwarded by the commission or its agents to the official chemist for analysis. The analysis of materials seized under the provisions of this section is not subject to 71 IAC 8.5-3. (Indiana Horse Racing Commission; 71 IAC 5.5-1-6; emergency rule filed
Jun 15, 1995, 5:00 p.m.: 18 IR 2850, eff Jul 1, 1995; readopted filed Oct 30, 2001, 11:50 a.m.: 25 IR 899; readopted filed Mar 23, 2007, 11:31 a.m.: 20070404-IR-071070030RFA; emergency rule filed May 12, 2008, 1:29 p.m.: 20080521-IR-071080353ERA)
First of all, you don't even have to be a licensee to fall under the scope of this administrative rule. You only have to be "engaging in activities that require a license" which is a definition that only the IHRC will control, irrespective of any individual opinion. But, do you see any limits for a search? We don't see anything but a forced consent to search that doesn't describe specifics of any location, for any particular purposes, or with any limitations on the timing or scope of a search. Do you see any limits for a seizure? While we do see the terms "prohibited medication" and "controlled substances", the administrative rule also uses the term "paraphernalia." One of the definitions of paraphernalia is 'personal belongings' which opens up for the IHRC to interpret that term as they see fit. So, is there a limit as to what can be seized? In our view, not under this administrative rule as written.
What we find interesting is that the Association of Racing Commissioner's International (ARCI) uses very similar language in their 'Consent to Search and Seizure' model rule: "By acceptance of a license, a licensee consents to search and inspection by the Commission or its agents and to the seizure of any prohibited medication, drugs, paraphernalia or devices in accordance with state/provincial and federal law." Our position has always been that the language in ARCI model rules have never been vetted for compliance versus Indiana statute to determine if a model rule would even be legal in Indiana. This is a good example as the IHRC seems to have followed the model rule to a degree, but at least the ARCI model rule requires searches and seizures to be done "in accordance with state/provisional and federal law' which is not even a consideration in Indiana's rule.
With any administrative rule, our first question is always, has the IHRC been granted explicit rulemaking authority via Indiana statute to even create such a 'search and seizure' rule? In this particular case, the answer is unequivocally 'no.' According to the Indiana's Administrative Rule Drafting Manual, the 'Authority Line' for any administrative rule "must give the citation of each Indiana statute (enabling statute) that expressly delegates rulemaking power to the agency to issue a rule on the subject matter of the accompanying rule." In other words, the IHRC is required to demonstrate where they gain the authority to create a specific administrative rule. In addition, the drafting manual states, "If the General Assembly has not expressly delegated authority to issue a rule, the authority line must give the citation of each statute that grants rulemaking power to the agency by implication."
In the case of '71 IAC 5.5-1-6', the IHRC cites IC 4-31-6-2 as providing their authority to create this 'search and seizure' rule. This very short aspect of Indiana statute is copied below:
IC 4-31-6-2
Procedures for license applications; license fees; adoption of rules
Sec. 2. The commission shall adopt rules under IC 4-22-2 establishing:
(1) procedures for license applications; and
(2) license fees.
As added by P.L.341-1989(ss), SEC.2.
While there is an explicit authorization for adopting administrative rules in IC 4-31-6-2, this authorization applies only for "procedures for a license application" and for "license fees." There is no explicit authority granted to the IHRC to create any 'search and seizure' rule. So, is there an implicit authorization to promulgate a search and seizure administrative rule in IC 4-31-6-2? To say 'yes' to that question, the IHRC would somehow have to believe that a consent to a search or to a seizure is a part of a necessary step-by-step process (procedure) for applying for a license. We find that to be a stretch, especially when considering that Indiana statute outlines the conditions under which the IHRC can refuse or deny a license application. None of those conditions allow for a refusal or a denial of a license application based a person's refusal to acknowledge the IHRC created 'search and seizure' administrative rule. Searches and seizures can fit the definition of a procedure; however, they would be procedures performed post-issuance of a license, not before.
