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Fidelity’s Promises on Trial After Donated Stock Value Drop

Oct. 19, 2020, 8:46 AM

Monday marks the start of a virtual trial to determine whether a Fidelity vehicle for charitable giving negligently lost millions in donations and taxes for a wealthy couple by liquidating their donated stock too quickly.

The case was brought by Emily and Malcolm Fairbairn, a couple that decided to donate about $100 million, mostly in the form of stock from Energous Corp., a publicly-traded company. Their lawsuit, filed in the U.S. District Court for the Northern District of California, claims that misconduct by Fidelity Investments Charitable Gift Fund reduced their donation by about $9.6 million and cost them about $3.3 million in tax losses.

The lawsuit shines a light on donor-advised funds, an increasingly popular type of charitable vehicle. In such funds, donors give money or other assets to a fund sponsor, which then disperses donations to charitable causes over time. And with Fidelity, the case zeroes in on a commercial donor-advised fund connected to a financial institution. While such funds have nonprofit status, the for-profit financial institutions connected to them stand to make money through management and investment fees.

Donor-advised funds can provide tax benefits. They allow donors to claim an immediate deduction for the full value of a donation while spreading out its disbursement over years. Donors can also sometimes use the funds to reduce their capital gains tax by donating assets like company stock without first liquidating it, as the Fairbairns did.

The Arguments

The multi-day trial will focus on whether Fidelity Charitable made and then broke legally binding promises about how to liquidate the donated stock.

The Fairbairns have said that Justin Kunz of Fidelity Family Office Services, which provides services to the wealthy, induced them to make the donation by making several promises. The couple claims that they were promised that Fidelity Charitable wouldn’t sell the stock before 2018, wouldn’t sell more than 10% of the stock’s trading volume, would allow Malcolm Fairbairn to advise on the liquidation, and would use sophisticated methods for liquidating large amounts of stock, so as to avoid a sharp decline in the price.

Kunz denies making the promises and Fidelity pledged in its trial brief to show the Fairbairns were committed to “making a substantial donation by year’s end to offset their tax liability.”

“The Court will have to decide who is telling the truth and who is not,” the Fairbairns wrote in their trial brief.

The trial will also examine whether Fidelity Charitable negligently botched the December 2017 liquidation of nearly 2 million donated shares in Energous. Those shares were sold within a 154-minute period, during which the company’s stock price dropped by about 30%.

Fidelity says it had no duty to the Fairbairns regarding the liquidation, and that there is no evidence it negatively affected the company’s stock price.

Fidelity Charitable will also argue that the donated shares became its exclusive property after the donation, so the Fairbairns can’t get money restored to their donor-advised fund account for any loss to the account.

The Fairbairns say this issue was already resolved in their favor in March, when the court denied Fidelity’s motion for summary judgment in the case.

To contact the reporter on this story: Aysha Bagchi in Washington at abagchi@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; David Jolly at djolly@bloombergindustry.com