The past five years have seen a major uptick in FTC enforcement against alleged charity fundraising scams, along with increased multi-state coordination in this space. Regular readers of this blog already know that, by having read this, this, this, and this. On September 15, 2020, the FTC filed a complaint in the U.S. District Court for the Southern District of New York against fundraiser Outreach Calling, its owner and principal Mark Gelvan, two other related organizations, and three additional individuals. The attorneys general of New York, New Jersey, Virginia, and Minnesota joined the FTC as plaintiffs in the lawsuit. Alongside their complaint, the FTC and states filed proposed stipulated orders against each of the defendants.
The FTC and states allege that the defendants engaged in deceptive telemarketing campaigns on behalf of numerous (and now defunct) “sham” charities. According to the complaint, the Outreach Calling entities induced tens of millions of dollars in charitable donations by telling donors that the recipient charities provided assistance to particularly vulnerable populations, such as disabled and homeless veterans, breast cancer patients, law enforcement officers, and children. In fact, say the plaintiffs, the recipient charities spent very little of the money raised – in some cases only 1 or 2 percent of gross donations – on charitable programs. Instead, approximately 90 percent of the funds raised were paid to the Outreach Calling fundraisers; most of the remaining money funded the personal expenses of the charities’ principals.
The FTC and states brought causes of action under Section 5 of the FTC Act, the Telemarketing Sales Rule, and state charity and anti-fraud laws. To resolve the litigation, the parties have agreed to enter into stipulated orders that permanently ban the defendants from charity fundraising and that impose a collective monetary judgment of approximately $58 million. As is typical in cases like this one, the monetary judgment will be suspended because of the defendants’ inability to pay it; however, each of them must surrender certain assets, and Mr. Gelvan will have to sell two homes and grant the FTC a lien and mortgage on three of his properties in order to secure his payment obligations under the proposed order.
The alleged fact pattern here will look familiar to anyone who follows charity fundraising law enforcement trends: (1) a professional fundraiser that keeps a very high percentage – in this case, about 90 percent – of the donations raised for its charity clients; (2) the fundraiser, rather than the charity, driving the campaign; and (3) the presence of charities purporting to benefit certain “heartstring” missions, such as disabled veterans, fallen police officers’ families, children, and women with breast cancer. Familiar as it may be, there are still important lessons to be learned from the FTC’s and states’ actions:
- High Fundraising Costs Leave Little Margin For Error. It is not, I repeat, not illegal for a professional fundraiser to keep a very high percentage of funds raised for a charity as a fee – even 90 percent. High fundraising fees and percentage-based contracts are disfavored by regulators, are frowned upon by charity watchdogs, and violate certain industry codes of ethics, such as that adopted by the Association of Fundraising Professionals. But the practice, by itself, is not unlawful.Thus, law enforcement actions are not focused on the percentage of fees paid to the fundraiser but rather on the representations that the fundraiser makes to prospective donors. When much of the donor’s contribution goes to the fundraiser instead of the charity, regulators may assert that any fundraising claims about a donor’s impact or about the charity’s programs are misleading. Both charities and their fundraisers should script fundraising appeals with care and ensure that claims about the charity’s programs are consistent with the charity’s program expenditures contained in its IRS 990 filing.
- PACs May Be the Next Field of Battle. The proposed orders permanently ban the defendants from charitable fundraising, but (with one exception) these bans do not apply to fundraising for political purposes “where donations shall be used to lobby or fund campaigns for or against candidates, ballot initiatives, or legislation, or fund political influence campaigns.” However, the defendants are prohibited from making any material misrepresentations in their political fundraising, and they must clearly and conspicuously disclose that any political donations are not contributions and are not deductible for federal or state income tax purposes.These provisions may signal the FTC’s and states’ growing awareness that certain charities now opt to form as political action committees (PACs) in an apparent attempt, regulators believe, to avoid the scrutiny of state charity regulators and state laws governing charitable solicitation. Charities should pursue this strategy with caution: state and local regulators have recently brought actions against PACs accused of deceptive fundraising practices.
- It Is Never a Bad Time for a Compliance Check. Beyond deception, certain states also accused the Outreach Calling defendants of compliance leaks, such as failing to register as a fundraising counsel under New York law and failing to make required solicitation disclosures under Minnesota law. And this case serves as an important reminder that the FTC’s Telemarketing Sales Rule applies to telemarketing campaigns conducted by charity fundraisers, just as it does to commercial marketers.
Whether you are a professional fundraiser or a charity, it is never a bad time to review your fundraising and other vendor contracts, your solicitation scripts, and your registration status.