Fairbairn et al v. Fidelity Investments Charitable Gift Fund, No. 3:2018cv04881 - Document 257 (N.D. Cal. 2021)
Court Description: OPINION FOLLOWING BENCH TRIAL. Signed by Magistrate Judge Jacqueline Scott Corley on 2/26/2021. (ahm, COURT STAFF) (Filed on 2/26/2021)
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Fairbairn et al v. Fidelity Investments Charitable Gift Fund Doc. 257 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 1 of 22 1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 EMILY FAIRBAIRN, et al., 7 Plaintiffs, 8 OPINION FOLLOWING BENCH TRIAL v. 9 FIDELITY INVESTMENTS CHARITABLE GIFT FUND, 10 11 United States District Court Northern District of California Case No. 18-cv-04881-JSC Defendant. 12 Malcolm and Emily Fairbairn, a married couple, are financially successful former hedge 13 14 fund managers. This lawsuit arises out of their donation of Energous stock to their Fidelity 15 Charitable Donor Advised Fund at the end of December 2017. The Fairbairns allege that to 16 induce them to transfer the stock, Fidelity Charitable made promises about how the donation 17 would be liquidated. They contend those promises were broken and that, in any event, Fidelity 18 Charitable sold the stock in a negligent manner which harmed the Fairbairns by reducing the 19 amount of their tax deduction and leaving less money in their donor advised fund to be distributed 20 to charity. The Court held a bench trial by video on the liability questions on October 19, 20, 21, 21 23, 26, 27 and 28 and heard closing arguments on December 4, 2020. This Opinion constitutes the 22 Findings of Fact and Conclusions of Law required by Federal Rule of Civil Procedure 52.1 BACKGROUND 23 Nearly 20 years ago the Fairbairns founded Ascend Capital where they managed over $3 24 25 billion in funds. For the first seven years of the Fairbairns’ hedge fund, they were able to avoid 26 paying income tax on compensation earned from offshore funds. In 2007, however, Congress 27 28 1 All parties have consented to the jurisdiction of a magistrate judge pursuant to 28 U.S.C. § 636(c). (Dkt. Nos. 11 & 18.) Dockets.Justia.com Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 2 of 22 1 changed the tax laws to require repatriation by December 31, 2017 of the income sheltered abroad. 2 On their accountants’ advice, the Fairbairns decided they had to recognize all of that off-shore 3 income—approximately $250 million—in December 2017, which would lead to a very large tax 4 bill. To reduce their tax liability caused by the repatriation, they decided to make a very large United States District Court Northern District of California 5 6 charitable donation in 2017. In late 2016 they began discussing how they would make their large 7 2017 donation. Malcolm and Emily2 had not always agreed on their method of giving to charity. 8 Emily preferred to give cash, and in the past, they had only given cash. Malcolm, however, would 9 have preferred to donate appreciated assets, such as stocks. He preferred to donate stocks because 10 “if you bought a stock at a dollar and it’s now worth $10, they [the government] will give you $10 11 worth of a tax donation if you donate it to a charity.” (Dkt. 242 at 153.3) And by donating stock 12 the charity receives more money than if the donor first sells the asset, pays the taxes, and then 13 donates the remainder to the charity. Thus, with the donation of appreciated assets, the donor 14 obtains a larger tax deduction and the charity receives more money. The Fairbairns owned stock in a small company known as Energous which trades on the 15 16 NASDAC as WATT. They invested in Energous before its initial public offering (IPO), as part of 17 the IPO, and afterwards and paid from approximately $3 to $12 per share, depending on when 18 purchased. Energous was developing technology that would allow for wireless charging of 19 devices at a distance. Its management had told its investors that it expected WATT’s technology 20 to receive Federal Communications Commission (FCC) approval by the end of 2017; thus, around 21 the time the Fairbairns were contemplating making a large donation because of the repatriation of 22 their offshore income they were also expecting their WATT shares to appreciate “a little” in light 23 of the anticipated FCC approval. For the large 2017 donation Emily considered starting a family foundation that they could 24 25 have controlled themselves, but she decided it would take too much of her time. The Fairbairns 26 27 28 The Court uses the Fairbairns’ first names when referring to each individually to avoid confusion. 3 Record Citations are to material in the Electronic Case File (“ECF”); pinpoint citations are to the ECF-generated page numbers at the top of the document. 