Supreme Court Allows Charges Against Deceptive Charity Fundraisers

The U.S. Supreme Court (search) ruled Monday that states can press fraud charges against telemarketers (search) or other fund-raisers who deceive potential donors about how much of a contribution really goes to charity.

The First Amendment (search) does not protect fund-raisers who intentionally mislead potential donors, the court said. The unanimous ruling allows Illinois to go after a telemarketing firm that took in more than $8 million on behalf of a Vietnam veterans' charity, and pocketed 85 percent of the money.

Would-be donors allegedly were told their money would go for food baskets, job training and other services for needy veterans, with no mention of fund-raising costs.

Lawyers for the fund-raising firm, Telemarketing Associates Inc. (search) , had claimed its activities were protected under prior Supreme Court rulings, and lower courts agreed.

Monday's ruling makes clear that while fund-raisers have leeway to keep quiet about the high costs of running a charity drive, they may not lie about it.

"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," Justice Ruth Bader Ginsburg wrote for the court.

Charitable solicitation is protected under the First Amendment, and the Supreme Court has three times struck down state or local laws intended to regulate how much charity fund-raisers were paid or what donors must be told about the costs.

Illinois, backed by 45 states and the federal government, says some fund drives amount to fraud. The state wants to stop misleading sales pitches made by a professional fund-raising firm in the name of a Vietnam veterans' charity called VietNow.

Better-known charities have taken pains to distance themselves from VietNow and its practices but still sided with the charity and its fund-raiser in the Supreme Court case.

Charities say potential donors would slam down the receiver if told upfront that a telemarketer would keep the overwhelming share of any contribution. The fees and overhead costs that telemarketers charge simply are a cost of doing business, and there is an intangible value in spreading a charity's message through fund drives, charities contend.

The Better Business Bureau's Wise Giving Alliance (search) calculated that VietNow spent 91 percent of what it raised in 2001 for fund raising, and spent only 3 percent on charitable programs.

"VietNow has one of the worst, if not the worst, performances of the charities reviewed," the nonprofit alliance argued in a friend-of-the-court brief.

Wise Giving's standard is that fund-raising and administrative costs should not exceed 35 percent of funds raised from donors, unless the charity provides evidence that its use of a greater percentage is reasonable.

The case is Madigan v. Telemarketing Associates Inc., 01-1806.