Straus | Retama - Empower Texans...Steve Kosub 53 Dishonorable Mentions 54 Retama Individuals 55 8 Introduction The story of gambling on horse racing in Texas and the Retama racetrack

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Straus | Retama Dossier

Presented October 12, 2017 Prepared by Adapted Research

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Adapted Research Information to assist in public relations and grassroots political campaigns, both individual and issue-based.

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Executive Summary

Since its inception, the story of Retama has never been completely told. News articles that touch on the track usually lack needed context and key elements. This may be attributable in part to the complexity of the endeavor or the power of the individuals involved. For example, as recently as June 2017, Retama fallout continues to be reported without valuable context and a permanent links back to the originators of the debacle, the Straus family. In the spring of 2017, the Securities and Exchange Commission prevailed in a lawsuit against Christopher J. Hall, formerly head of Call Now Inc., which bailed Retama out from 1997 to 2013. That ruling against Hall did not include a substantial monetary reprimand. The SEC petitioned for a larger fine and recently a judge ordered Hall to pay back $3.7 million in ill-gotten gains plus interest. Call Now Inc. and Hall made the same bet as the Straus family: that the State of Texas would expand gambling to Texas horse racing tracks. Retama and horse racing in Texas in general is a Straus family venture. Speaker Joe Straus III, whose business interests have included family trusts with ownership of Retama, has a stake in the potential of future expanded gambling. Speaker Joe Straus III was the Marketing Director for Retama in the early years. As part of the management, Straus’s “low-key” approach to marketing was blamed in part for sending the racetrack into bankruptcy. The Retama story is filled with a multitude of untrustworthy people, bad decisions, and dishonest ploys at taxpayers’ expense. Overall, it is difficult to find an aspect of Retama that is above board. Speaker Straus benefits greatly from the lack of reporting of his direct connections to Retama. He also benefits from the confusing nature of Retama’s business organization and history. However, the corruption itself is not confusing. While a comprehensive understanding of Retama is possible, it is easy to get buried in the weeds of corruption when tracking the story from start to finish. This dossier seeks to accomplish two tasks. For those who want to know the big picture and be fluent on the history of pari-mutuel gambling and its originator in Texas, the Straus family, there

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is a condensed history. Also provided in this document are background materials and a more comprehensive history, outline of key individuals and additional documents including depositions and UT-San Antonio archive notes that paint a more full picture.

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Table of Contents

Introduction 8

Retama Timeline 11

Straus Connection Remains 15

The Straus Family, Responsible for Retama 15

Joe Straus III Directly Connected to Retama 16

Retama brought to you by Straus and Democrats 18

Economics 20

Bankrupt 20

Joe Straus III to Blame? 20

High Risk Investment 20

Slots, Not a Fix 22

Off-Track Betting Request 22

1989 Tax Break Request 22

Financing Issues & Selma 23

Retama Loophole Created 24

Companies Linked to Retama 25

Retama’s confusing corporate structure 25

The Retama Entities 25

Ownership Diagrams 26

Companies Linked to Retama 31

Retama Development Corporation 31

Call Now Inc. (Collapse) 31

Call Now Inc. (IRS Sanctions $773,750) 31

Penson Sued for Retama involvement in class action lawsuit 32

SEC Seeks Action Against Brokerage Firm 32

BDO SEIDMAN 32

Retama Lawsuit Research 34

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Deposition: Margaret “Jan” Smalling Haynes 35

Deposition: Tommy Azopardi 39

Deposition: Bryan Brown 42

Disciplinary Actions

William “Bill” Allen (Deceased) 50Ken Roberts 50

Thomas R. Johnson 51

Christopher J. Hall 51

Robert C. Buffkin 51

Appearance of Impropriety 53

Elgin Friesenhahn 53

Lisa Medrano 53

Ken Flennor 53

Steve Kosub 53

Dishonorable Mentions 54

Retama Individuals 55

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Introduction

The story of gambling on horse racing in Texas and the Retama racetrack is one of untrustworthy people misleading Texans into a financial boondoggle. When it comes to Retama, it is difficult to find any aspect of the endeavor that is above board. Speaker Joe Straus benefits from a lack of focus on his direct connection to Retama, a lack of reporting on the history of how pari-mutuel gambling was legalized, and how the track in Selma, Texas was originally developed. This brief history provides a bird’s eye view of how we’ve come from no legalized gambling on horseracing in the 1980s, to the failure of racing and bankruptcy of Retama in the 1990s, to the continued unsavory activities of Straus’ partners and allies in the 2000s. Included in this report are in-depth and heavily-footnoted sections on the following items: History - from zero and back again, the failure of pari-mutuel gambling in Texas The Crew - the cast of characters involved in Retama including convicted criminals Broken Economics - pari-mutuel gambling alone was never going to work The Enemy - horsemen have been used and abused for profit The Story First things first… the only reason gambling on horseracing exists in Texas today is the Straus family. Speaker Joe Straus III’s grandfather, Joe Straus Sr., was involved with the horseracing industry before it was legalized and then outlawed again in the 1930s. It was outlawed in 1937 after just five years of operation because it substantially underperformed economic projections. This is a recurring issue with the current iteration of legalized pari-mutuel gambling. Joe Straus Jr. was the driving force behind getting pari-mutuel gambling legalized again in 1987. He was lobbying as far back as 1966, but formalized and energized his efforts in 1973 when he founded the Texas Horse Racing Association. His activity between 1973 and 1987 culminated with the passage of the Texas Racing Act by the Texas Legislature during a downturn in the oil industry.

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After selling lawmakers and the public on the viability of pari-mutuel gambling on horse races and convincing them to adopt a constitutional amendment to legalize it, Straus reneged, claiming that it was not going to be profitable under the terms he proposed and Texans consented to in 1987. Straus Jr., who had been lobbying for betting on horses for 21 years, claimed ignorance to the problems with the legislation he helped pass. “The problem is we passed a bad bill,'' he said. “None of us knew what the hell we were doing.'' The Straus family asked for and was eventually given an 80% tax cut by Democratic Gov. Ann Richards. Only after they were awarded the tax cut did Straus began to pursue the construction of a Class 1 race track in the San Antonio area. In 1995, during the 74th Legislative session, Senator Jeff Wentworth passed a resolution crediting Straus Jr. and the Straus Family with the creation of Retama Park. The Straus name is synonymous with the track. One headline from 1996, while the park was going through bankruptcy, read Retama Park Still the House of Straus.1 The public-private nature of Retama, its bankruptcy, and its various acquisitions has led to confusion about Straus’ ownership interest in the track. Straus and his family continue to have a stake in the track and would reap a windfall if gambling were expanded in the future. Speaker Straus still stands to gain from the legalization of gambling and has an interest in Retama through his family connection and continued stake in the Straus 2003 Irrevocable Trust. At a Texas Tribune event following the acquisition of Retama by Pinnacle Entertainment, Straus said that his family stood to gain financially should historical racing machines (slot machines) be installed at Retama. Pari-mutuel gambling in Texas and the failure that it has been over the last three decades can be laid at the feet of one family. The Straus family used a small town to off-load risk and run an enrichment scheme that left vendors and bondholders out tens of millions of dollars.

1 Express-News Staff Writer, Tim Price. "Retama Park Still the House of Straus - Track chairman's role could be up in the air under new owners." San Antonio Express-News, 2 Jun. 1996.

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As they had from the beginning, the Straus family had worked to minimize exposure to risk on the project. When the track declared bankruptcy in 1996, the Straus family investment was reported to be less than $4 million of the $80 million spent to build it.

In 2008 Retama was at risk of going under and sought a loan from the Texas Thoroughbred Association. The terms of the loan were that it would be repaid when the horse racing operation at Retama found a buyer. That buyer eventually emerged and a majority interest in Retama was purchased by national casino operator Pinnacle Entertainment. Following the sale, the Thoroughbred Association tried to recoup its loan but was denied on a contractual technicality. The Association sued. Excerpts from depositions from that lawsuit are included in this report and help further illuminate the despicable nature of the cabal behind Retama. Since 1990 there have been several attempts to expand gambling in Texas, specifically at horse tracks. The latest attempt was to circumvent the legislature altogether and use the Texas Racing Commission to install slot machines under the guise of “historical racing.” That attempt was eventually crushed when the Racing Commission was faced with being defunded by the legislature. Even had that effort succeeded, it’s no sure bet that it would have saved the doomed horse racing industry. Richard Thalheimer, an economist from Kentucky, in 2010 stated that slots at racetracks is the only option racetracks have for raising more revenue but are only a short-term solution. "If people cannot be attracted to bet on horse races, in the long run, the outlook is the same," he said. "This buys you time to figure out how to get people back to betting on horses."

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Retama Timeline

● Horse racing is legalized in 1933, touted as a revenue source during the Great

Depression. The sport lasts just five years before gate receipts dwindle. Gov. James V. Allred abolishes racetrack gambling in 1937.

