By Kevin G. Demarrais, The Record (New Jersey)
The U.S. Supreme Court agreed Monday to review a long-standing legal loophole that has allowed telemarketers to pocket most of the money they raise on behalf of charities.
In an Illinois case that could have broad implications in New Jersey and throughout the nation, the court said it will decide whether the Constitution’s free-speech guarantee protects fund-raisers who do not tell donors that only a small fraction of their contributions will go to charity.
Previous court rulings have struck down state efforts to regulate how much of the $ 200 billion in charitable contributions Americans make annually goes for the stated purposes, and how much remains with telemarketers.
The nation’s highest court will reexamine those rulings based on state fraud laws. The court plans to hear arguments early next year and rule by the end of June.
“There are different issues here,” said Bennett Weiner, head of the BBB Wise Giving Alliance, the charity oversight unit of the Better Business Bureau.
“Other cases concerned regulations that put actual limits on how much charities should be spending on programs, how much on fund raising,” Weiner said.
In overturning a Maryland law in 1984, Justice Harry A. Blackmun wrote for a 5-4 majority that the law “imposes a direct restriction on protected First Amendment activity,” and that the goal of preventing fraud could not justify this.
The Maryland statute was flawed in that “it operates on a fundamentally mistaken premise that high solicitation costs are an accurate measure of fraud,” Blackmun wrote.
In the Illinois case, the state is saying the public was deceived because very little was going to the charity, Weiner said. “They are very different questions, but similar types of issues.” The issues are similar to those uncovered by The Record in August in an investigation of fund raising for police unions and police fraternal organizations in New Jersey.
Most of the lodges of the New Jersey Fraternal Order of Police (FOP), New Jersey Patrolmen’s Benevolent Association (PBA), and superior officers’ associations earmarked most of the money they raised for charities for its intended purposes, but telemarketers for 14 of 143 lodges that raise the most money from the public retained more than three-quarters of what they collected.
Among them were several of the most aggressive fund-raisers, including the state FOP, which spent $ 2.4 million to raise $ 3.1 million, leaving $ 656,274 -- or less than 22 percent -- for programs.
In the Illinois case, only 3 percent of the money raised by a telemarketer on behalf of needy Vietnam War veterans actually reached the veterans.
Standards set by the BBB Wise Giving Alliance call for no more than 35 percent to be spent on fund raising, Weiner said. “If not, they will not meet our standard.” Reports detailing how much money a charity spends on programs, management expenses, and fund-raising expenses are usually available to the public in annual filings the charities make with the states and the Internal Revenue Service, but telemarketers rarely offer that information when soliciting funds, critics say.
“Unfortunately, abuses are only too common,” Illinois Attorney General James E. Ryan said in his appeal of a state Supreme Court ruling that stopped the state from going after the telemarketer.
In his filing, Michael Ficaro, an attorney for the telemarketing company, said that to allow the lawsuit “would place all charitable fund-raisers at the mercy (of) the attorney general’s whims. Potentially any gross fee can be called too high. Potentially any contractor arrangement can be called unreasonable.” Blackmun’s opinion in Maryland vs. Munson was one of three cases in the 1980s in which the Supreme Court said free-speech guarantees limit the states’ power to regulate fund raising.
As long as the organizations accurately report where the money goes, even if their declarations are couched in “weasel words to stay inside the white lines,” the states have no basis to take action, said Mark Herr, former director of the New Jersey Division of Consumer Affairs.
Only when they go outside those lines, as has happened several times in recent years, have regulators been able to take action.
In recent years, New Jersey has filed several “badge fraud” suits, including one in 2000 that charged Community Affairs Inc. of Linden and four police unions with pocketing almost $ 1.9 million donated to charities.
In a 12-count complaint, the state said the fund-raiser’s agents posed as local or state police officers and told thousands of prospective donors they were raising money to buy bulletproof vests, help widows and orphans, and provide scholarships.
The telemarketers and unions actually represented jail guards, and barely 2 percent of the money -- about $ 35,000 -- went to charity or was spent on vests, while $ 1.6 million was paid to the telemarketer, the Division of Consumer Affairs said.
The case is pending.
Eighteen states joined Illinois in asking the Supreme Court to hear the Illinois case. New Jersey was not among them, but the state “will watch with interest how the court rules “and its potential impact on New Jersey’s charitable giving, Reni Erdos, Herr’s successor at Consumer Affairs, said in a statement.