If you have worked closely with charities sponsoring donor-advised funds (DAFs), there is a common back-andforth with donors that takes place. It goes something like this:
Donor: I’d like to do…
Charity DAF Sponsor: We can’t do…
Donor: But Charity X said they would…
In the case of Emily and Malcolm Fairbairn vs. Fidelity Investments Charitable Gift Fund (“Fidelity Charitable”), currently playing out in a Federal court in Northern California, this make-believe exchange was very much real, and the outcome of the case is very high-stakes for DAF donors and the nonprofit community as a whole. The core claim made by the Fairbairns is that Fidelity Charitable failed to abide by promises made to the Fairbairns in a series of conversations tailored to win a sizable donation in a competitive process against other commercial DAF options. Regardless of who wins this case, the impact will be felt throughout the sector for years to come.
There are many contours to the Fairbairns’ story. The Fairbairns, successful hedge fund managers, decided to make a charitable donation of 2 million shares in a company called Energous, a maker of wireless charging devices. The donation was said to be worth $100 million, but because of alleged “botched trades” when the shares were sold by Fidelity Charitable, $20 million of value was lost, thereby substantially reducing the Fairbairns’ charitable deduction and reducing the amount ultimately available to make grants through the DAF account. Fidelity Charitable contends, among other things, that that the sale of the securities was conducted in accordance with its policy: to immediately sell securities it receives. The Fairbairns, however, contend that Fidelity Charitable told them before they donated that it would not sell more than 10% of the Energous daily trading volume and that the Fairbairns could advise on the best selling price for the securities. In reality, all of the shares were sold over a two and half hour period, and the Fairbairns were not consulted about the date of the sale or the selling price.
A careful read of the discovery, in this case, reads almost like a suspense novel including testimony, emails, and texts describing the lengths to which FMR LLC (“FMR”), the financial advisory group associated with Fidelity Charitable, went to convince the Fairbairns to make a substantial contribution to Fidelity Charitable as opposed to other charities operating DAF programs. While much is unveiled throughout the reading of the discovery materials, the most disturbing part of it all is the exposure of certain beliefs central to what might be thought of as the underbelly of fundraising, namely, when commercial interests move ahead of philanthropic interests and when donors view the charity as a vehicle of their own. There is much to be said about this case, and we will look at various aspects of the case in the coming weeks, but from the outset, an important question emerges; what is the Board of Directors of Fidelity Charitable thinking about this case and its potential liability? Some history puts this question into perspective.
Background of Fidelity Charitable
Fidelity Charitable was founded in 1991 and is what many characterize as a commercial donor-advised fund because it both has a relationship with an investment management firm and primarily receives donations to fund its donoradvised fund program. Despite its characterization, it is an independent nonprofit organization and a public charity under US tax law. Its primary charitable activity is grantmaking, and it does so through the donor-advised fund program it sponsors. Though Fidelity Charitable may have been the first charity to be founded with a relationship to a commercial financial firm (and, at present, both the largest by far and having facilitated billions in donations to charitable causes), this model is not unique. Many such charities exist today. Numerous other financial firms, including Vanguard, Schwab, TIAA, BNY Mellon, Morgan Stanley and Goldman Sachs, all have similar relationships with public charities, which they founded. While in each of these cases, the vast majority, if not all, of the assets are invested within products managed by the commercial investment firm, the charities vary significantly with respect to how they are staffed. Some have a small staff and outsource to an independent third-party many of the necessary tasks to operate the charity, while others have some type of shared services agreement with the investment firm.
Fidelity Charitable does not have any paid employees. Instead, according to the discovery (and other publicly available information), there is a master services agreement between Fidelity Charitable and FMR, a for-profit entity that houses many of the employees who work for the “Fidelity entities.” Pursuant to the master services agreement, FMR does all of the work to administer Fidelity Charitable’s DAF program, including both the fundraising and investing. On its face, there is nothing wrong with Fidelity Charitable hiring a thirdparty administrator to outsource substantial portions of its operational needs. It is well-established law that the board of a nonprofit can delegate numerous responsibilities to others. However, in order for such a delegation to be proper, the board must monitor the performance of the delegate and exercise the requisite standard of care in determining that the ongoing delegation is in the best interests of the organization. Given what we know of the case so far and the fiduciary responsibilities of the board, the critical question is: must the Board of Fidelity Charitable fire FMR?