2 2 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 3 of 22 1 settled instead on giving to a donor advised fund. A donor advised fund (DAF) is a special type of 2 financial account that individual donors open at a 501(c)(3) nonprofit organization that has usually 3 been created by a for-profit financial institution. When donors contribute to their DAF account, the 4 nonprofit organization takes legal title to the assets, but the donors retain the right to advise how 5 the donated funds are invested and ultimately distributed to charitable organizations. A DAF 6 enables a donor to get an immediate tax deduction but defer the actual donation of the funds to 7 individual charities until later. Prior to 2017, the Fairbairns had made two $10 million donations 8 to a JP Morgan Donor Advised Fund and a $20 million donation to a Fidelity Charitable Donor 9 Advised Fund. In 2017, the Fairbairns were particularly interested in having their donated funds 10 United States District Court Northern District of California 11 support Lyme disease research. During what the Fairbairns refer to as the “prospecting period,” from late 2016 through 12 February 2017 they communicated with Fidelity Charitable and JP Morgan about making a large 13 donation of appreciated assets. Justin Kunz, of the Fidelity Family Office, had discussions with 14 Emily in October 2016 and February 2017, and those discussions picked up again mid-way 15 through December 2017. 16 On December 20, 2017, the FCC approved the Energous technology. Emily was aware of 17 the approval and in fact assisted with drafting the Energous press release. After the market closed 18 on December 26, 2017, the FCC approval became public. The price of WATT rose dramatically 19 on the after-market trading. The next morning Emily called Kunz to discuss donating WATT 20 stock to the Fairbarins’ Fidelity Charitable DAF. The Fairbairns continued to communicate with 21 Kunz over email and by telephone throughout December 27 and 28. They then transferred 22 approximately 700,000 shares from a Morgan Stanley account to their Fidelity Charitable DAF on 23 the afternoon of December 28 and the remainder of the shares, approximately another 1.23 24 million, on December 29. Fidelity Charitable sold all 1.93 million shares on the afternoon of 25 December 29 for proceeds of approximately $44 million with a fair market value of $52 million, 26 giving the Fairbairns a 2017 tax deduction of $52 million. The average sale price was $22 per 27 share. Before December 27, WATT had never traded above $22 and since December 2017 has 28 never traded above $23; indeed, as of the date of this opinion WATT is trading at around $5 per 3 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 4 of 22 1 share. The Fairbairns filed this lawsuit on August 18, 2018. They insist that in liquidating their 2 3 donated WATT shares Fidelity Charitable violated promises Kunz made to induce them to donate 4 the shares to their Fidelity Charitable DAF. They also contend that Fidelity Charitable botched 5 the selling of the WATT shares: by selling all 1.93 million donated shares in the last 2.5 hours of 6 the last trading day of the year, Fidelity Charitable drove down the price of the stock, thus 7 reducing the Fairbairns’ tax deduction and the amount of money in their DAF. They bring state 8 law claims for intentional misrepresentation, promissory estoppel, breach of contract, violation of 9 the California Unfair Practices Act, and negligence. 10 I. The Fairbains allege that Fidelity Charitable representative Justin Kunz made four separate 11 United States District Court Northern District of California THE PROMISE CLAIMS 12 promises on December 27 or December 28, 2017 to entice them to donate 1.93 million-WATT 13 shares to their Fidelity Charitable DAF: 14 15 16 17 18 • Fidelity Charitable would not trade more than 10% of the daily trading volume of Energous shares, • Fidelity Charitable would employ sophisticated, state-of-the art methods for liquidating large blocks of stock, • Fidelity Charitable would allow the Fairbairns to advise on a price limit (i.e., a point below which Fidelity would not sell shares without first consulting the Fairbairns), and • Fidelity would not liquidate any of the donated Energous shares until the new year. 19 20 21 22 23 24 25 26 27 28 (Dkt. No. 1 at ¶ 65.) The Fairbairns contend that Fidelity Charitable did not do as Kunz promised and therefore Fidelity Charitable is liable for common law misrepresentation, breach of contract, promissory estoppel and violating California’s unfair competition law. Each of these claims requires the Fairbairns to prove by a preponderance of the evidence that Kunz made at least one of the alleged promises. If the promise was made, the Fairbairns must also prove that Fidelity Charitable did not do as promised, and finally that the Fairbairns relied on/ were harmed by the untrue/broken promise. See CACI 1900, Civ. Code, § 1710(1) 4 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 5 of 22 1 (misrepresentation claim); CACI 303 (contract claim); Graham–Sult v. Clainos, 756 F.3d 724, 2 749 (9th Cir. 2014) (promissory estoppel); Peterson v. Cellco P’ship, 164 Cal. App. 4th 1583, 3 1590 (2008) (UCL). 