Prosecuting Fraudulent Appeals

Unanimous court ruling divides charities and state regulators

A unanimous United States Supreme Court opinion last week that cleared the way for the State of Illinois to prosecute a

telemarketing company has left charities, fund-raising businesses, and state regulators debating what difference the ruling will make to nonprofit solicitations. At issue is a telemarketer whose contract with a veterans group allowed the company to keep 85 percent of all the money it raised.

Some attorneys general applauded the Supreme Court ruling because the justices unambiguously said that the First Amendment does not prevent states from charging telemarketers with fraud if the fund raisers knowingly mislead charity donors about how their contributions will be used. That could open the door to stepped-up prosecution, although others suggested it may actually hamper their ability to crack down on deceptive practices.

Lawyers for charities and fund-raising companies were pleased that the Supreme Court reiterated that states cannot prosecute for fraud simply because a telemarketer keeps a large share of dollars contributed to charity and does not explain that arrangement to potential donors. However, they also worried that the decision would encourage regulators to look for new ways to bring fraud cases.

In its decision, the court stood by three key rulings that it had issued in the 1980s that laid out a road map restricting state regulation of charitable fund-raising activities on the grounds that they are protected free speech under the First Amendment. The three decisions made clear that states could not impose limits on fund-raising expenses or make charities disclose such costs when seeking gifts.

Soliciting for Veterans

Behind the controversial new Supreme Court ruling was a legal challenge first filed in Illinois more than a decade ago.

The Illinois attorney general accused Telemarketing Associates, in River Grove, Ill., of intentionally misleading donors by creating the false impression during telephone solicitations that contributions would be used by a veterans organization, VietNow, to provide food, shelter, and financial support for hungry, homeless, and injured Vietnam War veterans — when the fund-raising company knew that an overwhelming percentage of donated funds would never be used that way.

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 costs of publishing a magazine for the charity and providing public education, as well as the professional solicitor’s expenses 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 to provide direct services to veterans. 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.

The company denied any wrongdoing and won three state court rulings that the attorney general’s fraud claims were barred by free-speech protections of the First Amendment. The Illinois Supreme Court threw out the case after concluding that the attorney general’s lawsuit was actually an attempt to regulate the telemarketing company’s “ability to engage in a protected activity based on a percentage-rate limitation” — a concept rejected by the U.S. Supreme Court in the 1980s (The Chronicle, March 6). Forty state regulators filed legal briefs supporting the Illinois attorney general, while scores of charities and commercial fund raisers filed briefs asking the court to uphold the Illinois ruling.

But in its ruling last week, Madigan v. Telemarketing Associates, the Supreme Court said that Illinois and other states can prosecute for fraud when fund raisers make false or misleading claims designed to deceive donors about how their donations will be used. The court pointed out that it had left such a “corridor” open for state fraud prosecutions in its 1980s decisions.

“Our prior decisions do not rule out, as supportive of a fraud claim against fund raisers, any and all reliance on the percentage of charitable donations fund raisers retain for themselves,” said the opinion, written by Justice Ruth Bader Ginsburg. “While bare failure to disclose that information directly to potential donors does not suffice to establish fraud, when nondisclosure is accompanied by intentionally misleading statements designed to deceive the listener, the First Amendment leaves room for a fraud claim.”

If the Illinois attorney general had charged the telemarketer with fraud based solely on the percentage of donations the fund raiser would retain — or the company’s failure to alert donors to fee arrangements at the start of each call — the Supreme Court said, it would have tossed out the case. (Indeed, the Supreme Court noted that the Illinois attorney general’s office had in fact based part of its argument on its contention that the telemarketing company’s charges were excessive. “A state’s attorney general surely cannot gain case-by-case ground this court has declared off-limits to legislators,” the court said.)

To support its claim that the telemarketing company committed fraud, the Illinois attorney general’s office attached 44 affidavits from people who said they had been misled by Telemarketing Associates’ callers. The court cited several of these claims as providing grounds for fraud charges (if proven to be true), including two by donors who said they were told that 90 percent of their contributions would go to the veterans.

Sharp Divisions

Experts disagreed sharply on the decision’s impact.

The opinion “is a major victory for consumers in Illinois and other states who want to make charitable donations but want those donations to go to the charity, not the pockets of professional telemarketers,” said Illinois Attorney General Lisa Madigan, whose office intends to take the Telemarketing Associates case back to court in Illinois.

William Josephson, the New York assistant attorney general in charge of the agency’s Charities Bureau, said the Supreme Court’s ruling would have a major impact.

“In light of the decision, we certainly will be much more vigilant than we’ve been in our fraud-enforcement actions,” Mr. Josephson said. “The case takes away from the professional fund raisers and the charities that use them the purported shield that they thought the 1980s cases gave them, even from fraud.”

Mr. Josephson said telemarketers, companies that produce direct-mail solicitations, and charities “are all going to have to pay very close attention now to what they say and what they write” when asking for donations in light of the court’s decision.

