Amicus Curiae Brief — Illinois Ex Rel. Madigan, Attorney General of Illinois v. Telemarketing Associates, Inc.

' JAN 29 2405

No. 01-1806 (UY oe ree

In The

Supreme Court of the United States

JAMES E. RYAN, ATTORNEY GENERAL OF ILLINOIS,

Petitioner,

Vv.

TELEMARKETING ASSOCIATES, INC., ET AL.,

Respondents.

On Writ of Certiorari to the Supreme Court of Illinois

Brief of Thirty-Two Commercial Fundraisers

and Fundraising Consultants*

as Amici Curiae in Support of Respondents

CHARLES H. NAVE

Counsel of Record

CHARLES H. NAVE, P.C.

601 MADISON STREET

SUITE 2090

ALEXANDRIA, VIRGINIA 22314

(703) 684-4665

Attorney for Amici Curiae

* See Appendix

Table of Contents

TABLE OF AUTHORITIES .000.0.......ccccccccccseeeseesseeeeeeeees il

SS CR ee ecrecvenensecnicnedaensetniniainnmeaensieainanieiiiiins l

INTEREST OF THE AMICT 0000... ..ccccccccccccsseeesseeeseeeeneesenees l

SUMMARY OF ARGUMENT .....0.........cccccccceceeeteeeeeeeeees 2

SIE ctercenetsstenmcensntitnnnniniinnmimniaiiie 3

I. The donors in this case were not defrauded............... 3

II. The donors in this case were not misled................000. 5

III. Petitioner’s proposed relief would undermine

constitutional protections and guarantees to which

fundraisers and their clients are entitled .................... 8

A. Petitioner’s relief would effectively compel speech

semmenanpadanensniseteniincansiadesasateneniisntsiaiundeneaiesnipenniantiiid 9

B. Fundraisers would never know what is illegal..... 10

IV. Petitioner Seeks Too Much Discretion ...............000+ 16

SDT cxecccmnsnncsesesnsccnsncsnestmaniescssmentanietisinniniaien 19

FF Ee reccrcscstertessnescnnssnsnsnteaseies ssessensnsersensenensensenensesenss A

il

TABLE OF AUTHORITIES

Cases

Bouie v. City of Columbia, 378 U.S. 347 (1964)..........000 15

City of Chicago v. Morales, 527 U.S. 41 (1999).......c:ces0 19

Riley v. National Federation of the Blind of N.C., Inc., 487

SEIN, ST TTT ie iacceiniinseneanadintnuarsnenscesensceeccosessssesecees passim

Rose v. Locke, 423 U.S. 48 (1975)......cccccccsssesseeesrsserrreeennes 15

Ryan v. Telemarketing Associates, Inc., 198 Ill. 2d 345

IIc lnetddindedidieebdnenenantnemnavensenneenessesensneceneesoscovoenaneneen 7

Secretary of State of Maryland v. Joseph H. Munson Co.,

Inc., 467 U.S. 947 (19B4).......cscecrscssorersecsesescesceeeeeee 1,8, 19

Smith v. Goguen, 415 U.S. 566 (1974) .....cccceceeesseereeeeeeees 19

Village of Schaumburg v. Citizens for a Better Environment,

444 U.S. 620 (1980).......cesceceeeeeeees penipnenencennecenees 1, 8,9, 19

Statutes

Be ers Fe Oe CI ccccceccecscenccecssccccsssconccccncoceccoccososanaens 17

Ill. Rev. Stat. ch. 225 para. 2(f) (2003)........sesseeeseereereereneeees 6

Ill. Rev. Stat. ch. 225 para. 7(a) (2003) ........s.e.. aes 6

Other Authorities

AICPA, Accounting for Costs of Activities of Not-for-Profit

Organizations and State or Local Government Entities that

Include Fund Raising, Statement of Position 98-02........ 14

I

fete a ae

iil

Heberling, State Lotteries: Advocating a Social III for the

Social Good, The Independent Review, v. VI, no. 4,

Spring 2002, 597-606 ...........ccccccssesssssssssceessesseeseeecseseeereeees 5

Lipman, Calling Solicitors to Account, Chronicle of

Philanthropy, April 5, 2001 ..........ccccccccccccescescesceseeeseeseeeeees 3

Novak and McKinney, Ryan Benefit Ball Gave Just 17%,

Chicago Sun-Times, September 10, 2001 ..........c.cccc0000. 17

Rettig, Cancer Crusade: The Story of the National Cancer

CC TTD 12

Steinberg, Profits and Incentive Compensation in Nonprofit

Firms, Nonprofit Management and Leadership, vol. 1 #2,

LAE ee 14

CONSENT TO FILE

Consent to file this Brief Amici Curiae’ has been

obtained from Petitioner and Respondent.

INTEREST OF THE AMICI

Amici are commercial fundraisers and consultants.’

They specialize in raising money for charities. As such, they

are quite concerned about fraud in charitable solicitations.