4 10% Daily Trading Volume Kunz affirmatively promised Emily Fairbairn that when Fidelity Charitable liquidated the 5 6 donated shares it would not trade more than 10% of the Energous daily trading volume. Kunz does not deny that he told the Fairbairns, or at least Emily, that Fidelity Charitable United States District Court Northern District of California 7 8 would trade only 10% of a donated stock’s daily trading volume; instead, he maintains that he told 9 them that ”typically” Fidelity Charitable would trade no more than 10% of daily trading volume. 10 The Court finds otherwise. When Kunz learned on January 2, 2018 that Fidelity had sold 11 essentially all the Fairbairns’ donated WATT shares on December 29, 2017, he asked in an 12 internal Fidelity email: “I thought we didn’t sell more than 10% trading volume.” (Ex. 119.001.4) 13 His statement is consistent with his having represented to the Fairbairns—as he had been told— 14 that as a policy matter and to avoid flooding the market Fidelity Charitable does not sell more than 15 10% of the daily trading volume. And in another internal January 18, 2018 email he admitted that 16 he told Malcolm that Fidelity looks “to maintain no more than 10% of the daily trading volume. 17 You guys confirmed this with me as well.” (Ex. 149.) His email makes no mention of the 18 “typically” qualifier. When later in January the Fairbairns accused “the DAF” people of making 19 several misrepresentations to them, he told others within Fidelity that he would respond to the 20 Fairbairns by being “neutral as to the 10% statement.” (Ex. 175.) In other words, he would not 21 deny the 10% daily trading volume policy because that is what he had represented. While Kunz represented that that Fidelity Charity would not sell more than 10% of the 22 23 daily trading volume, it is undisputed that on December 29, 2017 Fidelity Charitable sold less than 24 10% of WATT’s trading volume for that day: approximately 28.4 million WATT shares were 25 traded during the trading day and of those Fidelity Charitable sold 1,931,985 shares, amounting to 26 approximately 6.7%—well below the promised 10%. 27 28 4 Exhibits are referred to by their exhibit and page number where applicable, i.e., Ex. 45.002 refers to Exhibit 45 at page 2. 5 United States District Court Northern District of California Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 6 of 22 1 The Fairbairns’ attempt to characterize the 10% of daily trading volume representation as a 2 promise to trade 10% of the volume trading during the period that Fidelity was actively trading the 3 Fairbairns’ donated WATT shares as opposed to the volume of the entire trading day is 4 unpersuasive. Before the Fairbairns realized that Fidelity had, in fact, traded less than 10% of the 5 daily trading volume, they described Kunz’s promise as, just that, 10% of the daily trading 6 volume. In a January 23, 2018 email Emily told Kunz that the DAF people represented that the 7 shares would be “no more than 10% of the daily volume.” (Ex. 174.) And in their complaint— 8 filed less than nine months after the promise was allegedly made—the Fairbairns expressly and 9 unequivocally alleged the promise was about not exceeding 10% daily trading volume. (Dkt. No. 10 1 ¶ 65 (emphasis added).) Further, at trial, when discussing the percentage of the volume sold 11 while trading shares of a specific company, the Fairbairns and even their experts more 12 comfortably referred to “participation rate” not “daily trading volume.” At the time this promise 13 was made (in February 2017 at least), no one knew when the shares were going to land free and 14 clear in Fidelity Charitable’ s legal possession so that “immediate” liquidation would begin. The 15 shares were also thinly traded at that time. Thus, it is not surprising that they would have been 16 discussing “daily” trading volume. 17 18 The Sophisticated Means Promise The Fairbairns have not proved their sophisticated means promise by a preponderance of 19 the evidence. While the complaint alleges that Kunz promised to use sophisticated means and 20 “state of the art” methods for liquidating large blocks of stock, Malcolm testified that Kunz never 21 used those words, and Emily did not recall Kunz using those words. And there is nothing in the 22 documentary evidence that supports that promise having been made. While the record supports a 23 finding that Kunz told the Fairbairns that Fidelity Charitable would be “gentle” with their 24 donation, that does not support a finding that he promised them Fidelity Charitable would use 25 “state of the art” or sophisticated means; instead, in his January 16, 2018 email Malcolm stated 26 that being gentle meant trading less than 10% of trading volume. (Ex. 128.) While Kunz certainly 27 touted Fidelity’s trading experience and processes to encourage the Fairbairns to donate to Fidelity 28 Charitable, he did not make the specific promise the Fairbairns alleged in the complaint. 