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Supreme Court Rules that Fundraisers Who Don't Lie Can Pocket 85% of Donations

   Aug 01, 2003

By Daniel Borochoff, CharityWatch President

Learning the skills of an unethical fundraiser can start early in life:

Little Freddie finishes a big piece of chocolate cake. Wanting more and knowing his mom won't allow it, he shrewdly asks her if he can bring some cake next door for his friend Donny. Mom readily agrees and while handing Freddie the piece of cake she praises him for his generosity. As soon as mom walks out of view, Freddie devours most of the cake but is careful to leave a few crumbs to bring to his friend.

Freddie, like most kids who have been taught by their parents not to lie, may feel that he technically did not lie to his mom because he fulfilled his agreement to give some cake, albeit only a few crumbs, to his friend. In AIP's opinion, Freddie did lie, a lie of omission, by failing to inform his mom that he would eat most of the cake that she was led to believe would be for Donny. Unfortunately, the Supreme Court may not agree.

According to a recent Supreme Court case, Madigan v. Telemarketing Associates, it is okay if fundraisers keep nearly all the money raised as long as they don't falsely claim that a larger portion of contributions is going to the charity. So fundraisers can avoid getting into trouble with the law by not stating what portion of a donor's money goes to the charity. Just as Freddie can avoid getting into trouble with his mom by avoiding telling her what portion of the cake he gave to Donny.

The Court does not believe that Telemarketing Associates, the telemarketer for Vietnow, an AIP "F" rated charity, was deceiving donors by not mentioning in its solicitations that it was letting the fundraiser keep 85% of the proceeds. Between 1987 and the end of 1995, the telemarketer was allowed to keep more than $6 million of the $7.1 million raised. Please see "Should Telemarketer Disclose it Keeps 85% of Donations?" in the April 2003 AIP Charity Rating Guide.

The Court ruled that the fundraiser must knowingly provide false information with the intent to deceive to be convicted for fraud. Proving intent to deceive is very difficult and expensive and will discourage most regulators, even with good evidence, from enforcing fraud statutes. For example, if mom finds out about little Freddie's cake stunt, it would be difficult to prove intent to deceive. Freddie could defend himself by saying that when he asked for the cake for his friend he intended to give it to him but the smell of it was so alluring he could not resist consuming most of it himself.

The Supreme Court sent the case back to a lower Illinois court not because the telemarketer was keeping most of the donations and not disclosing this important fact to donors but because of alleged fraudulent statements made over the phone including "90% or more goes to the vets" and that donations would not be used for "labor expenses." Other alleged phone statements claimed that contributions would be used for "food baskets given to vets [and] their families for Thanksgiving," paying "bills and rent to help physically and mentally disabled Vietnam vets and their families" and "rehabilitation [and] other services for Vietnam veterans." This was promising a lot considering Vietnow only spent $118,000, or 4% of its $3,173,000 budget, on program services in its 2001 financial statements.

This case serves as an important warning to donors to be very careful when responding to telemarketing solicitations. Since regulators may only be able to protect donors from the most extremely dishonest telemarketing practices, donors need to make sure that they know how much of their contribution will go to a charity. Since telemarketers may not reveal the truth, AIP recommends that donors ask for and review a charity's telemarketing contract and/or consult AIP's fundraising ratios to see if the charity is receiving a substantial amount of the contributions raised.

From the April 2003 Watchdog Report

Should Telemarketer Disclose That It Keeps 85% of Donations?

Supreme Court to Decide If Charity Can Continue To Pull Wool Over Donors’ Eyes

The U.S. Supreme Court has agreed to hear a case filed by the Illinois Attorney General against Telemarketing Associates, a professional phone solicitor of an AIP “F” rated charity, Vietnow. The A.G.’s court filing points out that donors are asked to give money for specific purposes such as “food, shelter and financial support for hungry, homeless and injured Vietnam War Veterans,” yet 85% of the funds raised go to the telemarketer. In every contract over the past 13-years the charity agreed to let the fundraiser keep 85% of the proceeds. The charity also let the fundraiser maintain control of the list of donors and did not disclose them to Vietnow. This arrangement is not fair for a charity since over time it becomes less expensive to resolicit an identified group of supporters. Also, a charity should not give up control of its donor list in case it wants to improve by switching fundraisers or soliciting in-house. The A.G. has sworn testimony that “donors would not have made such contributions if they had known that at most only 15% of their donations actually went to Vietnow.” The A.G. believes that it’s a fraudulent misrepresentation for a professional fundraiser to say that a contribution will be used for charitable purposes but keeps the vast majority of contributions raised.

The telemarketer’s court filing states that its solicitations did not misrepresent material facts or claim that most of the money raised would go to Vietnow and that it should not be required to disclose the percentage spent on fundraising because it would make it very difficult to raise money. The telemarketer points to a trilogy of cases in the 80’s that limit state regulation of fundraising, as reasons why its practices are legal. According to the telemarketer, these cases set precedents that disallow state regulators from requiring solicitors to spend a minimum percentage on charitable programs or a maximum on fundraising costs, and could not compel fundraisers to disclose at time of solicitation what percentage of donations raised were distributed to a charity.

Many charities are afraid that should the A.G. prevail regulators will start to unfairly dictate unreasonable levels of fundraising costs, particularly for new, small or unpopular groups that have good reasons for higher fundraising expenses. It is AIP’s opinion that these fears are unfounded and that the Illinois A.G. and the other state and federal regulators that have signed on to this lawsuit are attempting to stop only those fundraisers that are severely violating the public trust. In 2001 Vietnow raised $3.5 million yet spent only $118,000 or 4% of it budget on program services. It is a disgrace to our brave veterans that Vietnow, a long-established charity raising money for one of America’s most popular causes, continues year-after-year to give only a pittance of its contributions to help veterans.

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