Just as the Times's rumored bombshell fizzles, sources say feds are investigating the Queens Racino deal that had Paterson “gnashing his teeth” this week. They want to determine if, by awarding a valuable gambling contract to a politically connected company, Gov. Paterson was angling for the support of influential ex-congressman Rev. Floyd Flake. Flake owns a .06% stake in Aqueduct Entertainment Group, which by running 4,500 video slot machines at a South Ozone Park racetrack, stands to make $180 million annually. "The entire matter stinks to high heaven to put it very bluntly," said Sen. Frank Padavan, a Republican from Queens.

To begin with, the investigation—that insiders call “very fresh”—will attempt to find out if mail or wire fraud was committed and if any laws were broken, reports WCBSTV. Officials say they’ll also examine the bidding process, to try to determine whether Aqueduct won out over larger competitors (MGM Mirage and Hard Rock Entertainment) because of politics. Most likely, they’ll want to look into a private meeting between the governor and Flake just two days after his company was awarded the gambling contract. Flake has publicly stated he’s considering supporting Attorney General Andrew Cuomo in the upcoming governor race. On Monday insiders reported Gov. Paterson was "paranoid" and lashing out at aides over the deal.

Still, Jeffrey Levin, a partner at AEG, says it got the contract based on its merits. "Aqueduct Entertainment Group won because our bid offered the best value for New York's taxpayers and the best plan for the residents of Queens. Like all bidders, we adhered to the bid process as outlined by the state of New York and were selected on that basis,” he said. So far, the Governor’s office says it hasn't heard about the investigation. Below, an excerpt from Paterson's discussion with Don Imus about Aqueduct this morning on Imus's Fox Business show:

PATERSON: There were five entities that competed. The state lottery rated this company as one of the three that they thought had a full proposal, one that could sustain itself. They had the second highest bid. They had the second highest long-term benefit to the state. In each case the first highest were different companies. They were strongly competitive. They had a good relationship with the community.

They had a strong minority and women's business quotient to their plan, and the three leaders had to select them and we all had equal governmental jurisdiction here. And we agreed to this group, all three of us, and we put some conditions on the final award at the time that we made the award and they have 30 days to comply with it. If they don't comply with it, it would go to someone else.

Other than that, here again, in the case of Reverend Flake, his value is 0.6. In other words, six-tenths of one percent of the whole value and he has no affiliation with this other organization that two elected officials were raising money from.

IMUS: So you didn't do it to try to get him to support you.

PATERSON: No, he'd already said he was neutral. At the time that the contract was awarded, he had already publicly stated that he was not picking a candidate in the Democratic primary.

IMUS: You met with him shortly after the bid was awarded. What was that meeting about?

PATERSON: Well, I met with him and I met with several others because the process took about eight months and they couldn't talk to me about other issues that they wanted to discuss. So I told them all that I’ll meet with all of you the week after the bidding is completed and there's nothing unethical with meeting with people after the bid has -- in other words, after the final decision has been made. As a matter of fact, you have to meet with their company to see if they can comply with the terms of the contract.

IMUS: You know... I’m just thinking as you were talking, I wasn't paying attention, half the time I do. These rumors, I mean, this is like --

PATERSON: You should be in the legislature, Don.