● In 1974 Joe Straus Jr. accuses Texas Baptists of “blackmail” and “bullying tactics” in

their opposition to expanded gambling.2

● In 1987 the Texas Legislature legalizes pari-mutuel gambling on horseracing. The provision required statewide voter approval and county approval for individual track development.

● In 1989 Democrat Senator Hector Uribe authors SB 820, empowering municipalities to

take on debt via bonds that would be repayable from future racetrack profits. The issuance of bonds circumvents voters.

● December 1990 – Incoming Gov. Ann Richards’ spokesman states that pari-mutuel

wagering is very close to the top of her agenda and that "she wants those tracks opened and running."3

● May 1991 – The Texas Legislature approves an 80% tax cut bailout (five cents on the

dollar to one cent) for horse track gambling operations. This is after horse racing was sold to voters in 1987 based on the revenue expected from the five-cent tax.

● September 1991 – The Texas Racing Commission approves Retama’s Class 1 racing

license with one dissenting vote.

● June 1992 – It is first reported that Selma is going to issue bonds to pay for Retama’s construction. The City of Selma issues $70 million in tax-exempt municipal bonds to fund construction of the track.

● Joe Straus Jr. and a group of investors lead the development of Retama Park which

opens on April 7, 1995. 2 "Baptists vs. another Straus, 1974: "Texas Baptists Blast Remark"." Fort Worth Star-Telegram: Blogs (TX), 5 Jan. 2009, PoliTex. 3 COULTER, BILL. "Pari-mutuel's nag - Racing has failed to produce revenue industry promised." Houston Chronicle, 30 Dec. 1990, 2 STAR, STATE, p. 4.

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● In 1995, the track runs over-budget on operational expenses. Retama owes more than

$4 million to companies that provided items including betting equipment and services, audio and visual equipment, and advertising. Retama has a dismal opening season, missing business projections by 40 percent and losing as much as $250,000 per week.4

● November 1995 – Retama suspends live racing.

● December 1995 – Less than eight months after opening, “Retama is looking for a savior”

and actively seeking buyers or investors as the track is already known as a financially-troubled loser.

● March 21, 1996 – Retama declares bankruptcy. Lee Katz is brought in to negotiate with

vendors and the debts are allowed to continue to accrue while operations continue. After Retama emerges from bankruptcy, these creditors (small businessmen and women) are paid, “according to Katz, 5 cents to the dollar.”5 “Vendors who provided services to Retama lose more than $2 million.”6

● July 13, 1996 – A deal between Call Now Inc. and Retama is reported.7

● September 1996 – Call Now, Inc., (Call Now) completes $10.3 million payment to buy Retama Park's senior debt.8

● In 1997, Call Now becomes controlling owner of Retama Entertainment Group Inc.,

owning an 80 percent stake.9 10

4 Express-News Staff Writer, Tim Price. "Retama Park gets boost as judge OKs reorganization." San Antonio Express-News, 14 Feb. 1997, Sports, p. 1C. 5 Express-News Business Writer, Tim Price. "Rebuilding Retama - Selma racetrack betting on new life after bankruptcy." San Antonio Express-News, 4 May 1997, Business, p. 1H. 6 Express-News Staff Writer, Tim Price. "Retama Park gets boost as judge OKs reorganization." San Antonio Express-News, 14 Feb. 1997, Sports, p. 1C. 7 AP. "Retama Park hopes it has found financial savior." Austin American-Statesman (TX), 13 Jul. 1996, Final, Sports, p. D3. 8 Express-News Staff Writer, Tim Price. "Call Now completes deal with Retama." San Antonio Express-News, 27 Sep. 1996, Alamo, Sports, p. 4C. 9 Danner, Patrick. "Ex-chairman linked to Retama Park barred; SEC case leads to exec's penalty for violations." San Antonio Express-News (TX), 15 Apr. 2017, State, Business, p. B001. 10 "Setting It Straight." San Antonio Express-News (TX), 29 Sep. 2005, METRO, A Section, p. 02A.

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● February 1997 – Retama emerges from bankruptcy proceedings following debt acquisition by Call Now and Howe, Solomon and Hall.

● July 1998 – Call Now explores and puts a $2 million down payment on three track deal

with Edward J. DeBartolo Corp.11

● January 1999 – Bryan Brown resigns as president of Call Now to “give sole attention to matters at Retama.”12

● April 1999 – Bryan Brown and Retama investors explore opening a track in Austin. It’s

unclear if Call Now will be part of the venture.

● May 1999 – Call Now sells $7 million in debt to “institutional investors.”13

● In 2001, Christopher J. Hall became the controlling shareholder in Call Now. Hall becomes Chairman in 2008.

● September 2010 – Call Now is publicly searching for an equity partner to make principal

and interest payments on senior debt.

● June 1, 2011 – Call Now holds annual shareholder meeting at Retama Park.14

● July 2011 – Call Now stock is trading at $5 per share.

● July 2011 – Pinnacle denies reports it is interested in acquiring Retama.15

● August 2011 – Penson Worldwide Inc. begins foreclosure filings on Call Now. Penson provided margin loans to Call Now.

● October 2011 – Call Now informs the SEC it is curtailing operations and will no longer

file reports because it can no longer pay for accountants.16 11 PLAIN DEALER REPORTER, PAT GALBINCEA. "THISTLEDOWN SALE SHOULD BE COMPLETED BY AUTUMN." Plain Dealer, The (Cleveland, OH), 2 Jul. 1998, FINAL / ALL, SPORTS, p. 3D. 12 Price, Tim. "Race meet to start on time at Manor." San Antonio Express-News, 8 Jan. 1999, Metro, Sports, p. 2C. 13 Price, Tim. "NOTES." San Antonio Express-News, 7 May 1999, Metro, Sports, p. 10C. 14 "THIS WEEK IN BUSINESS." San Antonio Express-News (TX), 30 May 2011, STATE&METRO, A Section, p. 11A. 15 Danner, Patrick. "GAMING ; BETTING ON LEGISLATION CHANGE ; Retama courting Vegas for funding." San Antonio Express-News (TX), 20 Jul. 2011

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● October 2011 – Call Now stock is trading at a 52-week low of 25 cents.

● November 2012 – Pinnacle is reported to be close to acquiring a majority interest “in the

partnership that owns the track.”17

● Call Now ends its involvement with Retama at the end of 2012.

● December 2012 – Pinnacle acquires a majority interest in Retama.18 Pinnacle takes over the Retama track license in a $22.8 million deal.19

● August 2014 – Texas Racing Commission adopts “historical racing” rules to allow slot

machines at horse racing tracks.

● November 2014 – A Travis County court blocks implementation of “historical racing.”

● A civil lawsuit is filed against Call Now Chairman Christopher J. Hall in 2015.

● February 2016 – Pinnacle goes on record as being upset about TXRC historical racing rules being repealed by Racing Commission.20

● February 2017 – Jury finds Call Now Chairman Christopher J. Hall guilty.

● April 13, 2017 – Judge bars Hall from serving as a director of a public company.

● June 2017 – Judge revisits ill-gotten gains ruling for Call Now Chairman Hall and orders

payment of $4.7 million.

16 Danner, Patrick. "Retama's parent in trouble." San Antonio Express-News (TX), 12 Oct. 2011, STATE&METRO, Business, p. 01C. 17 Pack, William. "RETAMA ; Layoffs at racetrack a formality." San Antonio Express-News (TX), 28 Nov. 2012, State, Business, p. 2C. 18 Whisler, John. "Horse racing ; Political fight puts Retama in jeopardy." San Antonio Express-News (TX), 20 Aug. 2015, State, Sports, p. 1C. 19 Danner, Patrick. "SEC prevails in case against Call Now Inc. chairman Hall; He is to ante up about $4.7M in ill-gotten gains, fines for frauds." San Antonio Express-News (TX), 30 Jun. 2017, State, Business, p. B001. 20 Rosenthal, Brian M.. "Betting game loses state's OK ; Panel rescinds its approval of historical racing." San Antonio Express-News (TX), 19 Feb. 2016, State, Metro, p. 3A.

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Straus Connection Remains

The Straus Family, Responsible for Retama

1. The State of Texas officially credited Joe Straus Jr. and the Straus family with the creation of Retama Park in a congratulatory resolution authored by Senator Jeff Wentworth during the 74th Legislative Session. This resolution flies in the face of the Straus-family blame-shifting and blame-sharing they’ve done since Retama’s financial troubles became public.

2. Joe Straus, Jr., dominates the minutes of the original Selma City Council meetings at

which he convinced the tiny town of just 600 people to buy land and build a racetrack for his family.

3. The Fort Worth Star Telegram heralded Straus Jr. as the architect of the Retama effort.

A FWST article published November 20, 1994 reported:

Joe Straus Jr., a San Antonio businessman, carried on his father's vision of returning major horse tracks to Texas. He traveled the state promoting horse racing for years before it was legalized again, and he founded the Texas Horse Racing Association.