And they well understand the public outrage over allegations

that a fundraiser kept 85% of donations made to a charity.

However, they also know this charge is misleading in this

case.

First, there is no nexus between a high cost of

fundraising percentage (“CFP”) and fraud.’ This Court has

so ruled in Schaumburg, Munson and Riley and Amici, along

with industry experts, wholeheartedly agree. Second, the

contracts attached to Petitioner’s complaint plainly show that

a portion of Respondents’ compensation was for public

education efforts advancing VietNow’s charitable mission.

Amici’s interest in this case is not the welfare of

Respondents, but the concern about the consequences of

Petitioner’s success in this matter. If Petitioner’s prayer for

' Neither party’s counsel authored any portion of this brief nor made any

monetary contribution to the preparation or submission of this brief.

Amici provided financial support for this brief directly as well as through

American Charities for Reasonable Fundraising Regulation, a nonprofit

organization. Consent letters are on file with the Clerk of the Court.

? Commercial fundraisers solicit on behalf of nonprofits and often collect

contributions before passing them along. Fundraising consultants, by

contrast, do not solicit but instead consult with nonprofits on how the

nonprofits themselves may make more effective solicitations.

Fundraising consultants do not receive, possess, or handle contributions.

_Riley v_ National Federation ofthe Plind of N.C.,Inc., 487 U.S. 781,

793 (1988); Villag aumbr ter Environment

444 US. 620, 636 (1980); and

H. Munson Co., Inc., 467 U.S. 947, 961 and 966 (1984).

2

relief is granted, fundraising for charities will undoubtedly

become significantly more difficult and expensive because

fundraisers will either be compelled to disclose the CFP

during each solicitation or they will face potential fraud

liability in every solicitation. In fact, they may face fraud

liability even though they disclose the CFP in every

solicitation. Not only will this chill charitable speech and

thus injure all Americans to one extent or another, but it

would also strip fundraisers’ clients (charities) of many of

their constitutional rights and guarantees.

SUMMARY OF ARGUMENT

To the extent that fraud in charitable solicitations can

be compared to common law fraud, Petitioner’s facts and

theory do not present sufficient evidence for a prima facia

fraud case. First, donors were simply not defrauded. They

were offered an opportunity to help advance VietNow’s

charitable mission and that is precisely what they got.

Second, the facts do not support Petitioner’s argument that

donors were misled about Respondents’ fee. Respondents

affirmatively and fully disclosed this information’ and, in

fact, did so more completely, and honestly than did Petitioner

in the conduct of his survey.

If Petitioner is allowed to prosecute charitable

solicitations fraud complaints with only the evidentiary

showing present in this case, he will essentially dissolve

certain constitutional protections under the weight of a

pervasive, perpetual threat of fraud prosecutions. Petitioner’s

fraud prosecution theory would essentially compel

fundraisers to disclose the CFP (assuming there is agreement

on what this is and how it is calculated) in their solicitations

as the only conceivable safe harbor against a fraud complaint.

And even this safe harbor would not protect them, because

* See infra note 13.

’ See infra note 14.

3

there is often no way for a fundraiser to know a CFP before

solicitations begin or even while they are being conducted.

Fundraisers would essentially be inviting a fraud complaint

every time they worked on behalf of charities.

Ultimately, Petitioner seeks to arrogate too much

discretion to the state and his office under this fraud

prosecution theory, and he has already raised questions about

his office’s ability to exercise this discretion impartially.°

ARGUMENT ——

Petitioner seeks to construct a prima facia fraud

complaint on the following allegations: (1) Respondent told

donors that their contributions would go to certain aspects of

VietNow’s charitable mission, (2) but because Respondent

only tured over 15% of those donations to VietNow,’ this

was substantially and intentionally false or misleading, and

(3) had donors known when they were solicited that

Respondent would retain 85% of donations, they would not

have donated in the first place. There are several flaws with

this theory.

I. The donors in this case were not defrauded

Petitioner claims this case is founded on the familiar

principles of consumer fraud. But this reasoning does not

withstand close scrutiny. Consider a consumer who ordered

a cheeseburger and a beer at a restaurant for ten dollars.

Later on, a neighbor tells the consumer that he paid for much

more than a cheeseburger and a beer. He paid for things he

probably wanted, such as refrigeration, napkins, and the

® See text accompanying note 37 infra.

” According to the Chronicle of Philanthropy, this is a rather typical yield

for a veterans’ group employing a commercial fundraiser. Lipman,

Calling Solicitors to Account, Chronicle of Philanthropy, April 5, 2001.

4

cook’s wages. But he also paid for things that he did not

want, such as marketing and overhead.

The neighbor says that, in his own calculation, five or

more of the dollars he spent went to defray this latter set of

costs. In fact, the food he was sold only really cost about one

and a half dollars. Was he defrauded?