IBOP's biggest concern with this particular administrative rule is with the unlimited authority the IHRC has granted to itself to conduct warrantless searches without probable cause. This self-appointed authority goes well beyond their statutory authority provided via IC 4-31 which is the pari-mutuel horse racing statute. So, what does the US Constitution have to say on this subject? The Fourth Amendment states, "The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no warrants shall issue, but upon probable cause, supported by oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized." The key phrase in the Fourth Amendment is "unreasonable searches and seizures," and more specifically, "unreasonable." In our view, many of the options the IHRC has provided itself within 71 IAC 5.5-1-6 are very unreasonable. But, can REASONABLE searches and seizures be done by an administrative agency without a warrant or probable cause?
Generally speaking, administrative searches of private property without a warrant have been held to be unconstitutional, especially a person's home. However, the US Supreme Court has upheld warrantless administrative searches for commercial property and have even done so when considering a warrantless administrative search of an unlicensed commercial stable outside of a racetrack. This exception to the administrative search warrant requirement "involves activities within a particular industry that has been subject to pervasive or long-standing governmental regulation" or what can be further described as "closely regulated industries." In effect, the courts view is that a person's involvement in a highly regulated industry should lower their expectation of privacy because of the government's interest in regulating that industry is increased. The pari-mutuel horse racing industry is definitely a "closely regulated" industry that could fit into the exception as long as warrantless administrative searches were considered to be reasonable. On the grounds of a racetrack, in most cases, would be considered reasonable. To be considered reasonable, especially when dealing with a potentially unreasonable government agency, courts have recognized that a warrantless administrative search is reasonable if three conditions are met.
First, the government agency must have a "substantial" interest in pursing any search. Simply, a horse racing commission's substantial interest would be their efforts to maintain the integrity of pari-mutuel horse racing. So, the substantial interest criterion would be fairly easy to meet. The second criterion is that any warrantless administrative search is being conducted as a necessity to further the agency's "regulatory scheme" which, in this case, can be defined as "a combination of elements (as statutes or regulations) that are connected, adjusted, and integrated by design: a systematic plan or program. This aspect of the three-pronged test is a little bit more difficult satisfy, and is designed to eliminate the arbitrary and "unbridled discretion [of] executive and administrative officers." We see any searches conducted outside of a racetrack under 71 IAC 5.5-1-6 as failing to meet this particular requirement. There is no design, or rhyme or reason, or administrative program associated with 71 IAC 5.5.-1-6. Yet, its the third court-established criterion where the IHRC's administrative 'search and seizure' rule fails miserably.
Any of the IHRC's attempted searches off premises of a racetrack, "in terms of the certainty and regularity of its application, [must] provid[e] a constitutionally adequate substitute for a warrant." To put this another way, the administrative rule (or statute) has to provide that any warrantless administrative search is being done pursuant to the law, has a defined and specific scope, and places limits on those conducting the search. In other words, the administrative rule or statute has to announce to the world that your property "will be subject to periodic inspections undertaken for a specific purpose." The administrative rule or statute that allows for warrantless administrative searches must also provide description of the "time, place, and scope" of any search. 71 IAC 5.5-1-6 allows for arbitrary and limitless actions by the IHRC, and therefore, in our view, needs to be removed from the Indiana Administrative Code as unconstitutional or modified significantly to comply with this long-established exception to the Fourth Amendment.
Below is how the Indiana statute (IC 4-31-13-4) reads that provides for the IHRC's statutory right of entry and authorization to search people or places. As mentioned earlier, the words 'seize' or 'seizure' appear no where in any portion of the IHRC's authorizing statute. You will also see that there is no authorization or expressed statutory authority granted to the IHRC to create any administrative rules on the subject. In our read, we are not even certain IC 4-31-13-4 meets the three criterion established by courts for affective warrantless administrative searches at a racetrack. However, our focus is on IC 4-31-13-4(5) which provides a much more limited capability to search places outside of a racetrack than the IHRC has granted itself through 71 IAC 5.5.-1-6.