His brother, David Straus, and son, Joe Straus III, are also involved with Retama Park.[Emphasis added]

After years of planning and months of ironing out the financing, Retama Park finally began construction in January. Come April 7, the track will start thoroughbred racing three days a week and move to a five-day schedule in May.

The starting gates can't open soon enough for the Straus family.

"I think San Antonio and South Texas have been ready for this for a long time," said Joe Straus Jr. "Hopefully, we'll be just as ready for it as the people will be.”22

22Shannon, Kelley. "Horse track near San Antonio heads down home stretch." Fort Worth Star-Telegram 20 Nov. 1994

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Joe Straus III Directly Connected to Retama

1. There are over 50 news articles listing Joe Straus III as “the Marketing Director” of Retama Park.

2. Straus was also involved in the planning phase, according to a news article:

While working in Washington, D.C., during the early '90s, prior to joining his father's racetrack project as marketing director, Joe Straus III asked a racing consultant for advice on a track president.

"He told me the guy we wanted for this thing was Bob Quigley," Straus said. "But he said that we wouldn't get him because Bob had done his thing. He was established."23

3. Straus III et. al. knew the track was a gamble according to a San Antonio Express-News

article:

Retama Park began on a bet, according to Joe Straus III, director of marketing for Retama Park Association. In 1987, the Texas Legislature legalized pari-mutuel betting. But after studying the feasibility of building a big racetrack in Texas, the Strauses concluded that such a venture would not be economically viable. So they asked the legislature to revise the law. In 1991, the Legislature responded, by essentially lowering state taxes on racetracks and making a provision for simulcast betting, Straus said. However, the Strauses had to apply for their Retama license before the Legislature changed the law. The application fee, payable to the Texas Racing Commission, was $1 million.24

4. Straus III truthfully said the project was a gamble, but this is contrary to what Joe Straus

Jr. led Selma City Council Members to believe. According to a Wall Street Journal Article:

23 Price, Tim. "Retama's man at the helm -Another challenge for Quigley." San Antonio Express-News 1 Feb. 1995. 24 Gibbs, Kristi. "Satellite wagering to start in fall at Retama." San Antonio Express-News 27 Jul. 1994.

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Like Sam Houston's owners, the Strauses were rebuffed in their first attempt to arrange financing for the $75 million track. "We found it would require a lot more equity, and be more expensive all the way," says Joe Straus III, the track's director of marketing. To reduce the costs, investment bankers Rauscher Pierce Refsnes Inc. in Dallas arranged for the city of Selma, a San Antonio suburb of 600, to issue tax-exempt municipal bonds. The city will own the track, leasing it to the Strauses, but won't be liable for repaying the debt, which will be paid out of the track's proceeds.

5. Joe Straus III, when he was first elected in 2005 and subsequently has disclosed himself

to be a beneficiary of the Straus 2003 Irrevocable Trust which owns an 8.17% stake in Retama.

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Retama brought to you by Straus and Democrats

Joe Straus and parimutuel gambling are brought to you by Democrats. First, the commonly reported concept that the Straus family are dyed-in-the-wool Republicans is without merit. In a 2009 article about Straus becoming Speaker, the Austin American Statesman honestly portrayed Straus as a flimsy Republican.

“Worse for [Republican] party loyalists: At the polls, Straus occasionally chooses Democrats. He even favors legislation forbidding automatic straight-ticket voting.”25

Additionally, in 1998 Straus III and his wife donated to the campaign of Democrat Paul Hobby. His father Joe Straus Jr. publicly supported Hobby’s campaign for Comptroller. When it comes to gambling in the state of Texas, and specifically the parimutuel variant, Democrats have been heavily involved. Democrat Hugo Berlanga sponsored the 1986 legislation that legalized pari-mutuel wagering in Texas. He was later linked to a dog racing track in 1991 as he worked to get taxes on pari-mutuel gambling lowered. Democrat Speaker of the House, Gib Lewis “played a pivotal role in the passage of legislation allowing pari-mutuel horse and dog racing in Texas.”26 Lewis’ Speakership was brought to an end in part due to this close connections, business dealings, and travel with a horse racing lobbyist. Berlanga and Lewis, along with horsemen and legislative proponents Sen. Ike Harris (R-Dallas) and Rep. Lloyd Criss (D-Galveston) were credited with the eventual passage of the Texas Racing Act in 1986. In 1989 Democrat Senator Hector Uribe authored SB 820 which empowered municipalities to take on debt via bonds that would be repayable subject to horse track profits. The issuance of

25 Selby, W. Gardner. "A natural long shot." Austin American-Statesman (TX), 22 Feb. 2009, Final, MAIN, p. A01. 26 SABLATURA, BOB. "Speaker failed to report $30,000 loan, records show." Houston Chronicle, 1 Feb. 1991, 2 STAR, A NEWS, p. 1.

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bonds circumvented voters. This bill and mechanism was used to sell Retama development to the City of Selma. Legislation that enabled Joe Straus III to begin development on Retama, the 80% tax cut, was made a priority by Democrat Ann Richards. In December 1990, Richards’ spokesman stated that pari-mutuel wagering was very close to the top of her agenda and that, "She wants those tracks opened and running."27 In 1991 the tax cut was granted. The bill was advanced with by Democrats. In 1995, former Democratic member of the Texas House Lloyd Criss lobbied the legislature for casino gambling at Texas racetracks. His daughter, Judge Susan Criss, in 2010 awarded Steve Mostyn millions allowing the trial lawyer to further bankroll Democrat campaigns. Gordon Johnson, a Democrat, former lobbyist, longtime Straus ally and business partner, and Straus’s current top political advisor, was the attorney for Retama during its licensing process with the Texas Racing Commission.28 Clyde Alexander, a former Democrat member of the Texas House, was Speaker Straus’ first Chief of Staff. Jesse Ancira, Straus’ chief of staff for the 83rd and 84th legislatures also has a hard-Democrat voting history.29 On the eve of his election as Speaker in 2009, Straus was given a standing ovation in the Democrat caucus. Straus is quoted as saying after the event his House would have two rules: "Play fair and be nice."30

27 COULTER, BILL. "Pari-mutuel's nag - Racing has failed to produce revenue industry promised." Houston Chronicle, 30 Dec. 1990, 2 STAR, STATE, p. 4. 28 Editor, To The. "Your Views." Big Spring Herald (TX), 16 Jan. 2011, News, p. 4A. 29 "There's a certain irony to Democrat Clyde Alexander being named as new House Speaker Joe Straus's chief of staff.." Midland Reporter-Telegram (TX), 28 Feb. 2009. 30 "Straus welcomed by Democrats." Fort Worth Star-Telegram: Blogs (TX), 12 Jan. 2009, PoliTex.

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Economics

Bankrupt Retama opened on April 17, 1995. Less than one year later on March 20, 1996, Retama filed for Chapter 9 bankruptcy.

Joe Straus III to Blame? According to a 1994 San Antonio Express-News article, Straus III took an unorthodox approach to promoting the track, keeping it “low-key.”

As marketing director of Retama Park in San Antonio, it is the responsibility of Joe Straus III to thump the promotional tubs and bring horse racing fans, and their money, streaming into the soon-to-be completed venue. But what is this? He doesn't want to make too big a thing of this? He doesn't want to beat the drums over-enthusiastically? He prefers to take a low-key approach? Is that any way to promote? Yes, according to the son of the Retama Park chairman of the board, Joe Straus Jr., and nephew of board member and other large investor, David Straus.31

Bankruptcy filings included a list of seven reasons for Retama’s failure, including “an inability to properly educate and market the product.” This was the responsibility of Straus III.

High Risk Investment

A San Antonio Express-News article from 1993 titled “Retama officials still trying to secure financing” stated:

Sources say Retama has attracted between one-third to one-half of the money needed in the equity offering.

The source said the closure of the equity would serve as a catalyst for the sale of the tax-free municipal bonds, which are high-risk investments.

31 SAEN S.A. Track Takes Different Promotional Path May 27 1994

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In the same article Straus stated:

"Our No. 1 priority is to build a racetrack that is going to be here for the long haul," Straus said. "We may not have everything that Birmingham (Ala.) Racecourse or Canterbury Downs (in the Minneapolis-St. Paul area) had for their first season of racing, but we will have a comfortable and efficient facility." Straus chided Birmingham and Canterbury, which opened in the late 1980s, because both of those racetracks were elaborate projects that were not supported by the markets where they were built. [Emphasis added] Birmingham has been converted to a greyhound track with limited live horse racing, and Canterbury Downs is not racing this year following severe declines in business the past three seasons.

Audits for RDC consistently have the phraseology:

Retama Development Corporation has suffered recurring net losses and has a net capital deficiency as of [date]. These conditions raise substantial doubt about its ability to continue as a going concern.

The IRS went after RDC starting in 2005 according to a SEC filing made by Call Now Inc.:

In February 2005, The IRS issued both preliminary and proposed adverse determinations with respect to the Company’s outstanding Retama Racetrack Projects Series 1993, Series 1993A and Series 1997A bonds stating that the interest on all these bonds is not excludable from the gross income of their holders.