Of course not. And by the same reasoning, it is

unrealistic and irrational to argue that donors were defrauded

in this case on similar evidence. Both the consumer and the

donor got what they wanted. The consumer got his

cheeseburger and beer. And the donor was able to make a

contribution to VietNow along with the personal satisfaction,

tax deductions, etc. appertaining thereto.

Donors in this case were asked to contribute to

VietNow and given examples of what VietNow does to help

Viet Nam veterans. However, VietNow donors would

probably support most other aspects of VietNow’s charitable

mission about which they did not hear during the solicitation.

For example, even though a donor only heard that VietNow

helps Chicago-area Viet Nam veterans with rent and food

baskets, he would most likely also support VietNow’s

mission to raise awareness of Viet Nam veterans issues,

particularly the POW/MIA issue.*

And, just as the consumer can complain that part of

his ten dollars went to overhead and marketing expenses, the

donor can complain that part of his donation went to

administrative and fundraising expenses. But that does not

mean either the consumer or the donor was defrauded. This

Court has already held that “[dJonors are ... undoubtedly

aware that solicitations | incur costs, to which part of their

donation might apply.”

; See infra note 14.

* Riley, 487 U.S. at 781. Amici believe this is a kind of “reasonable

donor” doctrine holding that a reasonable donor is not blind to the

obvious realities of the nonprofit sector.

If donors wanted 100% of their money to go directly to Viet

Nam veterans, their best strategy would be to locate a needy, deserving

_—

5

In light of all this, it is difficult to see how donors

were defrauded by Respondents under Petitioner’s theory.'°

Donors contributed to VietNow. At the tiie they

contributed, Donors were told about certain aspects of

VietNow’s charitable mission. Ultimately, the contributions

were indeed devoted to those aspects, but the contributions

were also dedicated to other, equally legitimate aspects of

VietNow’s charitable mission. The contributions also helped

defray necessary administrative and fundraising costs that

any reasonable donor would expect a charity to incur.

II. The donors in this case were not misled

Petitioner correctly states that Respondents told

- donors that their donations would be used to further certain

charitable purposes of VietNow.'' Petitioner then argues that

because the contract between Respondent and VietNow

provided that 85% of funds raised would be retained by

Viet Nam veteran themselves and give their money to him directly. This

highlights a central purpose of charities that is often overlooked or

derided as wasted administrative costs. Charities reduce the transaction

costs between the eleemosynary impulse and actual charitable gifts and

acts. A major reason why so many people give to charities is that they

have economies of scale, they can direct resources efficiently, and they

can identify those in need. Once a charity is up and running, a donor can

further a charitable mission by merely writing a check rather than

undertaking all the associated legwork himself.

'° In fact it is difficult to understand how the instant case is any more

“fraudulent” than state lotteries. Although studies indicate otherwise, the

state itself, acting as both regulator and promoter, often tells voters that

lottery proceeds will improve school funding or other “public purposes”

and occasionally encourages consumers to believe that the chances of

winning are greater than they actually are. Despite these

“misrepresentations,” there is no record of prosecution of state lotteries

for fraud. Heberling, State Lotteries: Advocating a Social II] for the

Social Good, The Independent Review, v. VI, no. 4, Spring 2002, 597-

a at page i.

6

Respondent as a fee for its services that the donors were

necessarily misled.'? That is, quite simply, wrong.

First, it is undeniable that Respondents disclosed the

terms of its contract with VietNow, including the portion of

each donation that Respondents would retain, before any

solicitation began.'’ Rather than being withheld, this

information was affirmatively placed on the public record.

Not only that, but the entire contract was disclosed, thus

making available to the public, including prospective donors,

a complete and accurate understanding of the agreement

between Respondent and VietNow. Any interested donor

could learn that Respondents retained 85% of donations

received. Such a donor could also have learned that this 85%

fee was not entirely payment for soliciting donations. It

included compensation for carrying out VietNow’s public

education mission and for the associated administrative

costs. ™

'? Pet. Br. at 16.

'3 TI. Rev. Stat. ch. 225 para. 7(a) (2003) clearly states that “A true and

correct copy of each contract [between charities and fund raisers] shall be

filed by the professional fund raiser ... with the Attorney General prior to

the conduct of a fundraising campaign under the contract.”

Petitioner admits that Respondent was properly registered for

years before this action began. Am. Compl. J 22. Record 8.

Ill. Rev. Stat. ch. 225 para. 2(f) (2003) decrees that “professional

fund raisers’ contracts ... shall be open to public inspection.”

In a sense, Petitioner’s regulatory regime would compel

fundraisers to first incriminate themselves when they file their contracts

and subsequently subject themselves to fraud prosecutions when they

solicit donations without disclosing a CFR, as they are entitled to do.

Riley, 487 U.S. at 799-800. After all, if Petitioner’s interpretation of the

contract and fraud jurisprudence is correct, how could it not be fraud if

the fundraiser keeps 85% and fails to disclose that during solicitations?

