FTC targeting charitable solicitation fraud

The Federal Trade Commission is aggressively targeting deceptive telemarketing schemes soliciting funds for purported charitable purposes. Within the short span of two months, the FTC has brought four cases against telemarketing firms allegedly engaging in deceptive prize promotion schemes to solicit funds by telephone for charitable organizations.

In February, the FTC filed its first enforcement action ever against a telemarketer using a prize promotion scheme to solicit charitable contributions. The complaint filed against National Clearing House Inc. (NCH) alleged that NCH misrepresented that consumers would receive specific valuable prizes in exchange for making a contribution to a charitable organization named Operation Life.

The FTC also alleged that NCH misrepresented the charitable activities of Operation Life. While the complaint against NCH represented the FTC's first enforcement action against a charitable telemarketing program utilizing prize promotion schemes, this action was a precursor of a growing trend, as the FTC has quickly followed suit with three additional actions. In March, the FTC challenged a telefunding program soliciting contributions for a teenage drug and alcohol rehabilitation program purportedly run by AWARE and food banks purportedly run by The Cleaners, a Las Vegas-based food bank. The FTC alleged that the defendants misrepresented the nature and value of prizes consumers would receive if they made a donation, misrepresented the activities the donations would support, falsely represented that a donation was necessary to receive a prize and falsely represented the tax deductibility of the contributions.

According to the complaint, telephone calls were made to consumers promising that they would receive one of five valuable prizes consisting of either a car or a substantial amount of cash. In actuality, according to the complaint, the prize most consumers received typically consisted of either a mass-produced Norman Rockwell lithograph, civil war memorabilia of nominal value or cheap jewelry. The FTC also alleged that the telemarketers falsely represented to consumers that most of their donations would go to the activities of the charity when such was not the case.

The FTC named in this complaint not only the companies and individuals primarily responsible for conducting the telemarketing program, but several defendants who allegedly helped promote the scheme by providing services such as donor leads, customer service support and prizes.

The FTC has obtained a freeze of the defendants' assets to preserve funds for consumer redress and is also seeking an injunction barring defendants from continuing to engage in the allegedly deceptive practices.

Most recently, on April 6, 1994, the FTC charged United Holdings Group, Inc. with using misleading prize promotion schemes to induce consumers to donate to the defendants' charity.

The complaint alleges that the defendants made unsolicited telephone calls to consumers offering them valuable prizes in exchange for a donation to a charity known as Express Line Foundation. The complaint alleges that consumers were told that the minimum prize they would receive was $3,500 in cash. In actuality, however, according to the FTC, the consumers received prizes of only a nominal value.

The FTC also alleged that the defendants falsely represented that the donations were tax-deductible since the charity for which the donations were being solicited was not a tax-exempt organization.

While this recent enforcement activity is obviously indicative of a heightened interest on the part of the FTC into deceptive telefunding programs, these actions also exemplify two significant trends at the FTC.

First, these schemes exemplify the FTC's "root" approach to combating telemarketing fraud. Under this approach, also referred to as the "dandelion theory of liability," the FTC targets not only the fraudulent telemarketers, but others who provide necessary support services to the telemarketing operation. In several of these cases, companies that provided vital support services to the telemarketing operation were also named as defendants and charged with aiding and abetting. At a recent hearing on charitable solicitation fraud before the Senate Commerce, Science and Transportation Committee, Christian S. White, acting director of the FTC's Bureau of Consumer Protection, acknowledged that the FTC has been actively applying the "root" approach in these cases and noted, "By using this approach, the Commission has been able to reach those entities that distance themselves from the deceptive consumer transaction, but whose behind-the-scenes participation is essential to its success."

These cases also exemplify the FTC's recent initiative to coordinate with state attorneys general, local district attorneys, U.S. attorneys and regional offices of the FBI, the Secret Service and the Postal Inspection Service in combating telemarketing fraud. In virtually all of these cases, the FTC acted in close coordination with and was actively assisted by other state and local civil and criminal enforcement divisions.

The FTC is deeply committed to intensifying cooperative efforts among federal, state and local agencies, which means we are likely to see even more cases of this type in the months ahead.

Linda Goldstein is a partner in the New York office of Hall, Dickler, Lawler, Kent & Friedman, a law firm specializing in advertising and marketing law, with particular expertise in direct marketing and telemarketing.

Copyright Technology Marketing Corporation Jun 1994
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