Legitimate Fund Raising or Fraud?

Supreme Court to consider Illinois charity-solicitation case

The Supreme Court this week is scheduled to hear arguments in a case that has the potential to alter the ground

rules of charity fund raising. For the first time in 15 years, the court is revisiting the question of how best to protect the public against fraud without infringing on the right of nonprofit groups to get their messages heard.

At issue in the case is whether the Illinois attorney general can put a telemarketing company on trial over allegations that it told prospective donors their gifts would be used for charitable purposes, even though it kept 85 percent of all funds contributed.

The Supreme Court is expected to rule on the case, Ryan v. Telemarketing Associates, by July.

The Illinois attorney general accused Telemarketing Associates of intentionally misleading donors by creating the false impression during telephone solicitations that contributed dollars would be used by a veterans organization to provide food, shelter, and financial support for hungry, homeless, and injured Vietnam War veterans — when the fund raiser knew that an overwhelming percentage of donated funds would never be used that way. The company denied any wrongdoing and won three state-court rulings that held the attorney general’s fraud claims were barred by free-speech protections of the First Amendment.

Charity regulators hope — and nonprofit organizations and fund raisers fear — that the Supreme Court will make it easier for prosecutors to charge charities and their solicitors with fraud.

In the 1980s, the Supreme Court issued three key rulings that laid out a road map restricting state regulation of charitable fund-raising activities. The decisions noted that for many charities the process of raising money and educating the public are often intertwined, so both activities should be considered forms of free speech and thus protected by the First Amendment.

Frustration Among Regulators

In a sign of growing frustration among regulators who feel hamstrung by the restrictions they face in prosecuting abuses, 40 state regulators submitted a legal brief imploring the Supreme Court to allow the Illinois attorney general to go forward with the fraud case. The regulators cited concerns over what they described as an increase in fraudulent activity in the name of charity. They say some charities and fund-raising companies have deliberately taken advantage of previous Supreme Court rulings to mislead donors and reap profits.

“We have to stop unscrupulous fund raisers from fleecing the public and lying about where the money is going,” says Mark Shurtleff, the attorney general of Utah, one of the regulators who signed the court brief. “Any reputable charity would want donors to know exactly how their money will be spent.”

However, many charities and fund raisers say that states are ultimately trying to accomplish indirectly what they failed to achieve in the 1980s: the right to impose limits on fund-raising expenses and to make charities disclose such costs when seeking gifts.

“This case is not about telemarketing,” American Charities for Reasonable Fundraising Regulation, an Arlington, Va., organization, said in an open letter to nonprofit organizations. “It is about all forms of fund raising and whether you and your board of directors decide how to communicate to your supporters or the attorney general does.”

Battle Has Taken More Than a Decade

The Illinois attorney general first filed its complaint against Telemarketing Associates, in River Grove, Ill., in 1991, accusing it of committing fraud when it sought donations for VietNow, a Rockford, Ill., charity that helps veterans.

Under VietNow’s contract with Telemarketing Associates, the charity received 15 percent of the money raised in Illinois, with the remainder going to cover the professional solicitor’s expenses (including publishing a newsletter for VietNow) and profit.

The attorney general said that the company, when making telephone solicitations on behalf of VietNow, told prospective donors that funds would be used for direct-assistance programs. However, the attorney general said that the representations were false and misleading because the company retained 85 percent of the donations. The company was aware of the deceptive nature of the calls, the attorney general said, but “nonetheless made them for the purpose of inducing people to make contributions” for the company’s own gain.

Over eight years, Telemarketing Associates (and a sister company that the attorney general also sued) took in more than $7-million that had been donated to VietNow and turned over about $1-million to the charity, the attorney general said.

The Supreme Court of Illinois eventually took up the case and ruled in 2001 that the attorney general could not sue the fund-raising company for fraud, citing the three U.S. Supreme Court rulings of the 1980s.

The Illinois Supreme Court noted that the previous rulings prohibit states from placing percentage-based limits on fund-raising costs.

The statements made by the telemarketer during solicitation calls to donors were alleged to be false by the attorney general only because the company retained 85 percent of the gross receipts and failed to disclose this information to donors, the Illinois court said.

Thus, the Illinois court concluded, the attorney general’s complaint was essentially an attempt to regulate the telemarketer’s “ability to engage in a protected activity based upon a percentage-rate limitation” — the “same regulatory principle” that the U.S. Supreme Court rejected in the 1980 decisions.

“Fraud cannot be defined in such a way that it places on solicitors the affirmative duty to disclose to potential donors, at the point of solicitation, the net proceeds to be returned to the charity,” the Illinois Supreme Court said.

1980s Decisions

In a brief filed with the U.S. Supreme Court, the Illinois attorney general said that the case against Telemarketing Associates does not improperly rely on the amount of the fund raiser’s fee to establish that fraud was committed.