The Attorney General is essentially telling the Respondent that he will

register Respondent's contract because there is no constitutional law

preventing it, but expect a summons as soon as solicitations commence.

* Telemarketing Associates agreed to promote goodwill and otherwise

contact the public about VietNow and its charitable mission. Record 21-

67, 214-218. VietNow’s “primary charitable mission” includes

—E ———— — — —— ee CO

Respondents were under no obligation whatsoever to

reveal any information concerning the cost of fundraising

during solicitations.’ And why should they? As this Court

has held before, there is no nexus between a cost of

fundraising percentage (“CFP”) and fraud.'® The state’s

presumption that “the charity derives no benefit from funds

collected but not turned over to it” is false.'? Donors are

generally aware that solicitations incur costs and part of their

donation will be applied to such costs.'® And, most

importantly, such compelled disclosure will almost certainly

hamper legitimate fundraising efforts.'? If the CFP were an

“help[ing] increase community awareness of the difficulties encountered

by the veterans and their families” and “increas[ing] national awareness

of the POW/MIA status in [sic] supporting other organizations involved

in the effort of accountability and release of these veterans.” See

VietNow National Headquarters 2000 Form 990, Schedule D, Part III

available at http://justice.hdcdojnet.state.ca.us/charitysr/default.asp.

The Supreme Court of Illinois recognized this saying:

The contract required Telemarketing to conduct “an

efficient and professional marketing program, promote

goodwill on behalf of [VietNow], and enhance good

public relations.” ... Defendants in this case were

contracted to perform a wide range of activates on

behalf of VietNow, all of which were to be paid for out

of [Telemarketing’s contractual portion of] the solicited

funds.” Ryan v. Telemarketing Associates, Inc., 198

Ill. 2d 345, 360 (2002).

In contrast, it was Petitioner's solicitation of affidavits that was

misleading in this case. In Petitioner’s survey affidavits, he twice

indicated that “80% or more of [the donor’s] donation would be used for

professional fund raising expenses” even though Petitioner had in his

possession clear evidence to the contrary, namely the fundraising

contracts clearly indicating that Respondent was undertaking far more

than just fundraising.

'* Riley, 487 U.S. at 798.

'® See supra note 3.

” Riley, 487 U.S. at 798.

* Riley, 487 U.S. at 799.

'? Riley, 487 U.S. at 799.

important and material matter to the donor, he was free to

inquire about a”

III. Petitioner’s proposed relief would undermine /

constitutional protections and guarantees to which

fundraisers and their clients are entitled

Petitioner seeks this Court’s blessing for a radically

new fraud prosecution theory. For decades, this Court has

explicitly recognized that charitable solicitations and

charitable speech are inextricably intertwined and thus merit

the full protection of the First Amendment. *! This Court,

citing the real-life practicalities of charitable fundraising, has

held that a hi igh CFP is no indicator of fraud in charitable

solicitations. Petitioner’s relief would necessarily reverse

these rulings, pare back First Amendment protections, and

20 Amici strongly believe that such donor inquiries deserve truthful and

accurate answers. Ifa solicitor misleads a donor in answering such a

question, he is clearly liable for fraud.

In fact, it appears that Petitioner already had the elements

necessary for such a prima facia case. One donor specifically asked how

her donation would be spent and was told that “90% or more goes to the

vets.” Record 358. It also appears that Petitioner had enough evidence to

file a prima facia case against Respondents for self-dealing and/or breach

of fiduciary duty for their practice of negotiating on behalf of themselves

and on behalf of VietNow in the same transaction. Am. Compl. {J 12-13.

Record 5

It is strange, then, that Petitioner chose to challenge long-

standing First Amendment jurisprudence when he had what appears to be

powerful and uncontroversial evidence of other malfeasance by

Respondents. At the very least, this evidence of affirmative

misrepresentation and self-dealing undermines Petitioner’s assertion that

he would be nearly powerless to stop fraud in charitable solicitations if

his relief is denied. To the contrary, it appears that Petitioner seeks .

authority to prosecute cases of “fraud” where no such evidence exists — in

other words where there is merely a high CFP.

2! Schaumburg, 444 U.S. at 632; Riley, 487 U.S. at 796.

2 Munson, 467 U.S. at 961, 966; Riley, 487 U.S. at 793, n. 7.

9

thus chill charitable speech.”* Amici believe that these

arguments are already well represented to this Court. Rather

than join that chorus, Amici will point out the other threats to

a fundraiser’s and charity’s constitutional rights that this

prosecution entails.

A. Petitioner's relief would effectively compel speech

According to Petitioner’s complaint, Respondents

must face fraud charges to answer allegations that they

misled one or more donors about what portion of their

donations would go to VietNow. Therefore, if Petitioner’s

prayer for relief is granted, to avoid fraud liability

commercial fundraisers and charities must necessarily

conduct their solicitations such that no donor misunderstands

how much of his donation is physically turned over to the

charity.** And if one discloses this percentage, then he

> Petitioner claims he is neither arguing that Respondents’ fee is per se

unreasonable (Pet. Br. at 41) or that he is compelling speech (Pet. Br. at

46-49). But the facts belie this. In his Complaint, Petitioner does

characterize the fee as unreasonably high (Am. Compl. 4 32, 43, 70-72.