IC 4-31-13-4
Right of entry by commission and representatives; searches of persons and property; violation; suspension
Sec. 4. (a) The commission and its representatives have the right of full and complete entry to any and all parts of the grounds and mutuel plants of permit holders.
(b) The commission, the commission's representatives, and the state judge investigating for violations of law or of the rules of the commission may permit persons authorized by them to search the following persons and areas:
(1) All persons who are within the racetrack premises and:
(A) licensed by the commission; or
(B) engaged in activities that require a license by the commission.
(2) Persons who have gained access to the racetrack premises by special permission.
(3) Vendors licensed by the commission when they are within the racetrack premises.
(4) Stables, rooms, vehicles, and other places within the racetrack premises that are used by those persons who may be searched under this section.
(5) Stables, rooms, and vehicles that are used or maintained by persons licensed by the commission and are located in areas outside of the racetrack premises where horses eligible to race at the racing meeting are stabled.
(c) If a licensee refuses to consent to a search under this section, the person shall be automatically suspended.
As added by P.L.341-1989(ss), SEC.2. Amended by P.L.50-1995, SEC.12.
IC 4-31-13-4(5) does add some specifics as to what locations can be searched as in "where horses eligible to race at the meeting are stabled." However, this subsection does seem to fail the final two tests for a warrantless administrative search to meet the any established exception. First, there is no specific program or design involved with a search conducted under this subsection. (For example, a search after receipt of a positive drug test would be part of a specific design.) Therefore, any off-track search would be considered to be arbitrary. Other than a somewhat of a more defined place, there are very few limits as to the regularity of possible searches, time frames, and the scope and limits of the search or those conducting a search. In our view, IC 4-31-13-4(5) also fails to meet any exception to the Fourth Amendment.
The Indiana Horse Racing Commission (IHRC) would have you believe that as a licensee you have no rights to privacy or protection from an unreasonable search and seizure. In specific locations, like on the grounds of a racetrack in Indiana with a permit to conduct pari-mutuel wagering, including barns, stables, stalls, tack rooms, or feed rooms, you generally don't have much of a right to privacy, nor should you expect such a right. The long-held view is that the threat of being searched is a reasonable attempt by an administrative agency to deter any illegal activity connected to pari-mutuel horse racing. However, the IHRC believes that their powers to search and to seize are extremely broad and somehow extend beyond the grounds of a racetrack to anywhere they choose, for whatever reason, and at any time of their choosing.
In fact, the IHRC includes the following required attestation on their Multi-Purpose License Application regarding searches, "I hereby acknowledge that I will be subject to the searches, either in my presence or absence, provided for in Indiana Code 4-31-13, as amended, and the Indiana Rules and Regulations that authorize personal inspections, inspections of any personal property, and inspections of premises and property related to my participation in a race meeting by persons authorized by the Indiana Horse Racing Commission" This statement references both Indiana statute (Indiana Code 4-31-14) and what we presume is the Indiana Administrative Code (Indiana Rules and Regulations). The IHRC, purposefully, uses phrases like "any personal property" which creates the illusion of an absolute authority any time, any place, especially when tied to "premises and property related to my participation in a race meeting." Could "premises and property" actually mean a person's home, farm, barns, etc. when the owner is not there ("either in my presence or absence")?
On that same license application, the IHRC has the following required attestation regarding seizure, "I further acknowledge that the Indiana Horse Racing Commission may seize any article or substance which is found in my possession or control or in a location under my control which may be forbidden or is against the applicable Indiana Rules and Regulations." The word "any" as in "any article or substance" is another absolute statement that brings into question if there are any limits to the IHRC's ability to search and seize property. What we find interesting about the seizure attestation in the application is that only the Indiana Rules and Regulations is mentioned and not Indiana Statute. That's because the words 'seize' or 'seizure' don't appear anywhere in IHRC's authorizing statute, just the word search. The phrase "a location under my control" is also a very broad and nebulous description.