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Slots, Not a Fix

Interestingly, an economist from Kentucky, Richard Thalheimer, stated in 2010 that slots at racetracks is the only option to raise more revenue but that he viewed slots as only a short-term solution. "If people cannot be attracted to bet on horse races, in the long run, the outlook is the same," he said. "This buys you time to figure out how to get people back to betting on horses."33

Off-Track Betting Request

Before the track even opened, the idea was floated to host off-site gambling at a local club. This was viewed as an action that might lead to expanded gambling. As the track faltered, Retama needed a legislative bailout in the form of off-track betting, according to Straus.34

1989 Tax Break Request

Two years after voters approved horseracing in 1987, would-be track developers, who sold the measure to Texans as a boon for state coffers, asked for the first of several bailouts from the state.

33 Danner, Patrick. "Money-losing Retama sees slots as good bet." San Antonio Express-News (TX), 3 Sep. 2010, STATE&METRO, A Section, p. 01A. 34 Herman, Ken. "RETAMA PARK SUSPENDS LIVE RACING - It's a another blow to Texas horse racing." Austin American-Statesman, 21 Nov. 1995, p. A1.

Some of those proposed changes are off-track betting parlors to bring racing to the far reaches of the state, automatic teller machines and cross species betting at horse and dog tracks, they say. Some track owners also would like to offer video poker and other Las Vegas-style games that have boosted attendance at tracks in other states. "There are so many inequities in this thing, and they wonder why we are not successful," lamented Joe Straus Jr., chairman and chief executive officer of Retama Downs in Selma. "We have to get rid of some of the restrictive legislation. . . . We have to have some means of expanding our product," he said. Retama Park, located just north of San Antonio, has faced serious financial problems along with Sam Houston Race Park near Houston, the state's other Class One horse track offering live racing.

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“What we really need is some sort of graduated scale. It is tough to get started when they tax you 5 percent on gross receipts,'' Straus said.

Straus predicts that the law will be amended and that the racing commission will reopen the application period.”

Straus Jr., who lobbied to have horse betting legalized dating back to 1966 (21 years) said of the 1987 betting bill, “The problem is we passed a bad bill. None of us knew what the hell we were doing.”35 About the same time that the bailout stalled in the legislature, Class 2 race date scheduling stalled in the Texas Racing Commission. It was reported that the delay was attributed to racing commissioner Hugh Fitzsimons’ and Joe Straus Jr.’s friendship.

Financing Issues & Selma

In 1991, before the 80% tax cut was granted to the racing industry, financing problems for Retama were well documented.36,37 At the time, the city was in talks with Retama Park Group to purchase bonds to construct the track ($3.8 million) but the economics did not work according to Selma City Council meeting minutes. The minutes reveal that in 1991, the Retama Park Group was going to settle for a 10 year tax abatement. At the June 15, 1992 Selma City Council meeting, the concept of city ownership of the Retama Race Track was discussed according to a review of council meeting minutes on file at UTSA. Joe Straus Jr. was in attendance and spoke for Retama Partners. In 1993 Retama financing was still not secure and the prospects were dim according to the San Antonio Express News:

Drake Leddy, project manager at Retama Park, made many trips to find financing for the Bexar County horse project. He soon found out that Texas had been "red-lined."

35 COULTER, BILL. "Racing industry lags despite hopes - Promise of quick income for state appears far from reality." Houston Chronicle, 13 Nov. 1989, 4 STAR, A, p. 11. 36 Moss, Randy. "High tax bite hobbles future of horse racing in Texas." Austin American-Statesman, 6 Jan. 1991, FINAL, SPORTS, p. D18. 37 RAMSEY, ROSS. "Legislature cuts tax on horse racing - Bill heads to governor." Houston Chronicle, 23 May 1991, 2 STAR, A NEWS, p. 1.

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"That means when you told lenders you were from Texas and you were trying to acquire financing to build a project - any project, whether it was a horse racetrack or whatever - you were told no," Leddy said.38

Retama Loophole Created

In 1995, Bexar CAD came calling for back taxes to be paid on the racetrack. While municipalities do not have to pay taxes for property owned to other government entities, Retama was technically owned by a company created by the city. In the waning moments of the legislative session Ken Armbrister (D-Victoria) amended the Texas Transportation Act to create a Retama loophole.39 The hit to Bexar County was $1 million per year.

38 "Slow going for big-time Texas racing By Tim Price - Express-News Staff Writer." San Antonio Express-News, 22 Sep. 1993, p. 1D 39 Express-News Staff Writer, Loydean Thomas. "BAD accuses Retama of tax trick - Amendment gives track exempt status." San Antonio Express-News, 20 Jul. 1995.

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Companies Linked to Retama

Retama’s confusing corporate structure Retama was set up to shield its benefactors from risk. To accomplish this task there were two sets of entities created when Retama was initially launched. The first was controlled by the City of Selma. This is where the majority of the risk resided. The second involved the Straus family and others hoping to hit it big on gambling in Texas. When the track was sold to Pinnacle in 2013 the Selma part of the equation did not change but the latter group was altered to including merging with Pinnacle in some entities while the Straus cabal retained direct ownership of others. As mentioned elsewhere in this report, this confusing nature was used to dope / confuse and avoid repayment of a loan made by the Texas Thoroughbred Association. Included below are descriptions of the various groups involved as well as charts to illustrate the confusing nature of Retama.

The Retama Entities

Retama Development Corporation (RDC) - is an entity the City of Selma set up to purchase bonds for the construction of the Class 1 horse track. It is a non-profit local government corporation, without the powers of taxation, created pursuant to Article 15281, Texas Revised Civil Statutes, as amended. RDC was created by the City of Selma to finance, acquire, and operate a Class 1 horse racetrack facility. Retama Park Association - Formed by Joe and David Straus and Jerry Carroll, Retama Park Association purchased an option to buy the 48 acre Retama Polo Center. The option to buy was contingent on the state giving Straus Jr. an 80% tax cut and on receiving a license from the Texas Racing Commission. The organization served as a general Partner. Retama Partners Ltd. - is a Texas limited Partnership formed to acquire, own, develop and operate a Class 1 horse racetrack facility. The Partnership acquired the license to operate a Class 1 racetrack in Selma, Texas, from the Texas Racing Commission. Under a license and agency agreement, the Partnership assigned its rights relating to horse racing at the racetrack facility under the license to Retama Development Corporation in exchange for the Subordinated

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Notes. The Partnership entered into a development services agreement under which the Partnership agreed to develop and construct the racetrack facility. Also under the license and agency agreement, the partnership has agreed to act as the agent, without remuneration, relating to all matters associated with the conduct of the race meeting and pari-mutuel wagering at the facility. The general partner of the partnership is Retama Park Association, Inc. Retama Entertainment Group - Retama Entertainment group was in charge of managing the track for a monthly fee. Following the purchase of Retama by Pinnacle Entertainment, the following entities were created. In essence, they are the original Straus controlled Retama entities Pinnacle Retama Partners / PRLLC - a converted entity that owns the title to the class I License, beneficial interest in all aspects of the license. Fifty percent of additional rights granted to the license holder is the converted entity formerly known as RPL. PNK (SA) owns a 75.5% interest in this entity and RPL Holdings owns a 24.5% interest. Ownership of these two entities is outlined below but PNK is owned entirely by Pinnacle Entertainment and RPL Holdings is owned by the Straus family and others. PNK (SA) LLC - is subsidiary of Pinnacle Entertainment, Inc. created to hold 75.5% of an ownership interest in Retama’s class 1 racing license. The sole member of this entity is Pinnacle Entertainment, Inc. RPL Holdings Ltd. - is a member of Pinnacle Retama LLC having a 24.5% interest in the organization. RPL Development GP LLC - is the general partner of and manages RPL Development Ltd. RPL Development Ltd. - Additional property and liabilities unrelated to the license were transferred into this entity (2 tracts of land adjacent to the track).

Ownership Diagrams

Below are diagrams of the structure of Retama Park before and after the acquisition by Pinnacle Entertainment (notice Owes section):

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In 2012 the Texas Racing Commission received a request from Retama Partners, Ltd. (RPL) for approval to convert to a limited liability company and to transfer 75.5% of its ownership interest in that company to PNK(SA), LLC, a subsidiary of Pinnacle Entertainment, Inc. PNK(SA) submitted its application for the change of ownership that same day. Diagrams of the newly formed groups are included below.

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Companies Linked to Retama

Retama Development Corporation The non-profit set up by the City of Selma filed for bankruptcy less than a year after the track opened. Vendors took a beating and some went out of business. The vendors were local small businessmen - plumbers, electricians, carpenters, lighting people, advertisers, etc.

Call Now Inc. (Collapse) The company collapsed under the weight of loans made to Retama.