Record 11, 13, 321-322) and he does fault Respondent for not disclosing

his fee during solicitations (Am. Compl. 49 38, 67F-67N (52-61). Record

12, 209-212.)

More importantly, the prosecution theory that Petitioner seeks to

vindicate necessarily relies on either or both of these unconstitutional

concepts. The only way for fundraisers to immunize themselves against

fraud suits under Petitioners’ theory is to disclose their CFP during

solicitations. It is unconstitutional to institute such a requirement. Riley,

487 U.S. at 799-800.

At the same time, there is an implicit ceiling on “reasonable”

fees. If Petitioner can bring a fraud action whenever he can gather a

certain number of affidavits stating that donors would not have given if

they knew the CFP was “that high” (and there’s no reason to believe the

minimum number of affidavits is not one), then there is a ceiling on

reasonable fees determined by the local community. This, too, is

unconstitutional. See. e.g., Schaumburg, 444 U.S. at 636-637.

** This position assumes that only funds actually turned over to the

charity advance the charitable mission. This Court rejected that

10

necessarily discloses the percentage that is not turned over to

the charity. This is precisely the type of compelled speech

declared unconstitutional in Riley.”

There are numerous reasons why this Court found

such compulsion to be both poor policy and unconstitutional.

They are briefly listed, supra, on page 7. All of these reasons

are still valid today. Petitioner simply cannot compel speech,

whether through legislative enactment or through the threat

of prosecution.

B. Fundraisers would never know what is illegal

Under Petitioner’s theory, a solicitor is committing

fraud if he fails to voluntarily disclose to a donor that a

substantial portion of the donor’s contribution will be used to

defray the costs of solicitation. Thus, Petitioner assumes that

a solicitor will have in mind at least a reasonably accurate

estimate of how donations will be allocated, and in particular

a good idea of what the CFP will be, when he makes the

solicitation. But in many cases, this is simply not possible.

A review of fundraising contracts filed with the states

(which are publicly available) shows that most fundraisers

are compensated on a fee-for-service (“FFS”) basis rather

than on a percentage basis. In other words, rather than

receiving a percentage of every donation raised, the

fundraiser is compensated for every donor to whom he talks,

or every hour he talks, or every direct mail solicitation upon

which he consults. Thus, even if the parties may have an

estimate of what the fundraising expenses will he before a

proposition at Riley, 487 U.S. at 798. N.B. Recall that fundraising

consultants never receive donations. Instead, contributions go directly to

the charity as the consultant merely advises the charity on solicitation

strategy and technique in return for a fee. How then should a consultant

immunize himself when the charity makes the solicitation and neither

knows in advance what percentage the fee will be of the funds raised?

5 Riley, 487 U.S. at 800.

1]

solicitation campaign begins,” they have no idea how many

donations will be made. The campaign could be very

successful or it could be an abject failure, often because of

factors beyond the control of either the charity or the

fundraiser. If many donations are received, the cost of

fundraising percentage (“CFP”) will be low.”’ If few

donations are received, the CFP will be high.

There are numerous factors affecting the success of

any charitable solicitation campaign. Although the charity

and fundraiser have a wide variety of fundraising media from

which to choose, their success is often dictated by factors

beyond their control. The weather is an example. A charity

could engage a fundraiser to plan and manage a fundraising

event such as a charity auction, a ball, or a dinner with a

featured speaker. The charity could pay or commit to pay for

facility rental, catering deposits, decorations, invitations, and

any number of other expenses. 3ut if a storm strikes on the

day of the event, the charity might raise very little money

beyond expenses, which would give it a high CFP. In fact, it

could very well lose money, which yields a CFP greater than

100%. The uncertainties do not end with the weather.

Charitable fundraising is affected by myriad factors.

Does the charity have an established “brand name?””*> Does

© This would be ascertainable, for example, if the charity and the

fundraiser agreed to send out a certain number of solicitation letters and

the fundraiser was paid a certain amount per letter mailed.

*” This, of course, assumes that the CFP can be calculated in some

rational, objective manner. For the difficulties associated with this

endeavor, see Brief Amici Curiae of Association of Fundraising

Professionals et al. section II.

8 It is much easier for the American Red Cross to raise money than for

the Brand X Disaster Relief Society. Even as venerable an organization

as the American Cancer Society was a “startup” at some point. The

American Cancer Society was founded in 1913. Until 1943, the Society

was “chiefly concerned with the improvement of treatment facilities and

the professional education of physicians” and spent nothing on research.