6 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 7 of 22 In any event, the Fairbairns also have not proved that Fidelity Charitable did not use United States District Court Northern District of California 1 2 sophisticated and “state-of-the art” trading methods in its liquidation of the 1.9 million shares of 3 Energous stock. Emily testified, and the documentary record confirms, that she wanted Capital 4 Markets Group to liquidate the donated shares and a trader from Capital Markets Group did so. 5 Further, the trader used time-weighted average price (TWAP) and volume-weighted average price 6 (VWAP) algorithms to sell the shares, and the algorithms divided the parent orders into smaller 7 child orders and took other steps to hide the trades from the market. These steps are consistent 8 with Emily’s testimony that sophisticated trading would involve hiding the trades. Further, the 9 Fairbairns’ expert Dr. Harris testified that the algorithms Fidelity Charitable utilized “are a typical 10 tool used by traders to sell large blocks of stock.” (Dkt. No. 245, 811:6-11.5) No expert testified 11 that the algorithms were not sophisticated or state-of-the art, only that they were not reasonably 12 used. 13 The Advise on Price/Not Sell Until 2018 Promises The Fairbairns have not proved by a preponderance of the evidence that Kunz told the 14 15 Fairbairns that they could advise on the price at which Fidelity Charitable would sell the donated 16 WATT shares or that Fidelity Charitable would not sell a single share of WATT until January 17 2018. 18 There is no contemporaneous written record to support that Kunz made such promises. 19 There are no Kunz emails in which he implies that he understood no trading would occur until 20 2018 or that the Fairbairns would have the opportunity to advise on the sell price. This omission is 21 especially damaging to the Fairbairns’ contention that they were specifically promised that no 22 WATT shares would be sold until 2018 given that in February 2017 Emily was told that the shares 23 would be liquidated automatically upon donation. In response to an inquiry from Emily about the 24 sale of donated shares, Christian Fernandez of the Fidelity Family Office emailed Emily on 25 February 14, 2017: 26 27 28 5 Trial transcript citations are to the trial transcript page, not the ECF header page. 7 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 8 of 22 1 ... 2 After reviewing with our Private Donor Group, they were able to confirm that shares are automatically sold once they arrive in the DAF. For thinly traded shares it may take longer to liquidate all shares if it is a large amount, but once shares are sold the proceeds settle into the investment pools in the DAF. . . . 3 United States District Court Northern District of California 4 5 (Ex. 1504.001.) Having been expressly told that Fidelity Charitable’ s policy is to sell 6 automatically upon donation, it would have been unreasonable for Emily to later rely on an oral 7 promise that no shares would be sold until 2018 rather than automatically as is the policy. Of 8 course, that policy was also in the written materials Fidelity Charitable provided to the Fairbairns. 9 Further, Emily failed to mention or even hint at either promise in writing even though she 10 confirmed by email Fidelity Charitable’ s promise to give the Fairbairns a 20% discount on the 11 administrative fee for the entire block of donated shares. Indeed, on December 29 she emailed 12 Kunz to confirm the discount was for all the shares, not just after they reached a certain threshold. 13 (Ex. 112.) Emily also emailed Kunz on the evening of December 27 to confirm that she wanted 14 control as to when her donation got priced—meaning which day her shares were deemed 15 donated—because it would mean millions of dollars for the Fairbairns’ tax deduction given that it 16 is computed based on the average share price of the stock on the day of donation. (Ex. 718; Dkt. 17 No. 250 at 26 (confirming that Emily was referring to the timing of the donation).) Neither in that 18 email, nor any other email did Emily ask for control over the timing of the donation’s liquidation 19 or suggest that such control had already been promised to her. Nor did she ask for the opportunity 20 to advise on a price limit for the liquidation. 21 Malcolm also failed to make any contemporaneous record of the alleged promises. Many 22 of the Fairbairns’ Energous shares had been on loan and had to be recalled so that the Fairbairns 23 could donate them to Fidelity Charitable by December 29, 2017. When there was uncertainty 24 whether the recall could happen in sufficient time, Malcolm floated the idea of having the DAF 25 loan the shares back out. Kunz responded to Malcolm on December 28: “I have several people 26 working on the inquiry of lending shares out in the DAF. There is a stipulation regarding having 27 ‘strings attached’ back to the donor which this could potentially fall under. Please stand by.” (Ex. 28 836.) Malcolm responded: “No conditions. We just need to facilitate the transfer before year end.” 8 