Mr. Josephson said that the Supreme Court’s opinion would lead his office to propose changes in recently adopted state rules for charities and solicitation companies that seek donations in New York (The Chronicle, May 1). “And there are certain provisions in our statutes — I’m not going to discuss which ones right now — that we have not enforced in light of the 1980s cases that I think we will now proceed to enforce.”

On the other hand, David E. Ormstedt, who retired at the end of last year as a longtime assistant attorney general of Connecticut, said that the Supreme Court’s opinion may not be a big breakthrough for some states. During his years as a prosecutor, Mr. Ormstedt said, he never accepted arguments from lawyers representing professional fund raisers that the First Amendment protected solicitors from being charged with lying — and he said that Connecticut courts agreed.

What’s more, Mr. Ormstedt, a founder of the National Association of State Charity Officials, a group that represents state charity regulators, said the decision could in part “actually be a setback for regulators.” He said he and many state officials have routinely pressed cases against fund-raising companies using laws that forbid unfair and deceptive trade practices, under which the attorneys general must prove that the actions of paid solicitors had the capacity to deceive potential donors.

The attorney general’s office in Illinois sued Telemarketing Associates on grounds of “common law” fraud — which requires a higher standard of proof, that a professional fund raiser knowingly and intentionally deceived donors.

“The Supreme Court’s opinion emphasized why it’s OK for states to use common-law fraud, and that could result in states not being able to use their unfair and deceptive trade-practice laws, which would heighten the bar for all those states,” said Mr. Ormstedt.

Fund Raisers’ View

Meanwhile, many professional fund raisers and their lawyers applauded the Supreme Court for refusing to weaken the principles it set down in the 1980s on charitable solicitations.

“This opinion affirmed that the First Amendment protects the decisions charities make about how funds are raised,” said William E. Raney, a Kansas City lawyer whose firm represented Telemarketing Associates in the Supreme Court case. “It prohibits the state from second-guessing a charity’s fund-raising decisions.”

However, some fund raisers and lawyers said they felt that the Supreme Court had gone out of its way in the wording of its opinion — and in the unanimity of its nine justices — to offer encouragement to regulators, who had been stung by the string of opinions against them in the 1980s.

“The court decided to do it 9-0 for law enforcement,” said Geoffrey W. Peters, general counsel for American Charities for Reasonable Fundraising Regulation, which also filed a brief with the Supreme Court in support of Telemarketing Associates. “This decision will have a psychologically chilling effect on charities, and it emboldens prosecutors.”

The Association of Fundraising Professionals agreed that the unanimous verdict carried extra emphasis, although it praised the action. “You’ve got to figure a message is being sent: You can’t hide behind the First Amendment just because you are working for a charity,” said Walter Sczudlo, executive vice president for public policy. “That’s a message that needed to be delivered.”

Concern About Donations

Some observers said that the Supreme Court has good reason to make clear that charitable fund-raising cannot escape the law’s reach.

In the wake of the court’s opinions of the 1980s, charities and fund raisers have become less forthcoming in solicitations about how contributions will be spent, said Frances Hill, a law professor at the University of Miami School of Law. “A lot of organizations felt quite free to make representations about the use of money that, in the most charitable interpretation, were confusing,” she said, especially following the September 11 terrorist attacks, when many nonprofit organizations were criticized for their appeals.

The Supreme Court opinion is “an important step in protecting the integrity of the charitable sector,” said Ms. Hill. “The public is increasingly assertive about wanting to know how its money is being used.” She added: “Exempt organizations are going to feel somewhat reined in, and that’s a good thing.”

Some said that the Supreme Court’s decision leaves open exactly what a fund raiser has to do to avoid being charged with fraud.

“What if your telemarketing script — or direct mailing, or ad copy — says that the $20 you give will get Johnny the medicine he needs,” said Mr. Peters. If the solicitation campaign is designed to bring in new donors, meaning that the charity will at best break even, he added, “in that case your $20 won’t get Johnny the medicine he needs.” Does a charity have to say instead, “Your $20 will help the charity and that will help Johnny get the medicine he needs?” he asked.

Added Mr. Peters: “Charities and telemarketers will have to tweak their copy to make sure they haven’t stepped over the line.”

The Supreme Court’s decision should spur charities and state regulators to work together on establishing clearer guidelines for fund raising, said Patricia Read, vice president for public affairs at Independent Sector, a national coalition of charities and grant makers.

“It puts greater pressure on boards and nonprofit executives to look at their contracts with fund raisers and have a better handle on what people raising money on their behalf are saying,” said Ms. Read. “It puts pressure on nonprofits to be more wary and aware of what is being said in their name.”

Full text of the opinion in the case, Madigan v. Telemarketing Associates (No. 01-1806), is online at: http://www.supremecourtus.gov/opinions/02pdf/01-1806.pdf.