Lawyer Emerson Foote “found the organization unbusinesslike and

incapable of conducting a first-rate fundraising drive” in 1944. Mary

12

the charity have and can it use a significant base of

volunteers to defray the administrative costs of running a

charity and soliciting donations? Did the charity start out

with a government or foundation grant that makes its CFR

look low at the outset? Is the charity popular?* And there’s

the biggest “X-factor” of all: timing.”

Thus, FFS fundraisers operating in good faith and

with no intent to defraud — indeed, operating with the

understanding that their anticipated overhead costs are

reasonable — could, through no fault of their own, become

liable for fraud. Under Petitioner’s theory, if donors

discovered that the CFP was dramatically higher than they

expected, and then decide that they would not have donated

had they known the final CFP when they were originally

solicited, the fundraiser and/or charity would be liable for

fraud. Petitioner’s theory has no room for explanations,

qualifications, weather emergencies, context, or

Lasker personally retained a professional fundraising firm to help the

1945 campaign on the condition that a mere 25% of the funds raised be

earmarked for cancer research. Thus, an outsider advanced funds for the

charity’s first big campaign and this campaign was run by an independent

for-profit fundraising counsel. Rettig, Cancer Crusade: The Story of the

National Cancer Act of 1971 at 20-21 (1977).

For example, in the early 1980s AIDS charities were viewed with

suspicion, but today they are well accepted and have many loyal donors

outside the communities initially believed to be affected by the disease.

© Prior to September 11, 2001 Islamic charities soliciting donations in the

United States did not raise too many eyebrows. Today, suspicion and

mistrust hamper their fundraising efforts.

The effects of some of these factors can be estimated before

solicitation campaigns begin. Even so, the charities have no control over

them and Petitioner’s prosecution theory would arbitrarily make them

more liable to a fraud charge merely because they were less well known,

had fewer volunteers, had never received a grant, etc.

—

13

understanding.”' It merely compares actual CFP with

donor’s expectation.”

Fundraisers operating under percentage-based

contracts would face similarly pervasive liability, but for

different reasons. As argued in Brief Amici Curiae of

Association of Fundraising Professionals et al., there are

numerous uncertainties in calculating the CFP. A fundraiser

operating under a percentage-based contract could take into

account all the public education work and any other efforts

furthering the charity’s mission, come up with a good faith

CFP, and perhaps mention it during solicitations. He could

then be subject to fraud prosecution under Petitioner’s theory

in at least three situations.

First, after contributing, a donor could calculate the

CFP using his own ideas about what is included and excluded

from the calculation and using information disclosed by the

charity or the fundraiser or both. If the donor’s CFP differed

significantly from the fundraiser’s CFP (which is entirely

possible given the many ways in which a CFP can be

calculated from the same data) the fundraiser would now be

guilty of fraud under Petitioner’s theory.

Second, a regulator or watchdog could have

calculated the CFP using his own terms, or simply taken the

percentage from the contract*’ without accounting for the

*! 4mici Council of Better Business Bureaus, Inc. et al. admit this in their

brief at page 24.

* Even if fee-for-service (“FFS”) fundraisers used their CFPs from past

years as an estimate in current solicitations, they would not escape this

pervasive liability. If something went wrong in the current year and the

CFP changed, as it invariably does, the fundraiser would be committing

fraud, under Petitioner's theory, with respect to donors who were told

about the previous year’s CFP and whose donations were spent according

to a new, higher CFP.

** Incidentally, Petitioners and other states implicitly discriminate against

charities that must raise money through percentage contracts. The federal

government allows charities to report “joint costs” — costs which are

attributable to program services, “management and general” expenses,

and to fundraising — and allocate them to these three categories on their

14

fundraiser’s work advancing the charitable mission, and

conveyed it to the donor, as happened in this case. The

donor, faced with new information from a supposedly

unbiased and knowledgeable third-party will likely accept it

at face value and consider himself defrauded.

Third, the fundraiser could elect not to mention the

CFP at all and the donor could decide after the fact that the

CFP was higher than he expected it to be.

annual information return to the Internal Revenue Service. (See IRS

Form 990, Part II. Many states accept a copy of the Form 990 in lieu of a

separate financial report from charities. Petitioner requires charities to

file a copy of their Form 990 in addition to another IIlinois-specific

annual report form.) However, joint cost allocation is done pursuant to a

rule promulgated by the American Institute of Certified Public

Accountants which allows joint aHocation of costs in FFS contracts but

not in most percentage-based contracts. AICPA, Accounting for Costs of

Activities of Not-for-Profit Organizations and State or Local Government

Entities that Include Fund Raising, Statement of Position 98-02, para. 10.

Thus, many states have adopted a rule that necessarily overstates

fundraising fees in percentage-based contracts that obligate fundraisers to

perform public education work for the charity. This misleads the public

into thinking that these charities spend more on fundraising than they

actually do.

This also discriminates against charities which must use

percentage-based contracts. Although there are many reasons to avoid

such contracts (See, ¢.g.,

http://www.afpnet.org/content_documents/2002 AFP Code of Ethics.p

df .), many new charities without grants or other “seed money” have little

choice.

