State officials refused to grant a gaming license to the politically-connected consortium selected by Gov.Paterson to open a casino at the Aqueduct Racetrack—meaning the company will not install slot machines at the Queens facility or receive the lucrative contract. "The Division of the Lottery has concluded that it cannot issue a gaming license to Aqueduct Entertainment Group. Therefore, the State has officially withdrawn its support for AEG," the governor's office wrote in a statement.

Officials launched a probe into the governor's selection of AEG amidst allegations that Paterson chose the company in an effort to win political support for his short-lived gubernatorial campaign from AEG shareholder and influential former Congressman Rev. Floyd Flake. Documents revealed that Paterson decided on AEG even though the company initially estimated it would generate the least revenue for the state, before dramatically altering its numbers. Paterson recused himself from the decision to nix AEG, according to the Times.

The state's move to drop its contract with AEG comes after Paterson threatened to revoke his support if the group didn't provide sufficient financial information by Tuesday. Just before the deadline, shareholders including Flake as well as rapper Jay-Z distanced themselves from AEG. The casino company has indicated that it might sue the state if it isn't awarded the contract, according to the Post. "We believe any adverse recommendation would be unsupported both as a matter of fact and a matter of law," AEG lawyer Barry Berke in a March 10 letter to top Paterson aides.

Without the AEG receiving the contract, the state will likely miss out on $300 million in licensing fees needed to balance the budget.