Accountability and Oversight

Frequently Asked Questions
Madigan v. Telemarketing Associates
(formerly known as Ryan v. Telemarketing Associates)


What is the case of Madigan v. Telemarketing Associates?
The Illinois Attorney General has charged a professional fundraising firm, Telemarketing Associates, with fraud because, in the opinion of the Attorney General, the fundraiser charged “excessive” fees to its nonprofit client, VietNow, and failed to tell potential donors about the fees the fundraiser was charging. The Illinois Supreme Court determined that this approach would unconstitutionally restrain other charities from exercising their right to educate and seek support from the public for their issues and causes. The Illinois Court further determined that the Attorney General had not brought sufficient grounds beyond the fundraising fees charged by Telemarketing Associates to justify a charge of fraud.


Why did INDEPENDENT SECTOR file an amicus brief in this case?
INDEPENDENT SECTOR is deeply concerned about fraudulent fundraising activities that harm the public, legitimate charities, and the people charities serve. After reviewing the legal case in Madigan v. Telemarketing Associates, we agreed with the Illinois Supreme Court that the Illinois Attorney General’s approach is not an appropriate way to stop fraudulent solicitations and would put responsible fundraisers at “a constant risk of incurring litigation costs, as well as civil and criminal penalties” based on any one state regulator’s judgment that their fundraising costs were “too high.” We wanted the U.S. Supreme Court to hear our view that in regulating charitable solicitations, government must strike an appropriate balance between protecting the public from fraud and permitting the public to learn from charities about the causes and issues they are addressing.


Why aren’t high fundraising costs an accurate measure of fraud?
Fundraising costs can vary widely for reasons that have nothing to do with fraud. When charities reach out to find new volunteers or raise public awareness about an issue or a cause, they generally ask for donations at the same time. Finding new volunteers and supporters can be very expensive in the short term, even for established nonprofits, and the costs may even exceed any donations that are collected initially—but the long-term benefits can be substantial in helping the charity to achieve its charitable goals. Furthermore, new organizations and charities supporting unpopular causes will almost always have higher fundraising costs. For all of these reasons, the U.S. Supreme Court has found in several previous cases that it is “a fundamentally mistaken premise that high solicitation costs are an accurate measure of fraud.”


But what about the high fundraising costs in Madigan v. Telemarketing Associates? 
In reviewing the facts presented in this case, the Illinois Supreme Court found that the fundraisers “had contracted to perform a wide range of activities,” all of which were funded out of the solicitation fee. Those activities included publication of a quarterly magazine and the maintenance of a live, nationwide, toll-free telephone number. The Court concluded by saying that this case “illustrates the principle that, because of the many different factors that may contribute to high solicitation costs, it is incorrect to assume, as a matter of law, that there is a nexus between high solicitation costs and fraud.”


What can state and federal prosecutors do to halt fraudulent fundraising practices? 
State and federal regulators have a large and growing arsenal of weapons that they may use to combat fraud by charities or their fundraisers. If there is evidence that a fundraiser has lied about the organization that will receive funds, if a paid solicitor falsely claims to be a volunteer or a recipient of services, or if an organization has used a false or misleading name to deceive donors, they can be prosecuted for fraud. If a fundraiser fails to register or file reports required by a state or federal authority or fails to abide by other state and local requirements for charitable solicitations, they will be subject to prosecution and severe penalties. 

An improper relationship between a charity and a professional fundraiser or excessive compensation of a fundraiser can also lead to penalties and possible revocation of the charity’s tax exemption. The courts have established that if a charity operates to a significant degree for the private benefit of a fundraiser, the IRS—and the state—can revoke the charity’s tax-exempt status. The IRS can also impose financial penalties on the fundraiser and force it to repay any excess benefits it has enjoyed at the charity’s expense.


If there are so many weapons available to state and federal regulators, why is there still fraud?
There is no question that state and federal regulators need more resources to oversee the growing number of nonprofit organizations and the increasingly complex regulatory requirements. The nonprofit community is working to increase government funding for the oversight of charitable organizations and fundraising solicitations, and we are working to help the IRS and state officials automate and streamline the filing of annual information returns and charitable registration forms. Currently, regulators much spend too much time processing paperwork, and that slows down the investigation and prosecution of fraud. Yet it will require more than vigilant investigation and law enforcement to stop fundraising fraud. We must also educate and help potential donors protect themselves from fraudulent solicitations.


What about the rights of donors? What can donors do to protect themselves against fraudulent solicitations? 
Donors have a right—and a responsibility—to ask questions about the people and organizations that are asking for their support and about how their contributions will be used. Donors have a right to ask charities to provide clear and honest answers to their questions and to provide written information about their programs and financial operations. We need to do more to teach donors about the many resources available to them to learn and verify information about any charity that is asking for support. Informed donors are the best defense against fraud and the most valuable asset of responsible charities.


Why shouldn’t charities be required to tell donors about their fundraising costs?
Most charities are required to file comprehensive annual reports about their financial operations, including their fundraising costs, with the Internal Revenue Service and they are required to provide copies of those reports, known as the Form 990, upon request. Many charities make copies of those reports, as well as other information, available on their own web sites, and copies of the Form 990s for all charities can be viewed on the Internet at www.GuideStar.org. Most states, and many local government authorities, also require charities to register and file comprehensive reports about their fundraising activities and those reports are also generally available to the public. 

Fundraising costs can vary widely for many good reasons, including the popularity and complexity of the issue, the public’s familiarity with the issue and the nonprofit, and whether the campaign includes mobilization of advocates and volunteers. The costs also vary significantly depending on the accounting methods used and whether one is evaluating a single fundraising campaign or activity versus the overall fundraising costs of an organization. It could be unfair and possibly misleading for fundraisers to discuss this complex issue in the course of a short telephone or direct mail solicitation. Nonetheless, responsible charities will share with donors written financial reports and information about their fundraising costs to any member of the public who requests that information.

While donors may ask—and expect honest answers to—questions about fundraising costs, the U.S. Supreme Court has determined that if the government required a charity to discuss its fundraising costs at the point of soliciting a charitable contribution, it would effectively prevent the charity from delivering its message about issues and needs facing the community. The Supreme Court has repeatedly reaffirmed that charitable solicitations are entitled to the highest degree of First Amendment protection because they are closely linked to informative and persuasive speech, and this protection extends to those who, under contract, raise money for charities. 


If the fundraisers in this case lied to donors about how much of their contributions would go to the charity, shouldn’t they be prosecuted for fraud?
Absolutely. The case before the U.S. Supreme Court is based on a charge that because they described the purposes of the charity, VietNow, without disclosing the fees they would be paid for their services, the fundraisers fraudulently misled donors. If, as the Illinois Attorney General’s amended complaint now alleges, the fundraisers lied directly to potential donors about how much was to be paid to VietNow, such as telling donors that “90 percent or more goes to the vets,” then the Attorney General could and should prosecute them for fraud on those grounds.

While the U.S. Supreme Court has rejected as unconstitutional any attempt by states to compel charities or their professional fundraisers to disclose their fundraising costs to potential donors during telephone solicitations, the law does not permit charities or their fundraisers to lie about fundraising costs.