Call Now Inc. (IRS Sanctions $773,750) According to a 2011 SEC filing, Call Now Inc. entered into a settlement with the IRS for over three quarters of a million dollars:

During the fourth fiscal quarter of 2009, the Company and the law firm that served as legal counsel for the original issuance of the 1997 RDC bonds entered into a Closing Agreement on Final Determination in settlement of issues raised by the IRS in the examination of the 1997 RDC bonds.

The terms of the settlement consist of two components: 1) there shall be a payment made to the IRS in the amount of $773,750. $375,000 of this amount will be paid by the law firm that provided the legal opinion for the 1997 RDC bond issue and will be funded at the time of final execution of the documents by the IRS. The Company will pay the remaining $398,750 over the next three years with $133,750 due on or before July 1, 2010, $135,000 due on or before July 1, 2011 and $130,000 due on or before July 1, 2012; and 2) 35% of the Series B bonds, or $30,425,000 face amount of the $86,925,000 outstanding, shall be converted to taxable bonds. In favor of the cash contribution to be made by the Company, the majority of the other holders of the Series B bonds agreed to a higher percentage of their bonds to be converted to taxable bonds, resulting in the Company agreeing to convert only $4,897,500, or 11.14%, of the $43,962,500 Series B bonds held by the Company to taxable bonds. The Company received final execution by the IRS of the closing documents in March 2010.

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Penson Sued for Retama involvement in class action lawsuit Reid Friedman on behalf of himself and others filed a lawsuit against Penson Worldwide, Inc., Philip A Pendergraft and Kevin W. McAleer in 2011. Friedman’s filing outlines and tracks the cratering of Penson’s stock value after Retama was written down.

SEC Seeks Action Against Brokerage Firm Dain Rauscher, a brokerage firm identified in city council meeting minutes as being involved in crafting the Retama sale of bonds and in a contract as the purchaser of the bonds has SEC anti-fraud actions in its past. According to a Los Angeles Times article dated August 4, 1998, Federal regulators charged brokerage firm Dain Rauscher Inc. and two of its former executives with fraud for allegedly withholding critical information from investors who bought nearly $1 billion in municipal bonds issued before Orange County’s 1994 bankruptcy.

BDO SEIDMAN According to SEC filings, BDO Siedman, LLP and BDO USA, LLP (collectively, “BDO” or the “BDO Defendants”):

Audited Penson’s financial statements and internal control over financial reporting. ... BDO issued unqualified audit reports concerning Penson’s financial results for 2006 through 2010 and the Company’s internal control over financial reporting. … BDO Seidman, LLP audited Call Now’s financial statements for the year ended December 31, 1997 and as of December 31, 1997, both the Retama Series A Bonds and Retama Series B Bonds had a combined value of $9 million. Therefore, at best, the Retama Series B Bonds were valued at 10% of their face value of $86.9 million, and, at worst, were valued at 2% of their face value, if the Series A Bonds were valued at face value of $7 million.

… BDO Defendants knew, or ignored with at least severe recklessness, the following red flags which they failed to act upon, causing their audit to be tantamount to not performing an independent audit at all: a. BDO knew or ignored with severe recklessness that Johnson, Hall and Call Now were related parties to Penson;

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b. BDO knew or ignored with severe recklessness that Call Now’s margin loan was delinquent by September 2009; c. BDO knew or ignored with severe recklessness that related party transactions require an auditor to be skeptical and examine evidence supporting the transactions and their business purpose; d. BDO knew or ignored with severe recklessness that the Retama Series B Bonds that served as collateral for Call Now’s margin loan were worthless as of December 31, 2009 and 2010; e. BDO knew or ignored with severe recklessness that after the February 2010 Hall/Johnson Transaction, Call Now was insolvent and therefore the Feb. 2010 Note would never be repaid; f. BDO knew or ignored with severe recklessness that Penson had $52.4 million in Nonaccrual Receivables by the end of 2009 and had approximately $97 million in Nonaccrual Receivables by the end of 2010, of which $43 million related to the Retama Series B Bonds and that Penson had failed to adequately reserve for its Nonaccrual Receivables; 26 g. BDO ignored the fact that Penson’s Nonaccrual Receivables represented almost 15% of Penson’s equity at December 31, 2009 and about 32% of Penson’s equity at December 31, 2010; h. BDO was auditor of Call Now in 1997 and knew that Call Now had acquired the Retama Series B Bonds for less than $0.10 on the dollar, and knew that Hall was involved with the bond financing and Call Now.

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Retama Lawsuit Research

The depositions of Jane Haynes, Bryan Brown, Tommy Azopardi, Lisa Medrano and Marc Schnall have been reviewed. The depositions we’ve reviewed paint Retama negatively, as habitual abusers of trust, in this case the trust of the Texas horse breeders.

At issue in the lawsuit is a $1.5 million loan that was made to Retama by the Texas Thoroughbred THBPA. Half was repaid. The other half was contingent on the sale of Retama.

These depositions show that Retama worked hard to not repay the Texas Thoroughbred THBPA after the Pinnacle sale despite previous assurances that the THBPA would be made whole after the track was sold. Bryan Brown emerges from the depositions as someone who breezed informally into business deals, operating closer than arm’s length, using other people’s trust in him against them.

Straus Jr. looms large in the deposition of Bryan Brown and Tommy Azopardi. The alleged poor character of Brown and the Retama group is exposed in the depositions of Brown and Jan Haynes.

These depositions crystallize the purposefully convoluted and deceptive organization of Retama.

The depositions highlight unconscionable debt and the failure of the Texas racing industry. In addition, Bryan Brown is open about his desperate desire for gambling expansion, since the absurd debt levels extended to Retama were done only on the promise of a constitutional amendment providing slot machine riches for Retama and her lenders.

Brown also draws attention to the lack of taxes that are being paid to the county because the track is tax exempt. He puts the number at $1M, though the number is much higher.

Maybe the most bizarre statements in his deposition was the repeated suggestion that 9/11 killed racing business. It seems more likely this is just a high profile excuse to try to cover for their monumental failure, a failure based on a political business plan built atop exorbitant borrowing.

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We’ve culled the depositions with excerpts and notes added below.

Deposition: Margaret “Jan” Smalling Haynes

Mentioned: Bryan Brown Lisa Medrano Chuck Trout Marsha Rountree Summary: Jan Haynes, President of the Texas Thoroughbred HBPA (Horsemen's Benevolent and Protective Association), is formerly a nurse practitioner, now a real estate agent and horse owner from Dallas. Her deposition was frank. She pulled no punches concerning Bryan Brown and his character. This deposition shows that Haynes believes Retama owners, and strongly suggests that racetrack industry owners as a whole, don’t care about their business associates. When asked about the sale of Retama to Pinnacle and when the horsemen could expect repayment of their loan, Bryan laughed and said they wouldn’t get a thing. Also, this deposition points out the convoluted setup of Retama. The breeders were dealing in good faith, Retama in bad, and Retama’s corporate maze and bad contracts were the weapons. Excerpts: pg 19: Haynes puts the drafting of the loan on Tommy Azopardi pg 20: Testimony by Haynes contradicts Azopardi about the fact that Retama ran races

in addition to the ones they were allotted due to Hurricane Ike

pg 22: A list of debts was presented to the THBPA pg 32: Speaking about a phone call with Bryan Brown: “Mr. Azopardi had him on the call

to answer any questions to try to get this approved because Bryan -- he was in a hurry. That’s why he had his attorneys draw this up and not wait on Mr. Palmer.

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He just said, “Look guys” -- he said, “we’re shopping investors.” And he wouldn’t give any specific of names of anything like that. He just said, “When the track sells, you’ll be repaid. And, you know, we just need this short-term loan.”

pg 33: I think you told me on that phone call it was 5-4 in favor of loaning money. What

was the opposition in general? A: I can’t speak for the other three. I was one of the -- Q: What was your opposition then? A: I didn’t trust Bryan Brown Q: Why not? A: The -- his numbers were wrong on projections. He just -- I just didn’t. Q: Was there anything else other than his incorrect projections? A: No, sir. He just -- at commission meetings -- you know, the other two tracks --

their presidents or CEOs -- you know, they’d come up there with their charts and their numbers and Bryan had nothing. He just would talk about UT games. It just didn’t look right.

pg 36: The confusion of Retama’s separated entities is shown on this page Q: Do you know who controlled the Retama racetrack -- the actual track prior to

the Pinnacle transaction. A: Well, I don’t know. Their stuff is so convoluted.

Q: Do you have any knowledge of who controlled the actual Retama racetrack and the land underneath it prior to the Pinnacle transaction?

A: No. I mean I thought it was RDC Q: And do you know who actually owned the racetrack and the land underneath it

prior to the Pinnacle transaction?

