Heard on the Web: Important Legal Ruling Impacts Planned Giving Marketing

Heard on the Web: Important Legal Ruling Impacts Planned Giving Marketing

News story posted in U.S. Court of Appeals on 10 September 2009| 4 comments
audience: National Publication | last updated: 18 May 2011


Writing for onPhilanthropy.com, attorney Jonathan Gudema reports the U.S. Court of Appeals for the 9th Circuit has issued an opinion in a case involving Robert Dillie this past June. Mr. Dillie operated a fraudulent foundation between 1996 and 2001. This foundation was in actuality a ponzi scheme which issued $55 million in gift annuities to over 400 donors, sold through investment advisers who were receiving commissions on the sales of new gift annuities. He is now serving 121 months in prison for his crimes but the legal fallout from his nefarious operation lives on.

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Marketing CGAs post Dillie

Given the court's well-reasoned opinion, charities may still market CGAs without implicating or running afoul of securities laws, provided that the charity does not pay comissions/fees to solicitors of this instrument. Incidentally, paying commission or fees to transact planned gifts violates the model ethical code of gift planners. In my experience, most charitable gift annuity programs, such as the JCF and CCF programs, are organized and operated with a high degree of integrity and ethics.

Why I posted the original

Why I posted the original story and think it is practically important is several-fold. Yes, if you don't sell CGAs with commissions, technically the PPA exempts you from SEC regulations. The problem with the Dillie case was that the court determined that the CGAs were investment products by virtue of their marketing (not by virtue of selling with commissions). In other words, a court can make a decision irrespective of a Statute or our own so-called ethical codes. Courts don't operate in our arena - they look at something and decide what it is based on the facts. Looks like a duck, walks like a duck, it is a duck. The PPA only exempts CGAs (sold w/o commissions) from SEC regs - it doesn't stop a court from applying investment product standards to CGAs in civil litigation. Anyway, the biggest concern I have is that this could give fodder for plaintiff attorneys representing disgruntled CGA donors or worse, disgruntled family members of CGA donors. The warning to the charitable world is to shore up you marketing - get away from investment language, and make sure you are doing everything you can to make sure unethical things aren't happening.

re:Heard on the Web: Important Legal Ruling Impacts Planned

The Court looked at the various gift annuity promotional advertisements used by Mr. Dillie, all of which are very similar to those used in the marketing of gift annuities throughout the non-profit community. And, the Court had no difficulty at all in concluding that gift annuities were in fact an investment contract under federal securities law, despite specific exemption from such laws under the Philanthropy Protection Act of 1995 (

CGAS - Dillie - Warfield v. Bestgen 9th Circ 2009

I agree. The potential for litigation based on representations related to "returns" on public marketing brochures is very real. Some materials are very aggressive. As the court in Warfield reiterates, what are donors "lead to expect"? Are donors being lead to believe that recovery of capital is profit? Cash flow doesn't necessarily mean a dividend or profit. Some marketing material makes CGA comparisons to investment alternatives as if cash flow recovery is the same as "return" on investment. The materials give scant information or warning that a large part of the cash flow to donor is return of principal. While this is a serious problem, I think the combination of this with representations, or the lack thereof, related to actuarial risk generates a large litigation risk for charities. For example, on page 7660 of the Warfield court, the court provided that, with respect to the gift annuity, "return" depended upon living to actuarial life expectancy. "Return" in this sense would include both return ON principal, as well as return OF principal. I cannot recall seeing CGA marketing materials indicate this risk of loss in clear fashion. CGAs behave like straight life annuities without any hedge bets available in commercial products. If the donor dies early, they might have transferred significantly more than the 10% gift they thought they were making. Sure, there might be some tax deduction to the estate, but cash is cash. I can almost hear the words "but Dad never knew he was making that big of a gift." Return OF principal differs from return ON principal and return OF principal matters. I believe charities need to immediately scrutinize their marketing material with an eye toward what is the donor "lead to expect?" Children of donors have been known to seize on less. Douglas S. Delaney, JD, LLM Managing Director CHIRA USA, LLC (843) 815-9777

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