Crime & Federalism

Did you know that when a telemarketer calls asking you to donate to a charity, that up to 85% of that money goes to the telemarketing company as a "commission."  I didn't either.  But Tim Lyons and Gabe Sanchez, old college buddies, did.  And they used this knowledge to make millions.

Lyons formed a church and several sham charities.  Sanchez formed a telemarketing-coordinating company.  Lyons would retain Sanchez's company to raise funds for the church and charities.  Sanchez would retain third-party telemarketing companies to call people up asking for money.

When some sucker  kind-but-naive person donated money to the charities, the telemarketing company kept 80% - leaving 10% each for Sanchez and Lyons.  Of the money Sanchez helped Lyons raise for the church and other charities, Lyons spent almost none of it on charitable endeavors, even though Lyons told donors that he would use the money he received for good words. 

After making several million dollars, a reporter learned of the scam and published an expose.  Finally, federal prosecutors indicted Lyons and Sanchez.  They were convicted.

On appeal, Lyons and Sanchez argued that the government impermissibly introduced the high commissions paid to telemarketers as evidence of fraud.  This was a very strong argument.  After all, every charity that users telemarketers does this.  The evidence thus was not probative of guilt.  Realizing, of course, that a court would likely hold any evidentiary error harmless, the defendants argued that introducing evidence of fundraising cost violated the First Amendment.

Under the First Amendment a telemarketer soliciting money from you on behalf of a charity cannot be compelled to tell you that 80-85% of the money is going to the telemarketers' bottom line.  After all, begging for money is protected speech.  And even though the high commission is unseemly, it's not fraudulent.  Indeed, keeping mum about the high commission is constitutionally protected. (!)  So Lyons and Sanchez argued that constitutionally-protected conduct cannot serve as evidence of criminal wrongdoing.  Makes total sense, right?

Wrong, according to a three-judge panel of the Ninth Circuit.  United States v. Lyons (here).  After several pages of unpersuasive analysis, the panel concludes: "Neither Madigan nor the First Amendment insulates defendants from criminal prosecution for fraudulent misrepresentations about their charitable endeavors. Rather, the government is constrained from charging that high fundraising costs per se are tantamount to fraud."

Isn't what the panel is doing here a textbook case of bootstrapping?  After all, Lyons and Sanchez could not have been prosecuted for giving the high commission to telemarketers.  Yet all along they could have been prosecuted for lying about doing good works with the money they received, as that's a textbook case of misrepresentation. 

So what this opinion allows prosecutors to do is bootstrap otherwise constitutionally-protected (and thus non-prosecutable) conduct onto conduct that can be properly criminalized.  And at the end of the case we seem to be left with this rule: High fundraising costs is relevant evidence of fraud, but standing alone would be constitutionally insufficient to support a fraud conviction.