Small or new nonprofit organizations that lack the

expertise or resources to conduct their own campaign

may prefer to negotiate an incentive contract [with an

outside firm] as a way of shifting risk onto those better

able to bear it ... if the campaign is more successful

than anticipated, the nonprofit must give up an extra

share of net receipts. In effect, this extra payment is an

insurance premium. Steinberg, Profits and Incentive

Compensation in Nonprofit Firms, Nonprofit

Management and Leadership, vol. 1 #2, Winter 1990,

137.

15

The ultimate result of all this is that no fundraiser,

whether he operates on a FFS basis or on a percentage basis,

will be able to raise money in good faith without exposing

himself to fraud liability. This is unconstitutional. Even

fundraisers are entitled to know what the law is before they

take action.** They cannot be held accountable because their

actions, which were perfectly honest and legal at the time,

appear fraudulent by fiat of a regulator’s hindsight. Yet this

is precisely the standard by which Petitioner seeks to judge

fundraisers, both those operating under FFS contracts and

those operating under percentage-based contracts.

Because the final CFP under a FFS contract is

especially unpredictable, these appeals will be chilled most.

Thus, charities will be more reliant on the “unethical”

percentage-based contracts” simply because the CFP is more

foreseeable, although frequently higher.

In the world into which Petitioner invites us, charities

and fundraisers stand perpetually on a trap door, waiting to

plunge into oblivion at any moment. They could be

operating in good faith, complying with constitutionally

sound registration, reporting, and disclosure laws, and

entirely innocent of even any intent to defraud. Suddenly,

they can be haled into court to prove their innocence, all the

while suffering incalculable damage to their reputation and

incurring stiff legal bills to protect their First Amendment

right to communicate with the public.

* See. e.g., Rose v. Locke, 423 U.S. 48, 49 (1975) (holding that “[iJt is

settled that the fair-warning requirement embodied in the Due Process

Clause prohibits the States from holding an individual ‘criminally

responsible for conduct which he could not reasonably understand to be

proscribed’”). See. also, Bouie v. City of Columbia, 378 U.S. 347, 352

(1964) (holding that“{t}here can be no doubt that a deprivation of the

right of fair warning can result not only from vague statutory language

but also from an unforeseeable and retroactive judicial expansion of

narrow and precise statutory language”).

*® See supra note 33.

16

IV. Petitioner seeks too much discretion

Throughout this case, Petitioner seeks to vest a

dramatic amount of discretion in the state. He claims the

discretion to determine how the CFP is calculated. He claims

discretion to determine what fundraising fees are reasonable.

He claims the discretion to determine when solicitations are

substantially misleading. He claims discretion to determine

when he has enough evidence to send out survey affidavits.

He claims discretion to determine when he has enough

executed survey affidavits to serve a complaint. In all, and

considered along with the implications of the theory he seeks

to impose, this is a power of dramatic scope and reach. It

seems reasonable to ask whether Petitioner will exercise this

discretion fairly and impartially.

It appears that Petitioner may have a political test for

fraud prosecutions. Petitioner claims that Respondents’ fee

was too high and fraudulent when VietNow received only

15% of the money raised. However, Petitioner had no such

objections to an Illinois charity fundraising event that only

passed 17% of the money raised along to charities.

This Illinois millennium gala was quite misleading by

the standards proffered by the Attorney General. Donors

were told it was a “charity ball” and that the proceeds would

go to charity. Donors paid $500 or $1000 to attend and they

were informed that they could take a charitable tax deduction

for all but $250, which was the fair market value of the meal

and entertainment. A reasonable donor could easily assume

that if the value of the meal and entertainment was $250, then

the remaining $250 (of the $500 ticket, or 50% of the donor’s

payment) or $750 (of the $1000 ticket, or 75% of the donor’s ~

17

payment) paid would be donated to charity.*° Nevertheless,

only 17% of the revenue ever went to charity.*”

Much of the rest was spent on fundraising fees and

expenses. A well-connected full-time state employee already

earning $100,000 annually was paid an additional $43,800

(more than double the money that went to one charity) to

organize the single event. $145,000 was spent on catering.

$350,000 was spent on one entertainer alone.**

There is every indication that the fundraiser allowed

donors to believe that a substantial portion of their ticket

price would go to charity, when, in fact, only 17% did. Yet

the Attorney General refused to investigate the matter.

It is unclear why this event was never investigated or

prosecuted for charitable fraud. The Attorney General

explained that “the amount of money we’re talking about that

was spent on overhead expenses and vendors ... given the

nature of the event, doesn’t suggest they’ve run afoul of the

law, which would prompt this office to do something. If

there’s information beyond that, give it to us.”*” And this

may be a reasonable explanation, but some concern was

expressed that no investigation was undertaken because the

gala’s host, Illinois House Leader Lee Daniels, was a “key

supporter of [Attorney General] Ryan’s bid for governor.”

