The charitable arm of Fidelity Investments on Friday won a lawsuit brought by a wealthy couple over the handling of stock sales tied to a tax break.
failed to prove their allegations that Fidelity broke its promises or engaged in negligent trading, U.S. Magistrate Judge Jacqueline Scott Corley ruled following a trial last year. The lawsuit stemmed from the final days of 2017, when the Fairbairns were trying to minimize a tax bill on more than $200 million of deferred hedge-fund income.
“While Fidelity Charitable did not the sell the shares to which it held legal title in the manner the Fairbairns—sophisticated hedge fund managers—would have done, and while in hindsight Fidelity Charitable might have handled the donation differently, the Fairbairns have not come close to proving that what Fidelity Charitable did violated the standard of care,” she wrote.
The case in federal court in northern California offered an unusual window into how donor-advised funds such as Fidelity Charitable woo potential donors and handle their assets. The increasingly popular funds offer flexibility to wealthy individuals, who can get immediate tax breaks and retain the ability to advise on future distributions to charities without the restrictions that govern private foundations.
To lower the tax bill on their hedge-fund income, the Fairbairns made donations of
stock to a donor-advised fund at Fidelity Charitable. That happened just after Energous had won government approval for its wireless charging technology and the stock price jumped. The price dropped just after their donation, as Fidelity was selling the shares they donated, and that decline limited how large the couple’s charitable deduction could be.
The Fairbairns, who started the Ascend Capital hedge fund, at one point had $61 million in stock. They ended up with a $52 million tax deduction and $44 million in the account for directing donations to charities. They were arguing that Fidelity’s actions shrunk their potential tax break and limited how much money eventually ended up going to operating charities, including Lyme disease research they have been funding.
In a statement issued through her attorneys, Emily Fairbairn said the couple was sad about the outcome.
“We are very experienced market participants and believe that Fidelity’s unprofessional trading cost charities we care about a 30% destruction in value and millions of dollars,” she said. “We knew it would be a David and Goliath struggle, but we wanted to give a voice to the charities and today, they lost.”
Vincent Loporchio, a Fidelity spokesman, said the company was “pleased with the decision and happy to put the matter behind us.”
The couple contended that Fidelity made and broke several promises about how and when it would sell the Energous stock. And they alleged that Fidelity’s trading was negligent, done in blocks so large that it drove down the price of the stock. In the lawsuit, the couple pointed to internal Fidelity conversations and documents about how poorly the trading had gone.
Judge Corley noted the absence of contemporaneous records of any promises Fidelity made from late 2017. She also found that the gap between the time that the Fairbairns learned of the stock sale in January 2018 and their first complaints to Fidelity weighed against the idea of broken promises.
“Malcolm’s testimony that he was too angry and needed to cool off would make sense for a few hours, or maybe a few days, but 10 days of silence is hard to understand,” she wrote.
Judge Corley also determined that Fidelity’s selling of the Energous stock wasn’t negligent, even though it likely did push the price down.
“That price impact matters only if Fidelity Charitable did something, or failed to do something, that breached the standard of care,” she wrote. “It did not.”
Mrs. Fairbairn said one lesson is that investors donating assets should get a liquidation plan in writing.
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