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 9 of 22 1 (Id.) While Malcolm’s comment was about no conditions on the transfer of shares, given Kunz’s 2 emphasis on the requirement that there be no strings be attached to the donation, if there existed 3 other “strings” (especially “strings” that contradicted Fidelity Charitable’s written policies), such 4 as a condition that no shares would be sold until 2018 and that the donors had the right to advise 5 on the liquidation price—one would reasonably expect Malcolm to highlight that condition. He 6 did not. United States District Court Northern District of California 7 There is also no evidence from internal Fidelity Charitable communications that Kunz 8 made such promises on December 27 or 28. For example, on the morning of December 28, there 9 are internal communications regarding Malcolm’s request that the DAF loan out the shares 10 following donation, as discussed above. The request is described as a “stipulation” that Malcolm 11 made about the donation, and Fidelity Family Office representative Kyle Casserino and Fidelity 12 Charitable Director of Investments Mike McClean banter over a messaging app that such 13 stipulation will never get approved. (Ex. 948.) There is no evidence that Kunz ever 14 communicated to McClean or anyone else the Fairbairns’ alleged other stipulations. 15 The Fairbairns’ narrative appears to be that Kunz went rogue and made the promises 16 without any basis for doing so, but they never explain why he would he make those promises 17 when they would be discovered as fraudulent as soon as the liquidation concluded. And they 18 never explain why Kunz inquired as to whether the DAF could loan the donated shares, and told 19 Malcolm that might not be possible, but yet apparently made no inquiry as to whether trading 20 would not start until January 2018 and instead boldly made that promise without any basis for 21 doing so. As it turned out Fidelity Charitable was able to retrieve the loaned shares in sufficient 22 time for the Fairbairns to donate them in 2017, but the discrepancy weighs against finding the 23 advise on a price/not sell any shares until 2018 promises were made. 24 The Fairbairns’ conduct after they learned that the shares had all been sold on December 25 29 also weighs against a finding that the promises were made. When Malcolm learned on January 26 5, 2018 about the December 29 sale of the WATT shares, he did not confront Kunz by email or 27 telephone about the alleged broken promises. Indeed, it was not until January 15, 2018 that the 28 Fairbairns even mentioned to Fidelity Charitable that the liquidation had violated promises made 9 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 10 of 22 1 to them. Malcolm’s testimony that he was too angry and needed to cool off would make sense for 2 a few hours, or maybe a few days, but 10 days of silence is hard to understand. Further, in January 2018, when the Fairbairns were communicating with Kunz about the United States District Court Northern District of California 3 4 liquidation, they never asserted that Kunz had made those promises. Instead, in their 5 communications with Kunz they stated they “were told,” or “the DAF people” had told them, 6 without suggesting that Kunz was the DAF person who told them. Emily’s testimony that she said 7 “the DAF people” rather than “You” because she did not want to accuse Kunz of wrongdoing 8 while he was trying to rectify the situation within Fidelity Charitable is not persuasive. In the very 9 same communications Emily also tells Kunz: “I do want you to know how much I respect your 10 integrity and efforts.” (Ex. 174 (emphasis added).) It is one thing to not directly accuse the 11 person who lied to you; it is another to gratuitously tell that person you respect their integrity. As to the alleged promise to allow the Fairbairns to advise on a sale price limit, even the 12 13 email Malcolm wrote on January 15, 2018 in which he states for the first time that he was told 14 certain things, represents only that he was told (by some unidentified person) that the Fairbairns 15 could advise on a price limit “if necessary.” (Ex. 128.) The email is consistent with Malcolm’s 16 trial testimony: “if we run into a problem, or if there is something that’s coming up, and if we’re 17 having any sort of difficulty in selling the stock, that, you know, I would be called, advised, I 18 would be able to advise.” (Dkt. No. 242 at 371.) Even accepting Malcolm’s testimony, the ability 19 to advise on a price was only if Fidelity Charitable was having difficulty in selling the stock, as a 20 trader might encounter with a thinly-traded stock. Fidelity Charitable was having no trouble 21 trading WATT on December 29, 2017 when it was trading at nearly historically high volume and 22 price. 