* And he would find a sound foundation for this belief in the Internal

Revenue Code and Regulations. 28 U.S.C. § 6115 (2003)

*” Novak and McKinney, Ryan Benefit Ball Gave Just 17%, Chicago

Sun-Times, September 10, 2001.

* Ibid.

39 Ibid.

“ Although it seems a similarly reasonable explanation could be made for

Respondents, to wit: they conducted and paid all expenses for VietNow’s

public education campaigns; they recruited new donors each year; and the

independent, uncompensated board of directors was pleased enough with

the arrangement to renew the contracts. This sounds at least as

reasonable as the Attorney General's explanation for the millennium gala,

particularly since there is no evidence that Respondents spent as lavishly

as — ball” spent on catering and entertaining.

1

18

This unexplained difference in treatment of the

instant case and the millennium gala raises the question of

whether, under Petitioner’s theory of fraud, some fundraisers

will be exempt from prosecution by various state Attorneys

General and, conversely, whether others will be singled out

for prosecution based on their political ties, political beliefs

or persuasions, or lack thereof.

Petitioner argues that his prosecution theory will not

“invite arbitrary prosecution of charities whenever the

Attorney General believes their fund-raising expenses are

‘unreasonable.’ What is important under the law of fraud,

and what Illinois alleged here, is not what the Attorney

General believes in the abstract, but what the victims

specifically understood based on what Respondent actually

told them.”

Again, the facts undermine Petitioner’s claim. The

genesis of this case was Petitioner's belief that Respondent’s

public education work on behalf of VietNow was negligible

ora sham. Petitioner believed that Respondent’s contractual

fee represented compensation for fundraising and nothing

else, despite the contracts in his possession proving the

contrary. Petitioner then sent out survey affidavits that

misled donors into believing that “80% or more of [the

donor’s] donation would be used for professional fund

raising expenses.”

It is particularly difficult to believe Petitioner’s claim

that his relief would not “invite arbitrary prosecution of

charities” when one compares the dogged, decade-long

prosecution of this case through four courts to the utter

indifference Respondent showed to investigating the “charity

gala” which turned only 17% of funds raised over to charity

but was sponsored by a key political supporter. Overall, it

* Pet. Br. at 28 n. 23 (emphasis in original).

19

appears that Petitioner's theory accretes far too much

discretion in his office to pass constitutional muster.*’

In the end, Petitioner seeks to subject every charity or

commercial fundraiser soliciting contributions from the

public to fraud liability at any time. His power would be

circumscribed only by his own discretion, and he seeks the

same license for every other state and local prosecutor in the

United States.

CONCLUSION

Under the jurisprudence of Schaumburg, Munson,

and Riley, and for the foregoing reasons, Petitioner cannot

constitutionally premise a fraud complaint on a cost of

—s percentage and his relief should therefore be

enied.

Respectfully submitted,

Charles H. Nave

Counsel of Record

* See, e.g., Smith v. Goguen, 415 U.S. 566, 575 (1974) (invalidating a

“standardless” legal theory that “allows ... prosecutors ... to pursue their

personal predilections.) See also, City of Chicago v. Morales, 527 U.S.

41, 63-64 (1999).

APPENDIX:

Amici Curiae

Abbe & Associates:

Philanthropy Solutions

Arlington, TX

Adams, Hussey &

Associates, Inc.

Washington, DC

Amergent

Peabody, MA

Black Mountain

Communications, Inc.

Scottsdale, AZ

Carl Bloom Associates,

Inc.

New York, NY

Charitable and

Philanthropic Management

Counsel

South Boston, MA

Craver, Mathews, Smith

and Company

Arlington, VA

Creative Direct Marketing

International

Annapolis, MD

Creative Direct Response

Crofton, MD

DMW, LLC

Braintree, MA

donordigital.com, LLC

San Francisco, CA

Epsilon Data

Management

Burlington, MA

GSB Associates, Inc.

Trumansburg, NY

Jeremy Squire &

Associates, Ltd.

Oakton, VA

The JM Advancement

Organization

Sarasota, FL

KMA Direct

Communications

Plano, TX

Lautman & Company

Washington, DC

Mailworks, Inc.

Chicago, IL

Mal Warwick and

Associates, Inc.

Berkeley, CA

Mansfield & Associates,

Inc.

Alexandria, VA

McGrath and Company

Westmont, IL

MDS Communications

Corporation

Mesa, AZ

Meyer Partners

Palatine, IL

New Designs

Frederick, MD

Public Interest

Communications, Inc.

Falls Church, VA

Quadriga

New York, NY

Sanky Perlowin

Associates

New York, NY

Share Group, Inc.

Somerville, MA

Steve Cram and

Associates

Fairfax, VA

Synergy Direct Marketing

Solutions

Fairlawn, OH

Warfield and Walsh, Inc.

Alexandria, VA

Whitney Associates

Portland, OR