The Association of Racing Commissioners International (ARCI) Multi-Jurisdictional Owner's Application, which is used by the IHRC, takes a different approach to search and seizure in its Affidavit of Licensure, "I consent to a search within the grounds of any racetrack or racing association of my person and property, including premises and vehicles that I have the right to (or do) occupy or control, and to the seizure of articles related to unlawful conduct." For owners, the consent to search is only "within the grounds" of a racetrack because the ARCI is taking a more legal and constitutional approach to the model rule than the IHRC does with Indiana's administrative rules. However, the affidavit also has an owner attest to compliance with all rules and regulations of the locations in which would include our July Administrative Rule of the Month. (The ARCI Multi-Jurisdictional Owner's Application can be found at: http://www.in.gov/hrc/files/2013_RCI_Multi_web_app.pdf)
The ability to search anywhere at any time and to 'seize' any property is a power that the IHRC has essentially granted itself. Given that one of the tenants upon which Indiana Breeder and Owner Protection, Inc. (IBOP) was founded is the protection against "infringement of constitutional and civil rights," we decided to make '71 IAC 5.5-1-6 Consent to search and seizure' (71 IAC 5-1-6 in the standardbred administrative rulebook) our July 2014 Administrative Rule of the Month. In our view, the IHRC has stepped well beyond their authorizing statute with their 'search and seizure' administrative rules. As you read 71 IAC 5.5-1-6, which is copied below, keep this question in mind, what are limits to the search and seizure authority that the IHRC has placed upon itself? For definition purposes, a search is the examination of something that a person would normally consider private and seizure is the actual taking of a person's property.
71 IAC 5.5-1-6 Consent to search and seizure
Authority: IC 4-31-6-2
Affected: IC 4-31-13-4
Sec. 6. By acceptance of a license or by engaging in activities that require a license by the commission, a licensee consents to search and inspection by the commission or its agents and to the seizure of any prohibited medication, controlled substances,
paraphernalia, or devices in violation of state or federal law or these rules. Any seized drugs, medication, or other materials may be forwarded by the commission or its agents to the official chemist for analysis. The analysis of materials seized under the provisions of this section is not subject to 71 IAC 8.5-3. (Indiana Horse Racing Commission; 71 IAC 5.5-1-6; emergency rule filed
Jun 15, 1995, 5:00 p.m.: 18 IR 2850, eff Jul 1, 1995; readopted filed Oct 30, 2001, 11:50 a.m.: 25 IR 899; readopted filed Mar 23, 2007, 11:31 a.m.: 20070404-IR-071070030RFA; emergency rule filed May 12, 2008, 1:29 p.m.: 20080521-IR-071080353ERA)
First of all, you don't even have to be a licensee to fall under the scope of this administrative rule. You only have to be "engaging in activities that require a license" which is a definition that only the IHRC will control, irrespective of any individual opinion. But, do you see any limits for a search? We don't see anything but a forced consent to search that doesn't describe specifics of any location, for any particular purposes, or with any limitations on the timing or scope of a search. Do you see any limits for a seizure? While we do see the terms "prohibited medication" and "controlled substances", the administrative rule also uses the term "paraphernalia." One of the definitions of paraphernalia is 'personal belongings' which opens up for the IHRC to interpret that term as they see fit. So, is there a limit as to what can be seized? In our view, not under this administrative rule as written.
What we find interesting is that the Association of Racing Commissioner's International (ARCI) uses very similar language in their 'Consent to Search and Seizure' model rule: "By acceptance of a license, a licensee consents to search and inspection by the Commission or its agents and to the seizure of any prohibited medication, drugs, paraphernalia or devices in accordance with state/provincial and federal law." Our position has always been that the language in ARCI model rules have never been vetted for compliance versus Indiana statute to determine if a model rule would even be legal in Indiana. This is a good example as the IHRC seems to have followed the model rule to a degree, but at least the ARCI model rule requires searches and seizures to be done "in accordance with state/provisional and federal law' which is not even a consideration in Indiana's rule.