FMR’s Actions at Issue
According to the record developed during discovery and preliminary motions made by the parties, FMR allegedly induced the Fairbairns to make their contribution to Fidelity Charitable, in part, on promises “it would employ stateof[sic]-the-art share liquidation methods, not trade more than 10% of the Energous daily trading volume, and not trade any shares until the new year” (the donation in question having been made at the end of December). The record is replete with testimony, emails and other evidence chronicling both the efforts of FMR to convince their “clients” (the Fairbairns) to make a contribution, as well as the Fairbairns’ requests to both Fidelity Charitable and J.P. Morgan to compete for their business by offering them the best fees and other benefits. Taken as a whole, both sides can make many claims about whether or not the actions taken were what one would reasonably expect to occur between a charity and donors interested in making a charitable contribution.
The question remains, however: were the actions taken by FMR employees while ostensibly working on behalf of Fidelity Charitable appropriate? Were those actions consistent with the organization’s mission, charitable purposes and its definition of ethical practice? If the Board does not take any action, will it be exposed to liability? While the determination of what action the board could or must take is beyond the scope of this discussion for many reasons, including that we do not know all of the facts, it stands to reason that the Board is in a difficult position.
Even assuming the Board had no prior knowledge of FMR’s conduct as described in the discovery process of the litigation, and what will ultimately come out during the trial
itself, the facts are all being laid out for the Board, as well as current and potential donors and grantees, state attorneys general, and the entire world to see. With that being the case, it would be interesting to know why Fidelity Charitable has not brought FMR into the lawsuit or asserted any claims against FMR. Maybe Fidelity Charitable has a tolling agreement (i.e., an agreement to extend the time in which Fidelity Charitable could sue FMR) in place reserving its right to make a claim again FMR in the event of an adverse result in the litigation, or better still, maybe Fidelity Charitable already has an indemnity agreement in place so that it will incur no financial loss. These are all, of course, interesting questions and will bear themselves out in due course. However, there are imporant lessons to these nonprofits, and especially for those that seek donations from the general public.
Lessons for Charities from the Fairbairn Case
First and foremost, while it is well and good for a charity to delegate to third-parties, it is critically important to have a process in place to both monitor the delegate’s actions and confirm that the actions taken are proper. Just because all appears to be well, that may not be the case. It is incumbent on an organization to regularly review the work done by delegates with a critical eye.
Second, organizations that raise funds need to monitor the activities of those that are raising funds on their behalf. This is done in a variety of ways. For example, establishing appropriate policies and procedures (e.g., an appropriate gift acceptance policy) is a start, but organizations need to go further, particularly when key responsibilities are outsourced. Having a policy on a subject is only valuable if people are educated about it and know it will be enforced. Organizations should proactively provide training to their fundraisers around issues pertaining to the gifts they may be soliciting and what they can and cannot promise a donor.
Third, consider how those responsible for fundraising are compensated. In this case, FMR sounds to be a “professional fundraiser” under many state laws since the master service agreement paid FMR to raise funds on behalf of Fidelity Charitable. This would subject FMR to registrations and reporting requirements in various states. Was FMR, and ultimately the individuals working for FMR involved with the Fairbairns, being paid based upon the funds raised? If so, did the prospect of increased payment contribute to the alleged actions that gave rise to this lawsuit? What would a state attorney general learn in the event of an investigation?
There is no doubt that this case will produce innumerable lessons for the entire nonprofit community. However, the true scope and magnitude of the great work that has been advanced over the years by Fidelity Charitable should not be lost as a result of this case, no matter what happens.
© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 304