May 31, 2019; New York Times
After having their entire family diagnosed with Lyme disease in 2017 following years of suffering with misdiagnosed symptoms, Emily and Malcolm Fairbairn decided in 2017 to make a $100 million commitment to fighting the illness through donating shares in a promising new technology just approved for market. According to their claims in a lawsuit, Fidelity Charitable, who manages the donor-advised funds where their money finally landed and from which the donations were to have been made, made them certain assurances about when and how the shares would be sold to preserve their worth. To compete with, say, JPMorgan, to whom they had previously donated, “Fidelity Charitable promised sophistication and white glove service.”
Fidelity Charitable aggressively promoted itself as the best choice for the Fairbairns’ charitable giving in 2017. With respect to the Energous stock in particular, Fidelity Charitable made a number of personalized promises: (1) it would employ sophisticated, state-of-the-art methods for liquidating large blocks of stock, (2) it would not trade more than 10% of the daily trading volume of Energous shares, (3) it would allow the Fairbairns to advise on a price limit (i.e., a point below which it would not sell without first consulting the Fairbairns), and (4) it would not liquidate any shares until the beginning of 2018.
But after the Fairbairns donated the 1.93 million shares, Fidelity Charitable promptly—and egregiously—broke each of its promises. It (1) liquidated the entire block of shares in a three-hour window on December 29, (2) accounting for 16% of the day’s exchange-traded volume and an incredible 35% of the volume over the three-hour trading window, (3) using inappropriate methodologies that caused its own trades to compete against each other and drive the share price down still further, (4) without even telling the Fairbairns it was happening, let alone allowing them to advise on a price limit.
The catastrophic result was a 30% run-down of the stock’s value—leaving the Fairbairns with tens of millions less to direct to charitable causes, and reducing the size of their tax deduction by millions more. To make matters worse, in stark contrast to its pre-donation solicitousness, Fidelity Charitable has refused to provide the Fairbairns even a basic explanation or documentation of what went wrong. The Fairbairns have sought information about the liquidation, relevant internal policies, and the compensation that Fidelity Charitable, its affiliated companies, and its employees received from this transaction. But Fidelity Charitable has stonewalled them completely.
What’s going on here? The trick with donor-advised funds is that once the gift is made to the sponsor—in this case, Fidelity—it is legally theirs. What binds the sponsor to the original donor is an agreement to act in good faith and as good stewards, both in handling the subsequent donations to other nonprofits and in handling the assets themselves in the meantime. There would certainly be little long-term upside in not honoring a donor’s intentions because there are too many options for taking one’s business elsewhere. (Or so one would think.) In any case, Fidelity liquidated the stock all at once, an action the Fairbairns claim reduced the stock’s value to the tune of “tens of millions.”
Disagreements like these, though rare, are, according to David A. Levitt of the nonprofit law firm Adler and Colvin, not isolated occurrences, “People are saying, ‘Hmm, I didn’t know this could happen.’ But with attorneys and sophisticated clients, we’re aware that this can happen. There are many issues like this that never make it to a case.”
Vincent Loporchio, a spokesman for Fidelity Charitable, disputes the Fairbairns’ allegations, claiming that Fidelity Charitable’s policy requires that securities are sold as soon as they are received, and that the Fairbairns had known this. “Their claim that they were told something different is entirely false, and not supported by any evidence,” Loporchio said in an email to the Times. Fidelity is fighting the suit, after a judge in United States District Court for the Northern District of California denied Fidelity’s motion for a dismissal back in November.
If Levitt is right about the degree to which these kinds of disputes have been problematic, we may see similar lawsuits from unhappy donors in the future. But, for many DAF sponsors, the donor is the customer. Attempts to keep them happy at all costs to remain competitive could cause other problems. And, to an earlier point, a lack of transparency written into the fund sponsor operations could, for now, pretty much obscure all of that.—Ruth McCambridge