With any administrative rule, our first question is always, has the IHRC been granted explicit rulemaking authority via Indiana statute to even create such a 'search and seizure' rule? In this particular case, the answer is unequivocally 'no.' According to the Indiana's Administrative Rule Drafting Manual, the 'Authority Line' for any administrative rule "must give the citation of each Indiana statute (enabling statute) that expressly delegates rulemaking power to the agency to issue a rule on the subject matter of the accompanying rule." In other words, the IHRC is required to demonstrate where they gain the authority to create a specific administrative rule. In addition, the drafting manual states, "If the General Assembly has not expressly delegated authority to issue a rule, the authority line must give the citation of each statute that grants rulemaking power to the agency by implication."
In the case of '71 IAC 5.5-1-6', the IHRC cites IC 4-31-6-2 as providing their authority to create this 'search and seizure' rule. This very short aspect of Indiana statute is copied below:
IC 4-31-6-2
Procedures for license applications; license fees; adoption of rules
Sec. 2. The commission shall adopt rules under IC 4-22-2 establishing:
(1) procedures for license applications; and
(2) license fees.
As added by P.L.341-1989(ss), SEC.2.
While there is an explicit authorization for adopting administrative rules in IC 4-31-6-2, this authorization applies only for "procedures for a license application" and for "license fees." There is no explicit authority granted to the IHRC to create any 'search and seizure' rule. So, is there an implicit authorization to promulgate a search and seizure administrative rule in IC 4-31-6-2? To say 'yes' to that question, the IHRC would somehow have to believe that a consent to a search or to a seizure is a part of a necessary step-by-step process (procedure) for applying for a license. We find that to be a stretch, especially when considering that Indiana statute outlines the conditions under which the IHRC can refuse or deny a license application. None of those conditions allow for a refusal or a denial of a license application based a person's refusal to acknowledge the IHRC created 'search and seizure' administrative rule. Searches and seizures can fit the definition of a procedure; however, they would be procedures performed post-issuance of a license, not before.
IBOP's biggest concern with this particular administrative rule is with the unlimited authority the IHRC has granted to itself to conduct warrantless searches without probable cause. This self-appointed authority goes well beyond their statutory authority provided via IC 4-31 which is the pari-mutuel horse racing statute. So, what does the US Constitution have to say on this subject? The Fourth Amendment states, "The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no warrants shall issue, but upon probable cause, supported by oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized." The key phrase in the Fourth Amendment is "unreasonable searches and seizures," and more specifically, "unreasonable." In our view, many of the options the IHRC has provided itself within 71 IAC 5.5-1-6 are very unreasonable. But, can REASONABLE searches and seizures be done by an administrative agency without a warrant or probable cause?
Generally speaking, administrative searches of private property without a warrant have been held to be unconstitutional, especially a person's home. However, the US Supreme Court has upheld warrantless administrative searches for commercial property and have even done so when considering a warrantless administrative search of an unlicensed commercial stable outside of a racetrack. This exception to the administrative search warrant requirement "involves activities within a particular industry that has been subject to pervasive or long-standing governmental regulation" or what can be further described as "closely regulated industries." In effect, the courts view is that a person's involvement in a highly regulated industry should lower their expectation of privacy because of the government's interest in regulating that industry is increased. The pari-mutuel horse racing industry is definitely a "closely regulated" industry that could fit into the exception as long as warrantless administrative searches were considered to be reasonable. On the grounds of a racetrack, in most cases, would be considered reasonable. To be considered reasonable, especially when dealing with a potentially unreasonable government agency, courts have recognized that a warrantless administrative search is reasonable if three conditions are met.