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A: The City of Selma pg 41: Q: Do you believe that the only party that you contracted with was Retama

Development Corporation? A: No, sir, I don’t. Q: Even though that’s the only party reference and that‘s the only party that

signed it? A: Right. Q: Okay. How was anyone else to know that they’re a party to Exhibit 2 if they’re

not listed in it? A: Because -- well, I -- Bryan [Brown] represented everybody. I mean at the

commission meeting, you know, Chairman Schmidt introduced him as representative from Retama Partners. You know, he was Retama.

pg 46: Q: Okay. And would you agree that the commission hearing would not have been

a proper place for Mr. Brown or anyone else to get up and debate with you whether or not the initial advance was owned or not owed?

A: I wish he would have got up and debated. Q. But do you agree it wouldn’t have been a proper place for that? A. I don’t agree, no, sir. pg 47: Okay. When -- beforehand -- before Sam Houston was told the Pinn and Lone

Start to Global, we had a chance to meet and talk with these people. Bryan kept us away from Pinnacle. Until then, I never even knew they existed because we never to to even have a phone call. So I wanted them to be aware going in because I want’ confident that Bryan disclosed the whole terms of this to them. And that was the only way to get I on there because he wasn’t going to say it.

Q. And you certainly could have had a discussion with Bryan outside the presence of the commission on that day about whether the money should be repaid or not; right?

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A. I knew how Bryan felt. I could have, yes. Q. Okay. Did you already know as of the hearing date that Bryan felt like the

money would not need to be repaid? A. Oh, yeah pg 48: -- he [Bryan Brown] told Marsha -- he laughed in her -- because she had told him

at one of our other industry meetings -- she said, “Bryan, so you’re closing. When should we expect our check?” And he laughed in her face, and said, “You should” -- he said, “You’re not going to get anything.” Q. And he say why not? A. He said , “You should look at the agreement more closely. It says facility.”

pg 55: A. Well, we had no reason to believe anything different other than what we were

told was -- that when the track sold we would be repaid, which is what Bryan advocated to our board. So in answer to your question, that’s what we thought the terms were.

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Deposition: Tommy Azopardi

Mentioned: Chris Corrado Marsha Rountree Jan Haynes Gene Palmer - deceased (THBPA attorney) Straus family LaMantia family Bryan Brown Chuck Trout

Texans for Economic Development Summary: Tommy Azopardi was deposed in his role as former head of the Thoroughbred HBPA. He served from May of 1997 to 2008/2009. He is currently the sole employee of Texans for Economic Development. According to Azopardi, TED is run by the LaMantia family and the Greene Group (Alabama). Azopardi states candidly that he represents his clients’ needs and interests in front of the Racing Commission and tries to affect legislation to benefit the industry even though, according to his testimony, he is not a registered lobbyist. He admitted to being arrested two years prior to the deposition on suspicion of driving under the influence, a charge Azopardi said was dismissed. At issue in this suit is loan repayment of $1.5 million from Retama to the Thoroughbred Association. The loan according to Azopardi was to cover debts owed by Retama. He made the loan knowing that additional debt would be taken on by Retama while its doors were open. The attorney acting on behalf of the Thoroughbred HBPA was Gene Palmer, who according to Azopardi is now deceased. He had a private practice. During the deposition, Azopardi admits that he did not read the loan contract that he signed and that he believed it was crafted by Retama’s side. Notes: pg 8: I represent two groups that own horse and Greyhound racetrack licenses pg 9: One is the Greene Group

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They are located in Tuscaloosa, Alabama. And the other group is -- basically it’s controlled by the LaMantia family. They’re located in South Texas.

pg 34 - 36: Azopardi talking about entering into the agreement and not knowing what entity was which. For example: Q: So am I to understand then that you were not aware at the time you were negotiating Exhibit 2 that Retama Development Corporation was the owner of the actual racetrack and the real estate underneath it? A: That would be correct.

pg 53: It says, “Retama shall not be obligated to repay any of the initial advance unless

within a period of five years from the date of this agreement effective ownership or control of Retama’s racing facility is transferred or assigned and Retama receives $9,750,000 or more of net cash for stock proceeds.”

pg 56: Azopardi refutes the testimony of Bryan Brown that the contract originated from the THBPA

pg 62: Do you think it would have been a good idea for you and/or Mr. Palmer and/or you management committee to fully understand the structure of the entire Retama facility and ownership and license issues before entering into Exhibit Number 2 [loan contract]?

pg 77: All contracts entered into by the Texas Horsemen's Partnership pg 84: Q: You have no knowledge of who owned the racing license back in 2008?

A: I know that the -- that a group of investors led by the Straus family owned the license. I don’t recall that I ever knew their specific name.

pg 85: Q: And did you know there was no cross-ownership of those two entities [the license and track] A: That’s correct

pg 90: Q: Do you recall that a gentleman named Chuck Trout prepared kind of a summary memorandum of his understanding of what was being brought before the commission on that day as it related to Retama?

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A: I do not recall pg 99: ...there is definitely an understanding that any time a racetrack runs live racing

they incur more expenses than they do revenue

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Deposition: Bryan Brown

Mentioned: Lisa Medrano (Former CFO of Retama Entertainment Group) Nina Sirak (Former Controller) Jeff Carr (Retama Partners Limited) William Allen (Call Now Inc.)

Drake Leddy (Retama Partners Limited) Anthony Sanfilippo (Pinnacle Retama Partners) Carlos Ruiz Sanchez (Pinnacle Retama Partners) Bill Buffalo (Pinnacle Retama Partners) Kevin Whalen (Pinnacle Retama Partners) Chris Corrado (Track Manager replacing Brown)

Marsha Rountree (THBPA) Jan Haynes (THBPA) Gene Palmer - deceased (THBPA attorney) Chuck Trout (Texas Racing Commission) Address: 16230 Hidden View San Antonio Texas 78232 Summary: Bryan Brown is currently a CEO of a real estate development company. He was combative out of the gate in not naming the group. The company builds apartments. Brown is a consultant for a racetrack license holder and would have reason to be in contact with the Texas Racing Commission. Interesting about Brown’s testimony is the fact that in his work with the TRC he is not primarily concerned with working with the commissioners (see pg 7). During his deposition Brown highlights the fact that taxpayers are getting jobbed by the current setup at Retama. Retama Development Corporation (the City of Selma) has all of the risk. His deposition shows that his dealings were closely connected to Straus Jr. This can be applied to other issues discovered outside of this specific suit. With the sale of the track license to Pinnacle, Brown and other REG managers were awarded bonuses. Brown got a year-long contract. During that time he did tax work in Cincinnati. Notes:

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pg 7: Q. Any testifying in front of them [Racing Commission] or just -- A. Yes. Q. -- dealing with the staff? A. Testifying and deal with the staff. Primarily, dealing with the staff. pg 9 Brown goes over the members of the Retama Development Corporation pg 10: A. They would rarely come to the offices at Retama except for the meetings. Q. Okay A. an exception to that was Gary Baber, who was the Board president. pg 14: Q. Did you have any involvement, sir, between 1997 and 2013, in consulting with

Retama Partners or Mr. Straus regarding the required reporting for the maintenance of the license? Did I make myself clear?

A. To a minor extent, Mr. Straus had -- for -- on behalf of the partners, had to file

annual reports, and at times I did look at those reports to make sure they were accurate, at his request.

pg 15 Q. Okay. But from time to time, maybe you did look at things for Mr. Straus, who

was the -- I guess , the representative of Retama Partners, Limited? A. Yes. And to clarify, he was represented for a while, and then that evolved into

Drake -- excuse me -- Jeff Carr being their representative and then Drake Leddy.

pg 16: Q. Did you commence your work as -- in the management aspects of Retama

Park in 1997 or was it prior to that? A. 1997 Q. And who was it that approached you about becoming a manager of Retama

Park at that time?

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A. William Allen. Q. And who was he ostensibly acting on behalf of at the time? A. Call Now, Inc. pg 17: Discussion about speaking with Mr. Straus about setting up a management

company when Call Now Inc. arrived.

pg 18: Q. Now, prior to you working at Retama Entertainment Group, did you have a job in the horseracing industry before that?

A. No. Q. What were you doing before that -- immediately before that? A. Real estate development in Florida. They’re very similar industries. pg 21: Q. Who do you know [with Pinnacle Retama Partners, LLC]

A. Anthony Sanfilippo, Carlos Ruiz Sanchez, Bill Buffalo, Kevin Whalen.

pg 25: Q. Do you know whether they [Pinnacle] came directly to you, or they were referred to you regarding their inquiries on Retama Park?

A. They were referred to me by Andrea Young, who was the then president of

Sam Houston Race Park

pg 27: When asked about why he pursued Pinnacle Brown he stated he approached “as CEO of the management company, as agent for the Retama Development Corporation. Retama Development Corporation was in terrible financial condition and need some investment help of some sort to survive.

pg 29: Q. Do you recall how far back you were discussing those matters with Tommy, or ongoing for your entire tenure, or what?

