A Look at Lawsuit Filed Against Fidelity Charitable

• Published date: 01 September 2019
• Date: 01 September 2019
• DOI: http://doi.org/10.1002/npc.30636

Bruce R. Hopkins’ NONPROFIT COUNSEL

September 2019 5

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

CHARITABLE GIVING

DECLINED IN 2018

Charitable giving in the United States in 2018 is esti-

mated to have totaled $427.71 billion, a 1.7 percent

decrease from the 2017 amount of $435.1 billion. Giv-

ing by individuals in 2018 amounted to an estimated

$292.09 billion; this level of giving constituted a little

more than 68 percent of all charitable giving for the year.

Grantmaking by private foundations was an estimated

$75.86 billion (17.7 percent of total funding). Gifts in

the form of charitable bequests in 2018 were estimated

to be $39.71 billion (9.3 percent of total giving). Gifts

from corporations in 2018 totaled $20.05 billion (4.69

percent of total giving for that year).

Contributions to religious organizations in 2018

totaled $124.52 billion (30 percent of giving that year).

Gifts to educational organizations amounted to $58.72

billion (13.8 percent); to human service entities, $51.54

billion (12.1 percent); to foundations, $50.29 billion (11.8

percent); to health care institutions, $40.78 billion (9.5

percent); to public-society benefit organizations, $31.21

billion (7 percent); to international affairs entities, $22.88

billion (5.3 percent); to arts, culture, and humanities enti-

ties, $19.49 billion (4 percent); and to environmental and

animals groups, $12.7 billion (3 percent). Gifts to indi-

viduals (e.g., gifts in kind) totaled $9 billion (2 percent),

and unallocated giving was $6.53 billion (1.5 percent).

These data are from Giving USA 2019: The Annual

Report on Philanthropy for the Year 2018, published by

the Giving USA Foundation and researched and written

by the Indiana University Lilly Family School of Philan-

thropy. [1.4] ◆

A LOOK AT LAWSUIT FILED

AGAINST FIDELITY CHARITABLE

As noted in last month’s issue, a lawsuit was filed in

the US District Court for the Northern District of Califor-

nia alleging a variety of misdeeds by the Fidelity Invest-

ments Charitable Gift Fund (Fidelity Charitable) in its

administration of two contributions made to one of the

donor-advised funds it sponsors and administers (Fair-

bairn v. Fidelity Investments Charitable Gift Fund). This

case is being touted in some quarters as being highly

damaging to Fidelity Charitable and donor-advised fund

vehicles in general. Based on the initial pleadings, that

does not appear to be the case. Indeed, this litigation

may well have the opposite effect: rebuffing DAF crit-

ics on the control issue and demonstrating (if further

proof is needed) that sponsoring organizations clearly

have exclusive dominion over money and other property

contributed to them.

Facts

Fidelity Charitable is the largest of the charitable

organizations sponsoring donor-advised funds. At the

beginning of its fiscal year ended June 30, 2017, Fidelity

Charitable held over $16 billion in assets. Because of its

relationship with Fidelity Investments, Fidelity Charitable

(and other sponsoring organizations with similar affilia-

tions) are dubbed by some (including the plaintiffs in this

case) “commercial” sponsoring organizations.

Mr. and Mrs. Fairbairn are wealthy. They were fac-

ing a large income tax liability in 2017. To alleviate their

tax exposure, they made a gift of 1.93 million shares in

Energous, a publicly traded company, generating a large

charitable deduction. This gift was made on December

28 and 29 of that year. On December 29, 2017, Fidelity

Charitable sold the stock.

Fidelity Charitable “admitted” in its answer that

“donors to [its funds] may advise on the investment

of donated assets among a variety of options and that

donors may advise [it] on the distribution of those funds

to appropriate charities.” Fidelity Charitable also admit-

ted that the “funds in Fidelity Charitable DAF accounts

are owned and controlled by [it], not by a donor.”

Allegations

The gifts involved what the complaint terms a “large

block” of Energous stock. Mr. and Mrs. Fairbairn allege

that their account representative at Fidelity Charitable

promised them that Fidelity Charitable would (1) employ

“sophisticated, state-of-the-art methods” for liquidat-

ing this large block of stock, (2) not trade more than

10 percent of the daily trading volume of the shares, (3)

allow the Fairbairns to advise on a price limit, and (4) not

liquidate any shares until the next year.

They allege that the shares were liquidated “for tens

of millions of dollars less” than they would have been if

Fidelity Charitable had not promptly sold the stock and

thus that this “drastic” reduction of share value reduced

their charitable deduction by millions of dollars.

The complaint seeks restitution based on, among

other claims, misrepresentation, breach of contract, and

negligence.

Answer

Fidelity Charitable, in its answer to the complaint,

denies every allegation, including the alleged four prom-

ises. It repeatedly denied that there is any “legal signifi-

cance” to the characterization of a donor-advised fund

as a “commercial” donor-advised fund.

Fidelity Charitable raised 25 affirmative defenses. One

of these defenses (which may prove pivotal if this case is

tried) is based on the duty to read, that is, the causes of

action advanced in the complaint are barred in that the

matters about which the plaintiffs complain “were ade-

quately disclosed” to them and/or they “failed to read

the documents that were provided to them that disclosed