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From the April/May 2007 Watchdog Report

Bungled Charity Raffles Become Gateway to Fraud Allegations

A St. Louis court ordered Gateway to a Cure, a charity that funds spinal cord injury research, to pay $2 million in restitution in what became a pricey raffle ticket scandal. The scandal involved 5 failed raffles: Grand Giveaway-Kansas City (GGKC), Grand Giveaway-St. Louis (GGSL), 7th Annual Dream Home Giveaway, Dream Home National Raffle and the Scholarship Raffle.

According to the Missouri attorney general's petition, the trouble started in October of 2003 with the debut of two $1,000-ticket raffles, the GGKC and the GGSL. Each raffle featured the grand prize of a million-dollar home and brand new Bentley. Other prizes included a Maserati Spyder valued at $98,500 and 7 carat designer diamond necklace valued at $35,000.

Gateway limited the number of tickets presumably to entice consumers: only 2,000 tickets available for GGKC and 1,000 for the GGSL, according to the A. G's petition. For those who could afford to drop $1,000, the odds of winning a luxury prize looked good. The charity's web site touted the raffles as a "non-conventional means" of raising funds that will "place [the charity] outside the standards of fundraising set for charities." It went on to state that in lieu of traditional donations, Gateway relied on "unique raffles and giveaways to meet the growing requests for funding."

But lagging ticket sales for all 5 raffles belied Gateway's non-conventional fundraising efforts. The charity did not even sell enough tickets to meet the breakeven point for any of these raffles, according to the attorney general's petition. Gateway only sold 1,409 of the 2,000 tickets available for the GGKC. The GGSL ticket sales fared even worse: only 234 were sold out of 1,000 available tickets, far below the breakeven point of 900 tickets. For the Dream Home National Raffle (Orlando) offering $25 tickets, the petition notes that if the dismal sale rates continue, it will take Gateway 28 years to reach a minimum breakeven point.

Rather than avert financial disaster, Gateway prolonged it. According to the attorney general's petition, over 6 months after the raffles began, Lou Sengheiser, the founder of the charity, sent a letter to GGKC raffle participants announcing a tentative drawing date of September/October 2004, nearly a year later. But by August 2004, the charity had still not set a date. Instead, Mary Bolling, Gateway's executive director, sent another letter that month to participants claiming that:

Everyone is getting very anxious for the drawing and we are very close to setting a date. At present, we are in need of your support to complete the ticket sales for our raffle. As you know, we are only selling 2, 000 tickets for the chance to win, and we have sold well over half that number, so we are SO CLOSE to completing our goal!!!

The drawing did not take place that fall, nor the next winter, spring or even summer of 2005, according to the petition. Mary Bolling sent yet another letter in January of 2005, claiming again that the charity was "so close" and that "we ONLY need to sell approx 300 more..." On July of 2005 Gateway's web site urged consumers to "Hurry! Less than 150 tickets remain!" Eventually, Gateway set a drawing date of September 23, 2005 but made the drawing contingent on a minimum sale of 1800 tickets.

But the drawing did not take place then either, according to the attorney general's petition. Instead, exactly a week before the drawing date, Sengheiser sent yet another letter that finally disclosed the truth: Gateway had not met its ticket sales goals and needed to postpone the drawing. The drawing would take place on February 14, 2006 regardless of the number of tickets sold.

In January 2006, after more than two years of stringing participants along, Gateway posted the following disclosure to its website: "Insufficient sales (less than the break-even number of tickets state [sic] on each raffle) on any raffle will result in a 50/50 cash split to a single winner," according to the petition.

The GGKC raffle finally took place on February 14. According to the Kansas City Star, 500 people crowded the Metro North Shopping Center as the winners were announced. S. Clark of Texaco, Illinois won the home and the Bentley but instead chose a cash settlement, according to the petition. Had S. Clark truly wanted the home, Gateway would not have been able to provide it because the purchase contract for the home expired in April of 2004.

The petition also alleges that the winner of the Maserati, S. Fitzgerald of New York City, did not claim the prize and may not exist. Upon investigation, the A.G's office learned that S. Fitzgerald did not live at the address Gateway provided and has not lived there since January of 2003, long before Gateway began the raffles in October of 2003. Not that it mattered because Gateway did not purchase a Maserati and thus, had nothing to give anyway. The same was true for the GGSL—the purchase contract on that home expired in February of 2005.

The lagging ticket sales from the big raffles did not deter Gateway from offering more of the same. In May of 2005, according to the attorney general's petition, as ticket holders from both Grand Giveaways eagerly awaited the drawing, Gateway unveiled its 7th Annual Gateway to a Cure Great American Dream Home Giveaway. Tickets cost $100 and the goal was to sell 4,000. And in June of 2005, the charity offered a different raffle, the Dream Home National Raffle at $25 per ticket.

A St. Louis Daily Record article quoted Kelly Kress, attorney for Gateway, as stating that the charity got in over its head. Kress also claimed that it was a challenge to raise funds on behalf of a select portion of the population, people with spinal cord injuries, according to the article.

But being overwhelmed would not explain all the allegations against Gateway. The petition alleges that Gateway sold duplicate tickets for the same ticket number, sold some $ 1000 tickets for less than that amount, and gave away tickets to settle debts. Gateway also could not account for all the funds raised from the GGKC raffle.

The petition also accuses Gateway of bilking the winners if the raffles did not break even. In this case, Gateway would split the proceeds 50/50 with the winner. But at least two winners received checks for less than the amount that represented the winner's share of the proceeds.

Bungling raffles and misleading consumers were not the only wrongdoings the State of Missouri prosecution alleged. Other allegations against Sengheiser include:

  • Using telemarketing to sell household goods in bulk by allegedly representing that some of the proceeds would go to charity.
  • Using the charity's tax-exempt status to purchase autos for private individuals so that these individuals could avoid paying state and local sales taxes. The private individuals would then reimburse the charity.
  • Using charitable funds to pay his mortgage and personal credit card debt.

Gateway apparently failed to respond to the attorney general's request for discovery, the legal term for the fact-finding that takes place after a lawsuit is filed. In its Judgement and Order, the court punished Gateway by entering a default judgment against it, ordering it to pay civil penalties of $1.6 million and set up a restitution fund of about $2 million so that ticket purchasers may get some of their money back.

AIP strongly encourages donors to bypass the flashy raffles and donate directly to a charity. Not only does the charity realize greater benefits, donors do as well because their donations are not covering expensive raffle promotion and prize giving. But for those who want the thrill, the big lesson of the Gateway fiasco is to select a trustworthy charity, verify the time frame for the drawing and make sure the charity owns the prizes outright before purchasing the ticket.

 
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