A. Certainly, after 9/11, all the tracks had discussions with Tommy about our

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financial condition. It was well known publicly that all the tracks had suffered great revenue losses following 9/11, so we would have had many conversations about that.

pg 39: A. When Lone Star Park was then, in some fashion -- I don’t want to use the world “sold,” but just for descriptive purposes -- to Magnet Entertainment Group, the horsemen were very upset that they had advanced $5 million, and that they perceived Lone Star Park’s investors to generate profits on the sale, and their $5 million was gone, in essence. That $5 million would have come out of their purse account, so Mr. Azopardi did make clear that this same thing couldn’t happen in this instance.

pg 47 - 48: Q. Who might that have been other than yourself? A. Drake Leddy, Joe Straus, and to some extent Gary Baber and Charlie Eads …. Q. All right. And Joe Straus, principle or former principal of Retama Partners,

Limited? A. Yes. And chairman of Retama Entertainment Group as well. Q. So these would be people that were involved in negotiations that occurred at

some time during the time frame between ‘97 and 2013, for cash infusions or potential sales

A. Yes

Q. Now, did you collaborate with these folks, or were they off working on their own, or did you-all do it together as a joint effort, or how would that work?

A. It was very much a joint effort. Q. And why was it a joint effort, why would it need to be? A. Because anybody coming in as an investor in any form or fashion would

need, number one, to know how all the different entities existed within our overall structure.

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pg 51: Q. Do you know who owned the trade name Retama Park at the time of Deposition Exhibit 2 was signed [race date agreement $1.5M contract]

A. It should have been the Retama Development Corporation Through the

assignment of Retama Partners Limited.

pg 53-55: Q. Did you have any discussions, Mr. Brown, with any representatives of Retama Partners, Limited, regarding the terms and conditions of Deposition Exhibit 2?

A. I would have with Mr. Joe Straus. Q. All right. What did you -- Do you recall with you talked to Mr. Straus about

pertaining to the terms and conditions of Deposition Exhibit 2? A. I do not recall. Q. But are you pretty sure you did talk to him? A. Yes. Q. What would be the reason that you would want to talk to him about this? A. He office right down the hall from me, so major decisions like this or major

agreements I would have always discussed with him.

Q. but now, he’s -- he was not affiliated with Retama Development Corporation, I assume? He wasn’t affiliated with that company, was he?

A. I’m not sure how you would define affiliate, but no, he was chairman of

Retama Entertainment Group and a partner in Retama Partners, Limited. Q. And it was just necessary to run this by him so he knew what was going on,

essentially? A. Yes, plus I’ve always enjoyed his advice. Q. And what’s the purpose of that document? A. To describe the relationship between Retama Development Corporation as

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facility owner and Retama Partners, Limited as the license holder Q. What, in your opinion, is the relationship? A. The -- From a broad standpoint, clearly, Retama Development Corporation

owns the facility. The beneficial use -- or the actual license owned by Retama Partners, Limited, the beneficial use of the license was assigned to Retama Development Corporation, which would then give it to the ability to run race meets at Retama and offer simulcasting.

The other major portion of -- you know, unfortunately, not as major as people hoped, but the other point addressed in here is what we referred to as gaming enhancements, and that would be any additional activities allowed by the legislature which was addressed, in part in this agreement.

pg 62 - 63: Q. Did Retama Entertainment Group, Mr. Brown, have any involvement in operating video gaming terminals, video lottery terminals, video poker, slot machines, or other gaming activities at Retama Park while you were CEO?

A. We did not. I sure wish we would have, but we did not.

pg 71: After establishing that Bryan Brown as a representative of Retama Entertainment

Group was the one shopping for a deal and made contact with Pinnacle and negotiated the sale, Retama Partners Limited went to the racing commission with the formal deal.

pg 71 - 72: Q. Did Pinnacle Entertainment ever express to you, during your negotiations with them in 2012, any interest in purchasing the fee title interest in the park from Retama Development Corporation?

A. We very early on looked at it. Because of the unique tax structure at Retama

Park, it didn’t make near as much sense as the transaction that ultimately took place.

Q. Okay. In what manner? Could you expound on that a little bit? A. Sure. Retama Development Corporation pays no property taxes under the

current structure. That could be worth a million dollars a year, I’m guessing, but it could be worth a substantial amount of money each year. And just that

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fact alone led Pinnale to seek a different structure, which is what we ended up with.

pg 93: Q. Did you stay on in some capacity after this closing occurred at Retama Park? A. Yes, I did. Q. And what was your capacity that you stayed on as? A. I stayed on as general manager until the new general manager was approved

by the racing commission. Q. And that was Mr. Corrado? A. Correct. Q. And once he came on, what did you do then? A. Then I worked for Pinnacle doing special projects for them. Q. Generally speaking, what kind of projects? Involving Retama? A. I did a taxing district in Cincinnati involving the River downs project. I also

assisted them in some of their development efforts.

pg 96 - 97: Bryan Brown comes in and starts scrubbing his deposition preemptively. His attorney injects:

MR. KIRSTEIN: Let him ask you questions, Bryan.

At issue in this section of the deposition is a transcript of Bryan Brown testifying before the Texas Racing Commission. A. “And quite frankly, one of the things that we’re excited about is even though

we remain somewhat a complex organization, we very much simplified it, with your blessing and approval of this application, by what will transpire following this meeting.”

A. “In addition to that, all the debt at -- virtually all the debt at Retama Park will be

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paid off and will be owned by the LLC that also owns the license, which is a major change. In the past we’ve had debt holders. We’ve had license holders. We had a track owner and all different -- and a different management company, a different alcoholic beverage entity, very confusing at times and somewhat [sic] difficult to deal with internally. And the one area that was very difficult to work with is talk to potential acquirers of our entity. So we very much simplified things by honing down the three basic entities.

pg 115: REG managers got bonuses of $615,000 pg 116: $500,000 was used to pay off Breckenridge. (Browns alcoholic distribution deal with RDC.)

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Disciplinary Actions

William “Bill” Allen (Deceased) Bill Allen was the owner of Call Now Inc. Call Now Inc. rescued Retama from bankruptcy and lent massive amounts of money for Retama to continue operations, contingent that Call Now Inc. receive casino royalties in the event the State of Texas legalized slot machines at horse tracks. According to a Horse Race Insider article, Allen was convicted of mail fraud and conspiracy before receiving a pardon from Richard Nixon:

Allen, from Clarendon, TX, has been involved in horse racing for four decades. He is among four Texas Horse Racing Hall of Fame inductees that will be enshrined on Oct. 4.

He also acquired the bond originally issued to finance Retama Park and his company, Call Now Inc., put together the management team that helped the track emerge from bankruptcy.

According to a 1998 Lubbock Avalanche-Journal article, Bill Allen was pardoned from a federal conviction. Allen's legal troubles were discussed in "Wild Ride," a book by Ann Hagedorn Auerbach about Calumet Farm in Kentucky. The book said Allen and two other men were convicted of conspiracy and mail fraud in a promotion scheme involving a Maryland country club. The book said Allen was sentenced to 12 to 36 months, served three, and then was placed on probation. President Nixon pardoned him in the early 1970s. "I got a conviction in a political deal," Allen told The Times-Picayune. "I was in my 20s. She's trying to sell books."

Bill is Bryan P. Brown’s, CEO of Retama Entertainment Group, father-in-law.

Ken Roberts A city administrator of Selma, Ken Roberts was run out of a previous government job for allegedly misleading his employer, Fort Sam Houston, about having a college education. He also allegedly lied about serving in Vietnam. Before leaving the post, a massive accounting

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inconsistency was discovered. It is believed by many that the accounting problem was the true reason for his firing and that the résumé falsification was simply an excuse. According to a letter from his commander, Roberts engaged in “abusive and unduly intimidating behavior with respect to several DRM employees.” His speech was “replete with vulgarity, racial slurs and personal invectives.” During his tenure as city administrator of Selma, Roberts was at the heart of a civil rights lawsuit for demoting a Firefighter because he complained about the use of ethnic slurs in the workplace. The lawsuit cost the city $37,500.41

Thomas R. Johnson The former CEO of Penson, he destroyed the company, including the retirement accounts of its employees, by providing money for Call Now Inc. to loan to Retama. The loans were secured by the uncollectable original Retama bonds issued by the City of Selma. He received a $25,000 penalty from the SEC for his role in the debacle. Penson employees who lost their retirements have sued.

Christopher J. Hall

Hall was a Call Now Inc. owner and an officer of Penson, which was a subsidiary of Call Now Inc. The SEC won a lawsuit against Hall seeking disgorgement of ill-gotten gains plus interest, penalties, an officer-and-director bar, and a permanent injunction, all related to the $6.8 million of loans he secured from Penson for Retama. In 1998, Hall agreed to pay more than $160,000 to settle securities-law charges that his firm excessively marked-up the prices of municipal securities and failed to disclose the markups to customers.

Robert C. Buffkin Another Call Now Inc. owner, according to an SEC News Digest dated March 9, 1962, Robert C. Buffkin was in part the cause of a permanent injunction on his employer Guardian and Lombard and has previously been enjoined by court order for violating SEC registration and antifraud provisions:

41 Contreras, Guillermo. "SELMA ; City pays up after fire chief's alleged slurs." San Antonio Express-News (TX) 29 Sep. 2012.

