Tuesday, July 18, 2006
Court Allows Evidence of Telemarketing Fees in Charity Fraud Case
By a MetNews Staff Writer
A judge does not violate the First Amendment rights of defendants accused of fundraising fraud by admitting evidence that 80 percent of donations went to telemarketers with other evidence of fraud, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
The court upheld the mail fraud and money laundering convictions of Timothy J. Lyons and Gabriel Sanchez, but remanded under United States v. Ameline, 409 F.3d 1073. The case holds that when a defendant was sentenced prior to the U.S. Supreme Court’s decision that the Sentencing Guidelines are advisory only, the defendant is entitled to a limited remand for the purpose of determining whether a new sentencing hearing is necessary.
Judge M. Margaret McKeown, writing for the Ninth Circuit, said:
“Their undoing was not that the commissions were large but that their charitable web was a scam. Donors were told their contributions went to specific charitable activities when, in reality, almost no money did.”
Prosecutors presented evidence that Lyons and Sanchez were longtime friends who, in 1994, devised a scheme in which Sanchez would form a church and Lyons would form a company to raise funds for it. Sanchez formed the First Church of Life, which had no congregation, services or place of worship, and Lyons formed North American Acquisitions to do the fundraising.
The two set up six charities—with sympathetic-sounding names like Children’s Assistance Foundation, AIDS Research Association, and Handicapped Youth Services—under the church’s apparent auspices to receive charitable donations.
NAA outsourced most of the fundraising to unrelated companies. On average, these third-party telemarketers took 80 percent of the donated funds as commissions. NAA kept 10 percent, and 10 percent was deposited into the accounts of the six charities, the evidence showed.
But of $6 million raised for the six charities, only about $4,800 was spent on charitable activities, the government claimed. Instead, Sanchez and Lyons used the funds to pay for personal items, including a sports car, house rent, unrelated legal fees, and medical bills.
After a jury found Lyons and Sanchez guilty, U. S District Judge David O. Carter of the Central District of California sentenced each of them to 15 years in prison.
Lyons and Sanchez appealed on the ground that their First Amendment rights were violated when Carter allowed testimony that the third-party telemarketers received 80 percent of the donations as commissions as evidence of fraud, even though Lyons, Sanchez and the telemarketers had never lied about the cost of fundraising to donors.
They relied on a U.S. Supreme Court holding that, under the First Amendment, the bare failure to disclose high telemarketing costs to donors cannot, by itself, support a fraud conviction.
They argued that “if the fundraiser affirmatively misrepresented the costs of the fundraising, then, and only then, evidence of the costs might be utilized to demonstrate the fraudulent nature of any specific misrepresentations.”
But, McKeown said, when a failure to disclosure high commissions is accompanied by misleading statements designed to deceive, the high costs of fundraising may be introduced as evidence of fraud.
Noting that the evidence was “overwhelming” that the “charities spent virtually no money on charitable activities promised to donors,” the judge wrote:
“Just as the government could not demonstrate fraud simply by showing that 80-90% of contributions went to telemarketing fees instead of charity, neither could it prove fraud solely by showing that 10-20% of donations were not spent on charity, without showing what happened to the remaining 80-90% of the funds.”
Judge Sidney R. Thomas and Senior Judge Samuel P. King, District of Hawaii, sitting by designation, concurred with McKeown.
Assistant U.S. Attorney Ellyn Marcus Lindsay represented the government. John H. Weston of Weston, Garrou & DeWitt in Los Angeles and William J. Kopeny of William J. Kopeny & Associates in Irvine represented Lyons and Sanchez.
The case is United States v. Lyons, 04-50082.
Copyright 2006, Metropolitan News Company