SYDNEY -- In the era when he was renowned as the world's top bookmaker, Bill Waterhouse received a phone call from a prospective client. Felipe "Babe" Ysmael had moved from the Philippines to Australia because it was the only place in the world where he could bet on the scale he wanted. Could they meet?

Waterhouse went to Ysmael's hotel that day and chatted with him, until the gambler proposed, innocently, "Could we have a bet?" The only racing that day was at an obscure country track. Ysmael glanced at a newspaper, scanned the entries for the first race, picked the 2-to-1 favorite and told Waterhouse, "Make it $20,000." When the bookmaker assented, they turned on the radio to hear the call of the race, and the favored horse lost.

Ysmael kept upping his bets, and losing them, and by late in the afternoon he had lost more than $500,000. Even so, Waterhouse was wary. Was this a setup of some kind? Indeed, it was, for Ysmael secretly owned a filly in the next race who had been training brilliantly at a private track. She was the 1-to-2 favorite, and Ysmael said quietly: "I want a chance to get out with a big bet."

"All right," Waterhouse said, "You can have a million dollars on."

They listened as the filly won easily, and Ysmael's $1 million wager had cut his losses for the day to a few thousand dollars, ending the first of what would be many titanic betting duels.

Most bookmakers operate by playing percentages, by striving to grind out a sure profit in a risky game, but Waterhouse approached his profession as if it were combat. Each day at the races, he would take his position at his stand in the betting ring, wearing a perpetual frown, projecting an attitude that said: "Take your best shot at me." Plenty of people did, and nobody ever broke Bill Waterhouse.

At least, no gambler ever did. But the Australian racing authorities put him out of business -- barring both him and his son from the sport on the basis of a connection to a notorious ringer scandal in 1984. Their supporters say they are the victims of a vendetta by the racing establishment. Their detractors say they are paying the price for their greed and lack of ethics. But even the Waterhouses' many enemies would concede that the game hasn't been the same without them.

Bill Waterhouse's father and older brother were both small-time bookmakers, and in his early teens he displayed an aptitude for the profession. Even so, he went to law school and launched a career as a barrister, while trying to keep his schedule clear on race days. But he soon chose bookmaking, and quickly rose to the top of a highly competitive profession. "He transformed the image of modern bookmaking," wrote his biographer, Kevin Perkins, in "The Gambling Man." "He was the first of the glamour bookies."

Waterhouse had a keen sense of the proper odds for a horse. He was astute at assessing the flow of information, rumor and money around the betting ring. He was a shrewd promoter, the first bookmaker to tell reporters about his big bets and to earn headlines as a result. But his greatest strength was his willingness to take risks, and he thrived on head-to-head duels with big bettors.

"You must respect your man," said Waterhouse, "and then you look for his weaknesses. "Once you break a man's nerve gambling, he'll never get it back."

At the Melbourne Cup one year, there were 4-to-1 favorites, Red Handed and General Command, and Waterhouse felt Red Handed was the stronger horse. He felt, too, that his old adversary Ysmael was prepared to make a six-figure bet on Red Handed.

"I saw Ysmael coming toward me," he recalled. "I looked at him, and I made sure he saw I was looking at him, and I moved the price on Red Handed from 4-1 to 9-2." By raising the odds, Waterhouse was almost shouting an invitation: Come here and bet Red Handed. Waterhouse knew his man. Ysmael concluded the bookmaker was trying to make him take this bait, so he changed his intended bet and put $50,000 on General Command. Red Handed won -- saving Waterhouse hundreds of thousands of dollars.

The publicity given to such huge plunges fostered more such action, and eventually Waterhouse had many clients who were prepared to bet six-figure sums on a single race. The gambling business was booming, Waterhouse maintained, because of the system that prevails in Australia. Legal bookmakers can offer fixed odds, and so big bettors don't have to worry about ruining their own prices as they do under a tote system.

Waterhouse had grand dreams of exporting the Australian system to other countries, and there was one, in particular, that fascinated him. "The place that's crying to be exploited," he said, "is the United States. I'd love to have a crack at America." He went to Las Vegas to try to persuade casino officials to let him make book on Australian races there, letting gamblers bet whatever they wanted. They thought he was crazy. But he was launching successful negotiations to branch into gambling operations in other countries.

He could cast his eye to an international market because his son was ready to carry on the Waterhouse supremacy in Australian bookmaking. Robbie Waterhouse probably would have been a natural in his profession even if he hadn't had the tutelage of the world's greatest bookmaker. He became as astute a student of form as any of the gamblers he would face in the betting ring. He assembled vast quantities of information, and his staff would feed huge quantities of information into a computer that would generate estimates of every horse's "correct" odds.

Robbie shared not only his father's professional astuteness, but also his ability for stirring up resentment. Bill Waterhouse always was perceived as aloof, humorless and tight-fisted -- a hard man. Robbie was viewed as a wise guy, and told one story about himself that illustrated the reasons for that perception.

Robbie was willing to work at the most humble race meetings, and he occasionally went to a small track in Canberra, where his presence both intimidated and annoyed the amateurish local bookies. Before the first race one day, Waterhouse posted his odds nearly an hour before anybody else, and he had the low-weighted horse in a handicap race at 33 to 1.

He took not a single bet, but when the other bookies put up their own prices, they basically copied the odds of the big-city sharpie. Waterhouse proceeded to have his agents go around the ring and bet the 33-to-1 shot, for his own handicapping had told him that the animal deserved to be the favorite. The horse won, creating another Waterhouse triumph, and more resentment.

"Bookmaking," he likes to say, "is the last business in which you can be a buccaneer." The nature of the game is to seek and exploit any edge you can find. But Robbie Waterhouse did it once too often, and the consequences brought down not only him, but his father.

Next: The Fine Cotton Scandal.