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In January 1962 Guardian and Lombard were preliminarily enjoined by the U. S. District Court in Washington from further violations of the Commission's net capital and bookkeeping rules, the court decree being entered with their consent. According to the Commission's order, since about October 2, 1961, Robert C. Buffkin and Ralph H. Whitmore have been or are employed by Guardian: but according to the Commission's staff, Guardian failed promptly to amend its registration application to disclose (a) that Buffkin was enjoined by court order of October 3, 1960, from further violations of the Securities Act registration and antifraud provisions in connection with the sale of stock of International Planning, Inc., and (b) that Whitmore was convicted on February 19, 1962, by the U. S. District Court in Florida of a felony or misdemeanor involving the purchase or sale of stock of Columbus Rexall Oil Co.

A 1960 SEC report contained a brief on the 1960 case involving Buffkin:

In S.E.C. v. International Planning Inc. the Commission filed a complaint which sought an injunction against IPI and its officers whose specialty was the sale of IPI stock to United States servicemen overseas. The Commission charged that the sales were made in violation of the registration provision of Section 5 and the antifraud provision of Section 17 of the Securities Act. IPI agents sold the stock to service men in Weisbaden, Germany, and at other large concentrations of United States Service personnel. The misrepresentations and misleading statements used to boost the sale of IPI stock caused Air Force officials in Germany to bar IPI solicitations on its installations.

The Commission obtained service on several defendants in the District of Columbia, but failed to reach Robert C. Buffkin, its president, who has remained in Europe with the firm's books. The case is still pending.

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Appearance of Impropriety

Elgin Friesenhahn Friesenhahn sold 140 acres to Retama Development in 1983 for $1.1M. A city councilman, Friesenhahn later voted to create the Retama Development Corporation to build the racetrack on that land. He later became Mayor of Selma.

Lisa Medrano Medrano ushered the Retama financing deal to completion with the firm KMPG then moved quickly into the role of CFO of Retama. She was the CFO for several years. According to a deposition, Medrano was let go a year after the track was purchased by Pinnacle.

Ken Flennor Flennor was a member of the Selma city council first from 1984 to 1987 and Mayor of Selma from 1987 to 1994. Flennor formed the Friends for Racing on I-35 to get the racetrack built in Selma. He was on the Board of Directors of the Retama Entertainment Group.

Steve Kosub As City Attorney, Kosub was a big advocate for the Retama vision from the first city council meetings. When pressed by a city council member who was skeptical of the deal, Kosub stated “All the information [collected to justify the track] is speculative simply because there is no precedent for this sort of undertaking in this location” A characteristic statement of his, Kosub said, “If everything works like it is projected the city can make a great deal of money. If the long term projections are accurate or close to accurate the city would make far more money from this operation than you would make if it remained in private ownership.” At a 1997 council meeting, Kosub finally advised the council that the Mayor had requested, that in light of his role with both the corporation and the council, it may be useful to have another attorney available for a second opinion.

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Dishonorable Mentions

Sen. John Montford A Democrat Senator who helped pave the way for the City of Selma to act as a tax shelter for the developers of Retama was a part of the Obama administration in the government takeover of GM. Recently, Montford was tied to a renewed push to expand gambling in Texas during the 2013 legislative session with the deceptively named Let Texans Decide. Texas Thoroughbred Association Sues RDC Retama was sued in 2012 for not repaying $1M loan from the Texas Thoroughbred Association. The lawsuit is still pending and the parties have shielded the public from viewing court records. See Retama Lawsuit Review below for additional records and information relating to the suit. Straus Got Paid No Matter What A review of records dating back to the track’s opening shows that Retama Entertainment Group, which is headed by Straus Jr., earned a $20,000 monthly fee for managing the racetrack plus a share of the gate. It also is reimbursed for payroll expenses. In a quarter in 2011 payroll reimbursements equaled nearly $1M ($970,000).

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Retama Individuals

Joe Straus Sr. Joseph R. Straus Sr. was an original investor in the San Antonio Spurs. Straus Sr. owned more than 20 stakes-level thoroughbreds, including No Le Hace, who finished second in Kentucky Derby and Preakness in 1972.42 Joe Straus Jr. It cannot be overstated how integral Straus Jr. is to horseracing existing in Texas in its current and any future forms. In addition to bringing racing back in the 80s, Straus conceived of and had housed at Retama the Texas Horse Racing Hall of Fame.43 B.J. “Red” McCombs

B.J. "Red" McCombs was an original investor but reportedly sold his 2 percent interest in 1991. Along with McCombs, the original group of investors included Peter Holt, Jeff Carr, Dr. Warren Neely, Neal Carter, Drake Leddy and Jerry Carroll. Bryan Brown He came to Retama by way of Call Now Inc. in 1997. Brown’s father-in-law William “Bill” Allen (deceased) was chairman of Call Now. When Brown was being onboarded in 1997, Joe Straus Jr. said of the situation and Brown himself:

"This is something we've been contemplating for some time," Straus said. "(Brown) is a very bright guy, he picks up on things very quickly. I think he'll make a good addition to our team."44

Lloyd Criss In 1995, Criss lobbied the legislature for casino gambling at Texas racetracks. Criss, a Democrat, is a former member of the Texas House. His daughter, Judge Susan Criss awarded Steve Mostyn millions allowing the trial lawyer to bankroll Democrat campaigns. 42 Briggs, Jerry. "S.A. SPORTS HALL OF FAME ; Incoming class to include avid sportsman." San Antonio Express-News (TX), 8 Oct. 2013, State, Sports, p. 2C. 43 Scheide, Lee. "State racing Hall of Fame welcomes inaugural class." San Antonio Express-News, 9 Oct. 1999, Metro, Sports, p. 7C. 44 Price, Tim. "New investor wants Retama CEO job." San Antonio Express-News, 12 Jun. 1997, Metro, Metro, p. 5C.

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Phillip Steven “Steve” Kosub Steve Kosub was City Attorney of Selma during the early 1990s, including during negotiations between the small town and Joe Straus Jr.’s Retama Group. Mr. Kosub is currently an attorney for the San Antonio Water System. As City Attorney, Kosub was a big advocate for the Retama vision from the first City Council meetings. When pressed by a city council member who was skeptical of the deal Kosub stated “All the information [collected to justify the track] is speculative simply because there is no precedent for this sort of undertaking in this location” A characteristic statement of his, Kosub said, “If everything works like it is projected the city can make a great deal of money. If the long term projections are accurate or close to accurate the city would make far more money from this operation than you would make if it remained in private ownership.” At a 1997 Council meeting Kosub finally advised the Council that the Mayor had requested, that in light of his role with both the Corporation and the Council, it may be useful to have another attorney available for a second opinion. William M. Allen William “Bill” M. Allen (deceased) was CEO of Call Now when it acquired Retama. He was noted in the press to have had business dealings that landed him in jail. Allen was accused of setting up "dummy organizations and diverting membership dues for themselves" in Maryland in the 1960s.45 Jerry Carroll Jerry Carroll was chairman of Turfway Park in Kentucky in 1995. He was the largest single investor in Retama. When the track started running deficits shortly after opening Carroll refused to sign off on a transfer of $1 million from an escrow account meant to service debt for track operating expenses. Carroll described Retama as a "total financial disaster." He and a consulting team from Turfway suggested that Retama cut costs citing upper-management salaries being extravagant and the track losing about $1 million a month.

45 Express-News Staff Writer, Tim Price. "Florida company buys Retama Park's bonds - Track still in bankruptcy proceedings despite transaction." San Antonio Express-News, 13 Jul. 1996.

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Andy Losue Andy Losue was a Selma City Council member who was outspoken in his support of issuing bonds to build the track. He was president of the Retama Development Corp. in 1995. Anne Dunigan Wilson Anne Dunigan Wilson was the lone vote no vote from the Texas Racing Commission approving Retama’s Class 1 track license in 1991.46 Dunigan Wilson was said to have been ready to launch a conflict of interest investigation into the vote of fellow commissioner Hugh Fitzsimons, who was a lifelong friend of Joe Straus Jr. John Leedom Senator John Leedom filibustered the 1991 bailout of Joe Straus Jr. and the horse gambling industry cutting the five cent tax agreed to in 1987 when gambling was approved to one cent. The bill would also have approved simulcasting. Gordon Johnson Gordon Johnson was the attorney for Retama during the application process and currently serves as Joe Straus III’s chief political advisor.47

46 Price, Tim. "RETAMA-FOLO Dissenting vote on Retama Park track a shocker." San Antonio Express-News, 5 Sep. 1991, p. 2C. 47 PRICE, TIM. "Horse Racing They're ready to roll at Retama Investors eager to get started on Class 1 horse track in San Antonio." San Antonio Express-News, 23 May 1991, p. 1C.