First, the government agency must have a "substantial" interest in pursing any search. Simply, a horse racing commission's substantial interest would be their efforts to maintain the integrity of pari-mutuel horse racing. So, the substantial interest criterion would be fairly easy to meet. The second criterion is that any warrantless administrative search is being conducted as a necessity to further the agency's "regulatory scheme" which, in this case, can be defined as "a combination of elements (as statutes or regulations) that are connected, adjusted, and integrated by design: a systematic plan or program. This aspect of the three-pronged test is a little bit more difficult satisfy, and is designed to eliminate the arbitrary and "unbridled discretion [of] executive and administrative officers." We see any searches conducted outside of a racetrack under 71 IAC 5.5-1-6 as failing to meet this particular requirement. There is no design, or rhyme or reason, or administrative program associated with 71 IAC 5.5.-1-6. Yet, its the third court-established criterion where the IHRC's administrative 'search and seizure' rule fails miserably.
Any of the IHRC's attempted searches off premises of a racetrack, "in terms of the certainty and regularity of its application, [must] provid[e] a constitutionally adequate substitute for a warrant." To put this another way, the administrative rule (or statute) has to provide that any warrantless administrative search is being done pursuant to the law, has a defined and specific scope, and places limits on those conducting the search. In other words, the administrative rule or statute has to announce to the world that your property "will be subject to periodic inspections undertaken for a specific purpose." The administrative rule or statute that allows for warrantless administrative searches must also provide description of the "time, place, and scope" of any search. 71 IAC 5.5-1-6 allows for arbitrary and limitless actions by the IHRC, and therefore, in our view, needs to be removed from the Indiana Administrative Code as unconstitutional or modified significantly to comply with this long-established exception to the Fourth Amendment.
Below is how the Indiana statute (IC 4-31-13-4) reads that provides for the IHRC's statutory right of entry and authorization to search people or places. As mentioned earlier, the words 'seize' or 'seizure' appear no where in any portion of the IHRC's authorizing statute. You will also see that there is no authorization or expressed statutory authority granted to the IHRC to create any administrative rules on the subject. In our read, we are not even certain IC 4-31-13-4 meets the three criterion established by courts for affective warrantless administrative searches at a racetrack. However, our focus is on IC 4-31-13-4(5) which provides a much more limited capability to search places outside of a racetrack than the IHRC has granted itself through 71 IAC 5.5.-1-6.
IC 4-31-13-4
Right of entry by commission and representatives; searches of persons and property; violation; suspension
Sec. 4. (a) The commission and its representatives have the right of full and complete entry to any and all parts of the grounds and mutuel plants of permit holders.
(b) The commission, the commission's representatives, and the state judge investigating for violations of law or of the rules of the commission may permit persons authorized by them to search the following persons and areas:
(1) All persons who are within the racetrack premises and:
(A) licensed by the commission; or
(B) engaged in activities that require a license by the commission.
(2) Persons who have gained access to the racetrack premises by special permission.
(3) Vendors licensed by the commission when they are within the racetrack premises.
(4) Stables, rooms, vehicles, and other places within the racetrack premises that are used by those persons who may be searched under this section.
(5) Stables, rooms, and vehicles that are used or maintained by persons licensed by the commission and are located in areas outside of the racetrack premises where horses eligible to race at the racing meeting are stabled.
(c) If a licensee refuses to consent to a search under this section, the person shall be automatically suspended.
As added by P.L.341-1989(ss), SEC.2. Amended by P.L.50-1995, SEC.12.
IC 4-31-13-4(5) does add some specifics as to what locations can be searched as in "where horses eligible to race at the meeting are stabled." However, this subsection does seem to fail the final two tests for a warrantless administrative search to meet the any established exception. First, there is no specific program or design involved with a search conducted under this subsection. (For example, a search after receipt of a positive drug test would be part of a specific design.) Therefore, any off-track search would be considered to be arbitrary. Other than a somewhat of a more defined place, there are very few limits as to the regularity of possible searches, time frames, and the scope and limits of the search or those conducting a search. In our view, IC 4-31-13-4(5) also fails to meet any exception to the Fourth Amendment.
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