Fidelity Charitable Fund Wins Negligence Suit Filed by Wealthy Hedge Fund Couple

The U.S. District Court for the Northern District of California in San Francisco.(Ken Lund via Flickr)

(CN) — A wealthy couple who donated $100 million of stock to Fidelity’s charitable donor-advised fund did not prove that the fund acted negligently in selling the stock at a time when its price was low, a federal judge in California ruled Friday.

Emily and Malcolm Fairbairn, successful hedge fund managers, filed a lawsuit in 2018 claiming Fidelity Investments Charitable Gift Fund breached their contract by using false promises to compel the couple to donate nearly two million shares of a tech company called Energous. 

They said the fund sold all the stocks in the last 2.5 hours of the trading day, driving down the price of the stock, reducing the value of their contribution by $9.6 million and cost them $3.3 million in tax losses. 

Donor-advised funds allow donors to contribute cash, stocks, bonds and other assets, which are then given to charities over time. This is often used, as in the Fairbairns’ case, to reduce tax bills.

The Fairbairns claimed Fidelity Charitable employee Justin Kunz made four promises to the couple; the fund would not trade more than 10% of the daily trading volume of their donated stock, sophisticated methods would be used to liquidate large blocks of stock in a way that would not start a selling panic, the couple would be allowed to advise on a price limit, and the fund would not sell any of the donated stock until the following year.

In a 22-page ruling, U.S. Magistrate Judge Jacqueline Scott Corley said the couple failed to provide evidence that either those promises were made or that the fund acted negligently.

With regards to the promise the fund would not trade more than 10% of the daily trading volume, Judge Corley said Kunz did indeed make that promise, but the 1.9 million shares sold only represented 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.

The judge also shot down the couple’s claim that their shares were not sold by sophisticated means, noting that the trader “used time-weighted average price and volume-weighted average price algorithms to sell the shares.”

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

Judge Corley also found no evidence to support the couple’s claim that Kunz promised not to sell the stock until the following year or that the couple would be allowed to advise on a price limit.

“There is no contemporaneous written record to support that Kunz made such promises,” the judge wrote. “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.

“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. Of course, that policy was also in the written materials Fidelity Charitable provided to the Fairbairns,” she added.

While donor-advised funds aren’t well known, they contributed $8.3 billion to charitable organizations last year, according to the National Philanthropic Trust. 

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