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Fidelity Charitable Wins Lawsuit Over Stock Donation

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What You Need to Know

  • A couple charged that false promises were made to induce them to contribute stock to a donor-advised fund.
  • The plaintiffs maintained that Fidelity Charitable had assured them that it would liquidate shares gradually and use state-of-the-art means to do so.
  • The judge found no contemporaneous written record to support that such assurances had been given.

A federal district court judge in Northern California has ruled in favor of Fidelity Charitable in a negligence lawsuit brought by hedge fund managers Malcolm and Emily Fairbairn, Courthouse News Service reported Friday.

The Fairbairns filed the lawsuit in 2018, accusing Fidelity Charitable of mishandling a contribution to their donor-advised fund account of $100 million of stock in late 2017.

Their donation represented about 10% of their ownership of a publicly traded company called Energous, a wireless charging technology venture, in which they were angel investors. After the company’s value soared by 39% in December 2017, Fidelity Charitable sold off the stock within three days.

It did this, the Fairbairns charged, without their authorization and with unsophisticated trading strategies that caused the stock’s value to plunge. As a result, they had less money in their DAF and a smaller tax deduction.

The Fairbairns maintained that Fidelity Charitable had assured them that it would liquidate shares gradually and would use state-of-the-art means to do so. It also agreed on price limits to ensure that the stock retained its value, they said.

Fidelity Charitable made these promises, they said, to induce them to transfer the stock. 

In their lawsuit, the couple alleged that Justin Kunz, a Fidelity Charitable employee, had assured them that the fund would not trade more than 10% of the daily trading volume of their donated stock, would use sophisticated methods to liquidate large blocks of stock in a way that would not start a selling panic, would allow the couple to advise on a price limit, and that the fund would not sell any of the donated stock until the following year.

Fidelity Charitable denied that it made such agreements. It said the Fairbairns were aware of its standard policy that it can sell securities as soon as they are received. 

The Ruling

U.S. Magistrate Judge Jacqueline Scott Corley wrote in her ruling that the Fairbairns failed to prove that either those promises were made or that the fund had acted negligently.

Corley said Kunz had indeed promised that the fund would not trade more than 10% of the daily trading volume, but that the 1.9 million shares the fund sold represented only 6.7% of the daily trading volume.

“The Fairbairns’ attempt to characterize the 10% of daily trading volume representation as a promise to trade 10% of the volume trading during the period that Fidelity was actively trading the Fairbairns’ donated shares as opposed to the volume of the entire trading day is unpersuasive,” Corley wrote.

On the couple’s assertion that the fund had used unsophisticated trading strategies, Corley said the trader “used time-weighted average price and volume-weighted average price algorithms to sell the shares.”

The algorithms, she wrote, divided the parent orders into smaller child orders and used other means to hide the trades from the market. “These steps are consistent with Emily’s testimony that sophisticated trading would involve hiding the trades.”

As to the Fairbairns’ claim that Kunz had promised that the stock would not be sold until the following year and that the couple would be allowed to advise on a price limit,  the judge found no contemporaneous written record to support that Kunz had given such assurances. 

“There are no Kunz emails in which he implies that he understood no trading would occur until 2018 or that the Fairbairns would have the opportunity to advise on the sell price,” she wrote.

“Having been expressly told that Fidelity Charitable’s policy is to sell automatically upon donation, it would have been unreasonable for Emily to later rely on an oral promise that no shares would be sold until 2018 rather than automatically as is the policy.”

Corley noted that Fidelity Charitable had provided the Fairbairns materials that laid out that policy.

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