The charitable arm of Fidelity Investments on Friday won a lawsuit brought by a wealthy couple over the handling of stock sales tied to a tax break.
Malcolm and Emily Fairbairn failed to prove their allegations that Fidelity broke its promises or engaged in negligent trading, U.S. Magistrate Judge Jacqueline Scott Corley ruled following a trial last year. The lawsuit stemmed from the final days of 2017, when the Fairbairns were trying to minimize a tax bill on more than $200 million of deferred hedge-fund income.
“While Fidelity Charitable did not the sell the shares to which it held legal title in the manner the Fairbairns—sophisticated hedge fund managers—would have done, and while in hindsight Fidelity Charitable might have handled the donation differently, the Fairbairns have not come close to proving that what Fidelity Charitable did violated the standard of care,” she wrote.
The case in federal court in northern California offered an unusual window into how donor-advised funds such as Fidelity Charitable woo potential donors and handle their assets. The increasingly popular funds offer flexibility to wealthy individuals, who can get immediate tax breaks and retain the ability to advise on future distributions to charities without the restrictions that govern private foundations.
To lower the tax bill on their hedge-fund income, the Fairbairns made donations of Energous Corp. stock to a donor-advised fund at Fidelity Charitable. That happened just after Energous had won government approval for its wireless charging technology and the stock price jumped. The price dropped just after their donation, as Fidelity was selling the shares they donated, and that decline limited how large the couple’s charitable deduction could be.