The three key U.S. Supreme Court decisions of the 1980s “held that the share of donations used for fund-raising expenses cannot, by itself, be used to declare charitable-solicitations fraudulent,” the attorney general said. “These decisions did not hold that the share of donations used for fund-raising expenses is categorically irrelevant to whether a fund raiser commits fraud.”

The Illinois attorney general said that because the fund raiser specifically told donors how gifts would be used, the state “may necessarily support its claim that these representations were materially false with evidence regarding the percentage of donations” that the fund raiser both turned over to charity and kept.

Moreover, the attorney general said that the Supreme Court in the 1980s “specifically approved an individual fraud action like this one as a narrowly tailored means to further its interest in protecting the public from fraud.”

Simply put, said Floyd D. Perkins, chief of the Charitable Trust Bureau of the Illinois attorney general’s office, the state is not trying to tell fund raisers what they must say during a solicitation. “But what they do say must be materially true,” says Mr. Perkins. “We’re just trying to protect donors who tell us they are not getting what they were promised.”

But lawyers for Telemarketing Associates say that Illinois’s Supreme Court was right to conclude that solicitations by or on behalf of a charity are “fully protected speech” under the First Amendment.

“The case is an attempt by Illinois to do indirectly that which the U.S. Supreme Court has held you can’t do directly, which is to compel a point-of-solicitation disclosure of the cost of fund raising,” says Errol Copilevitz, a lawyer for Telemarketing Associates.

“The case perpetuates the whole regulatory concept that the only worth of an organization is based upon its financial efficiency and its fund raising, and that’s simply not so,” says Mr. Copilevitz, who successfully presented the charity’s argument in the Supreme Court’s 1988 case Riley v. National Federation of the Blind of North Carolina.

High Stakes

People on both sides of the Ryan v. Telemarketing Associates case agree that the stakes are high.

Regulators have told the U.S. Supreme Court that potential donors will be victims of an increasing number of charity scams if states are not permitted to go after abusers.

All too often, the regulators said, some fund raisers and charity officials “invoke the First Amendment as a shield from otherwise legitimate” enforcement efforts.

“They assert that the First Amendment fully protects their activities, as long as they provide token dollars to charitable purposes and token statements of ‘public awareness’ to members of the donating public,” said the regulators. “The injection of fraud into the realm of charitable giving, immunized by the First Amendment, will chill charitable giving to the detriment of society as a whole.”

The Federal Trade Commission, which regulates appeals made by telemarketers, also filed a brief supporting the Illinois attorney general, saying that the Illinois Supreme Court had erred in its decision.

“That court mistakenly held that the First Amendment creates a special immunity for fund raisers who make fraudulent representations,” the Federal Trade Commission said. “But prohibitions on fraud always affect speech, and there is no reason for a special immunity in the charitable-solicitation context.”

The Better Business Bureau’s Wise Giving Alliance, a charity watchdog group that also sided with the Illinois attorney general, said donors need to be protected. The case, it said, “is about the accuracy and completeness of information donors need to make informed giving decisions, and whether that information may be intentionally hidden from them without consequences.”

Charity Views

But briefs filed in support of Telemarketing Associates by charities and fund raisers asked the U.S. Supreme Court not to give ground to those who would chip away at their First Amendment rights.

Independent Sector, a national coalition of charities and grant makers, and 55 other nonprofit organizations — including the American Cancer Society, the National Urban League, and the Points of Light Foundation — told the court that they backed the telemarketer not because they look with favor on the “particular contractual arrangements at issue here,” but because they “share this court’s historic commitment to the First Amendment principles at stake.”

Support for Telemarketing Associates also came in a brief submitted by Public Citizen, American Charities for Reasonable Fundraising Regulation, and 174 other nonprofit groups. The organizations wrote that the Illinois attorney general’s approach, if approved by the Supreme Court, carried an “acute risk of chilling fully protected speech by charities.”

A group of 32 commercial fund raisers also told the court that Telemarketing Associates did not mislead donors. The company’s contract with VietNow was by law a public document on file with the state and available to any donor, the brief by the commercial fund raisers noted.

Besides, the fund raisers said, Telemarketing Associates’ 85-percent fee was not entirely payment for soliciting donations, but included compensation for carrying out VietNow’s educational mission — because the fund-raising company had agreed to “promote good will and otherwise contact the public about VietNow and its charitable mission.”

Many of the nonprofit organizations that signed briefs in support of the telemarketing company do not use telephone solicitations, but felt that the case was important.

“We do not telemarket, and we have no intention of doing so,” says J. Kendall Hanna, executive director of the Central Pennsylvania Food Bank, in Harrisburg, Pa., which joined the brief filed by Public Citizen and American Charities for Reasonable Fundraising Regulation.

“But the case is important to us as an organization and to charities nationwide,” Mr. Hanna said, “because we don’t want to limit the ability of nonprofits to raise money.”