Donors Sue for Losing Millions in their Donor Advised Fund: What both Donors and Charities can learn from Fairbairn v. Fidelity Investments Charitable Fund

July 30, 2019 | Troy McEachren

Fundraising in today’s competitive environment can lead to increased pressure on fundraisers who make promises that cannot be kept. These broken promises can lead to serious litigation and reputational damage. A case presently before the courts in California provides a cautionary tale for both donors and charities.

Emily and Malcolm Fairbairn decided to make a significant donation of $100 million to charity to fight Lyme disease after having been personally affected by the illness.

Having tremendous wealth that was highly complex, the Fairbairns were aggressively solicited by numerous charities associated with large financial institutions; JP Morgan Charitable Giving Fund (“JP Morgan”) and Fidelity Investment Charitable Gift Fund (“Fidelity”) in particular.

The Fairbairns were angel investors in a technology company that had proven to be very successful. Faced with a significant capital gain, the Fairbairns decided to donate a significant portion of the shares of this company.  At the time of donation the value of the shares to be donated was approximately $54 million. They were concerned, however, by the manner and timing of the liquation of the shares. If not executed properly, the liquidation of a large block of shares could cause the share value to crash, decreasing the liquation value available for charitable activities.

JP Morgan’s standard policy was to give donors control over the timing and rate of liquidation while Fidelity had no such policy; its guidelines simply say that it will liquidate stock “at the earliest date possible.” The Fairnbairns allege that Fidelity expressly promised that the liquidation of the shares would occur according to a series of precise representations, such as not trading more than 10% of the daily trading volume of the shares and allowing the Fairbairns to advise on the price limit.  However, it appears that nothing to this effect was put in writing. Persuaded by Fidelity’s aggressive solicitation, the Fairbairns made their donation of a total of 1.93 million shares to Fidelity on December 28 and 29, 2017.

Unbeknownst to the Fairbairns, Fidelity sold all of the shares on the day they were donated, which the Fairbairns claim caused the share price to drop from $28 per share (when the selling started) to $20.61 per share (when the last tranche of shares were sold), resulting in a loss of approximately $5 million. This mass sale, according to the Fairbairns, also negatively affected the value the company and, thereby, the value of the shares they still owned.

The Fairbairns are now suing Fidelity for breach of contract, misrepresentation and negligence. Fidelity is claiming that the Fairbairns knew of Fidelity’s policy of selling on the earliest possible date and that the representations made to the Fairbairns were generalized, vague and unspecified.

While the case is still before the courts, it presently serves as a reminder of the importance to donors of insisting on careful negotiations, due diligence and clear drafting of donation agreements. As for charities, it highlights the perils of fundraising in a competitive environment and of making promises that cannot be delivered and upon which donors will rely.

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