One day after two high-profile investors pulled out of the project, there’s word the deal to bring thousands of video slots to Aqueduct racetrack could be scratched as early as today.

According to the Daily News, Aqueduct Entertainment Group – the group chosen to run the racino – has failed to clear all the state’s hurdles.

The News says last night, the state lottery division told Governor David Paterson’s Chief of Staff Larry Schwartz and Chief Counsel Peter Kiernan that AEG is unlicenseable.

Schwartz and Kiernan have final say after Paterson yesterday recused himself from any involvement in the project.

Queens minister Floyd Flake and rapper Jay-Z had minor stakes in AEG, but pulled out of the bid yesterday as the state demanded sensitive financial information.

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New York’s Senate Republicans want a public airing of the deal for video slot machines at the Aqueduct racetrack in Queens, and Assembly Minority Leader Sheldon Silver has asked the state inspector general to review it.

Silver, Gov. David Paterson, and Senate Democratic conference leader John Sampson selected the consortium Aqueduct Entertainment Group from among five bidders to develop the racino with up to 4,500 gambling machines.

That approval is subject to AEG paying a $300 million upfront licensing fee and other conditions, which the group said it’s committed to meeting. A formal agreement hasn’t been negotiated yet. The bids were not publicly disclosed.

Senate Minority Leader Dean Skelos said legislators and the public have a right to know whether allegations in news reports of political favoritism and a federal investigation have any truth.

In a letter Thursday to Sen. John Sampson, who heads the majority Democrats, Skelos called for a bipartisan legislative hearing in early March. “Since the selection process was conducted in secret, finding out answers to these questions and concerns can only be done at a public hearing,” Skelos wrote.

Citing only “serious questions” raised about the deal, Silver asked Inspector General Joseph Fisch on Thursday to review the process, whether all appropriate laws were followed by the Lottery Division and assure that AEG meets all conditions in the future. They include a designated environmental review, requiring gaming licenses for all investors, partners, principals and others with no disqualifying criminal convictions, and a final approval for all changes by Silver, Sampson and Paterson.

Separately, Sen. Ruben Diaz, a Bronx Democrat, urged Sampson to create a committee to investigate AEG’s selection and any connection to sitting senators.

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Aqueduct Entertainment Group has been selected to develop the racino at Aqueduct Racetrack in Queens, announced Gov. David Paterson late Friday afternoon. But there are some caveats.

The decision ends a drawn out bidding process that began about two years ago and has been closed to the public. AEG edged out a team led by SL Green, Manhattan’s largest commercial landlord, which at one time was seen as Mr. Paterson’s favorite. Three other bidders, Delaware North’s Aqueduct Gaming, R. Donahue Peebles/MGM Mirage and Penn National Gaming, also came up empty handed. One other bidder, casino mogul Steve Wynn, last year dropped out of the contest to revive the rundown racetrack in Ozone Park.

“After an extensive review of the five remaining bids to operate the video lottery terminals at Aqueduct racetrack, I have chosen and the leaders (of the state Assembly and Senate) have agreed the organization that best fulfills our selection criteria,” Mr. Paterson said, in a press statement. “All of the groups have valid proposals, but AEG presented a comprehensive bid that enjoys community support and also offers strong marketing appeal.”

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Las Vegas casino mogul Steve Wynn has abandoned his bid to run a slot parlor at Aqueduct Racetrack, whittling the field of hopefuls for the potentially lucrative license down to five.

The withdrawal of Mr. Wynn, who had been considered among the front-runners, leaves two favorites remaining, according to a source connected to the process but not affiliated with any of the bids. Penn National Gaming, a one-time dark horse that has gained momentum, and SL Green, New York City’s largest commercial landlord, are now leading the field, the source said.

The winning bidder is expected to be chosen within two weeks by a triumvirate of Gov. David Paterson, Assembly Speaker Sheldon Silver and John Sampson, the Senate Democratic conference leader. The bidders’ ability to guarantee a hefty upfront payment to the state will be the overriding factor in any decision.

The narrowing of the field comes less than a week after Gov. David Paterson sent a letter to the bidders asking each to provide proof it can pay the state $200 million upfront within 30 days of being selected.

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