Investors battle Fidelity in court in tax-break deal

In the final days of 2017, Malcolm and Emily Fairbarn thought they had a hedge-fund set to hit more than $ 200 million in income. He prepared a large charitable donation, using his relationships with Fidelity Investments and an increasingly energy stock to maximize his tax cuts.

This did not happen as he had hoped. Now, Fairbairns and Fidelity’s charitable arm are facing off in a controversial federal court lawsuit.

Fairbairns says Fidelity Charitable lured them into telling them how and when the shares would be sold, then violated those promises and stopped the transaction. Nishtha refused to make such promises and said that its business was fair.

The case puts a spotlight on the so-called donor-advised funds managed by firms including Fidelity, Mohra Group and Charles Shabazz. Corp.

Donor-aided funds had $ 121.4 billion as of 2018 according to the National Philanthropic Trust.

For investment firms, funds can help attract and retain high-net worth clients. Donors get a tax rebate when giving cash or securities. Investments are then tax-free and distributed to the operating charity on the recommendations of donors, which act as a charitable checking account.

Obstacles: Although donors can generally take those recommendations and funds into consideration, the donors should reduce legal control over the property to get tax breaks. This tension sits at the center of the Fairbairn case.

The Fairbarns were running in 2017 to meet donations for tax cuts. He authorized the donation of 1.9 million shares of Energous Corp.

On December 28, Fidelity Charitable, then worked to ensure the stock to Fidelity.

The timing seemed ideal: Energous’s price jumped that week after government approval for its wireless charging technology.

On December 29, Fidelity sold those shares – about 10% of the company in 154 minutes – as the price plummeted from a closing high of $ 31.57 to $ 19.45. Fairbairns argues that Fidelity’s quick sales flooded the market and pushed the price down.

At one point Fairbairns had $ 61 million in stock, but ended up with a $ 52 million tax cut and $ 44 million to direct donations to charities, including Lyme Disease Research. Those amounts were lower than they expected, and they can demand compensation for tax deductions and replenishment of their donor account.

The virtual trial began this week in federal court in Northern California and resumed on Monday; It focuses on whether loyalty broke promises and handled stock sales recklessly. If fidelity is found liable, a later stage will determine potential treatment for Fairbarns.

Mr. Fairborn testified that he knew that Fidelity Charitable owned the stock, when donations and reductions were completed in 2017 and could sell it. But he said he was told that the sale would happen in 2018 and he could advise Fidelity Charitable on the sales strategy. As the price fell on December 29, he thought of the one who sold so much energized stock – only to learn in January that this Fidelity Charitable was selling the shares he had given.

“I was upset and angry,” Mr. Fairburn told the court. “Generally, I do not get upset very often. It is only when I feel that I have been lied to. ”

Under cross-examination, Fairbairns admitted that promises were not written about the timing and manner of the sale of the stock.

Donor-aided funds are increasingly popular, and Fidelity Charitable is a giant in the region. In the year ended June 30, 2019, it had approximately 127,000 accounts, collected $ 8.6 billion, donated $ 6.1 billion and held $ 31 billion.

For donors who manage millions, but billions, the funds may be more attractive and efficient than private foundations, which have strict rules requiring annual payments.

But charitable objectives sometimes conflict with investment firms’ profit motives.

Messages displayed during the lawsuit showed Fidelity employees offering a discounted fee to attract Fidelity Charitable at JPMorgan Chase & Co. Justin Kunz, who managed Fidelity’s relationship with FairByans , Defended the use of words like “win”. Business “in an internal email to describe their discussion with the couple.

At various times, Mr. Kunz described his role in testimony as facilitating donors’ charitable efforts, showing how Fidelity’s financial-services professionals could help with Fairbear’s complex assets. At other times, he described a contest against JP Morgan.

Fairbairn’s case illustrates how commercially sponsored funds differentiate themselves by emphasizing how they can handle wealth-rich people, said Brian Mithandre, an accounting professor at Ohio State University who Are not involved in the case.

“Being a sponsor of a donor-advised fund is somewhat of a commodity,” he said in an interview. “If loyalty doesn’t take away my wealth, I can definitely find someone. Customer service becomes a big deal. ”

Fairbairns says they were won by Mr. Kunz’s promises of selling “gentle” stock, designed to protect the share price from damage in a sophisticated way. Which can be a challenge with such a large share of small stocks like Energus.

His lawyers displayed messages among Fidelity’s staff, leading to speculation that Mr. Kunz was too loose.

“I know that I have not made any of the promises they are alleging,” Mr. Kunz testified.

Funds generally follow donors’ recommendations to give money to donors, but they do not have them. Technically, once Fairbairns donated their stock, they no longer owned it and had no legal control over subsequent sales.

“Just like you can’t keep your cake after you have eaten it, you can’t control a charity with the property after it’s under your control,” said David Marcus, an attorney with Wilmarhel, who represents allegiance Is charitable, stated in his introductory argument.

Fairbairns pointed to internal loyalty messages to support his argument that stock sales were inundated. A December 29 message described the result of the sale as “ugly”. A January 2018 email from Mr Kunz described the business as “outlined”, although he testified that he parroted Mr Fairbairn’s details.

Fairbourne said that any trader would have fired his company, Ascend Capital, for supplying so much of the same stock at once.

“It was, literally, the worst-executed trade I’ve seen when I looked at it,” he said.

Fidelity Charitable says its sales did not fall on December 29. The stock has never captured its late 2017 highs and closed Friday at $ 2.55.

“Unlike Fairbairns hedge funds, Fidelity does not place bets on charitable stocks. The charity takes a conservative approach,” said Mr. Marcus. “They are blaming loyalty for not doing the market perfectly on time.”

Write Richard Rubin at [email protected]

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