23 The Court does not give any weight to the comments about Kunz made by Fidelity 24 Charitable representatives after the Fairbairns complained about the liquidation. While the Court 25 accepts the comments as statements of a party opponent, and therefore non-hearsay, the Court also 26 finds that the comments merely reflect that the employees were initially assuming “the customer is 27 always right,” especially when the customers are as wealthy and sophisticated as the Fairbairns. 28 There is nothing in the record that these employees had any personal knowledge of what 10 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 11 of 22 1 2 United States District Court Northern District of California 3 representations Kunz made and therefore their comments are not probative. Reliance/Harm The Court also finds that even if the promises had been made at some point on December 4 27 or December 28, the Fairbairns could not have reasonably relied on those promises in deciding 5 to donate the Energous stock to their Fidelity Charitable DAF. Emily learned of the FCC approval 6 on December 20 and two days later she made a note to herself to transfer the WATT shares from 7 the Fairbairns’ JP Morgan account to Fidelity Charitable—well before the promises were 8 allegedly made. Further, neither Emily nor Malcolm communicated with JP Morgan in December 9 2017, even when JP Morgan emailed them on December 13 to solicit a transfer of shares to their 10 JP Morgan DAF. December 27 or 28—the dates when the promises were allegedly made—was 11 too late to facilitate the donation of the shares to JP Morgan, especially since the only evidence as 12 to JP Morgan in the record is that it recommended that the transfer of shares be initiated by 13 December 22 to ensure that the shares were donated by December 29. And as the Fairbairns had 14 to make the donation because of their looming tax bill in light of the repatriation of their off-shore 15 income, not making any donation of the Energous shares was not an option. 16 For all the above reasons, judgment will be entered in favor of Fidelity Charitable and 17 against the Fairbairns on their claims for misrepresentation, breach of contract, promissory 18 estoppel, and violation of California’s Unfair Business Practices Act. 19 20 *** The Court cautions that it has not found that either Fairbairn did not tell what they believed 21 to be the truth about the alleged promises. The Court need only decide whether it is more likely 22 than not that Kunz made the promises alleged in the complaint. Other than the 10% daily trading 23 volume promise, a promise that was kept, the Fairbairns have not satisfied that burden. 24 II. The Negligence Claim 25 The Fairbairns also contend that apart from the alleged promises, Fidelity Charitable’s 26 liquidation of the donated WATT shares violated the duty of care Fidelity Charitable owed to 27 them. They insist that a reasonably prudent investor in Fidelity Charitable’s position would not 28 have sold all 1.93 million donated WATT shares in the last 2.5 hours of the last trading day of 11 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 12 of 22 1 2017. By engaging in such unreasonable trading, the Fairbairns’ argument goes, Fidelity 2 Charitable caused the price of WATT shares to decrease, thereby lowering the December 29, 2017 3 average WATT share price and thus the amount of the Fairbairns’ tax deduction, as well as the 4 money available for donation in their DAF account. i. 5 United States District Court Northern District of California 6 Recovery on a negligence claim depends as a threshold matter on whether the defendant 7 had “a duty to use due care toward an interest of [the plaintiff’s] that enjoys legal protection 8 against unintentional invasion.” S. California Gas Leak Cases, 7 Cal. 5th 391, 397 (2019) 9 (internal quotation marks and citation omitted). Under California law, the “‘general rule’ is that 10 people owe a duty of care to avoid causing harm to others and that they are thus usually liable for 11 injuries their negligence inflicts.” Id. at 397-98. However, liability in negligence for purely 12 economic losses is “the exception, not the rule.” Id. at 400. The primary exception to the general 13 rule of no-recovery for negligently inflicted purely economic losses is where the plaintiff and the 14 defendant have a “special relationship.” Id. 15 A special relationship exists where “the plaintiff was an intended beneficiary of a 16 particular transaction but was harmed by the defendant’s negligence in carrying it out.” Id. For 17 example, the California Supreme Court has held that the intended beneficiary of a will could 18 recover for assets she would have received if the notary had not been negligent in preparing the 19 document. Biakanja v. Irving, 49 Cal.2d 647, 650-651 (1958). “Discerning whether there is a 20 special relationship justifying liability of this sort can nonetheless be a subtle enterprise.” S. 21 California Gas Leak Cases, 7 Cal. 5th at 401. In addition to whether the transaction was intended 22 to benefit the plaintiff, courts should consider 25 (ii) “the foreseeability of harm to the plaintiff,” (iii) “the degree of certainty that the plaintiff suffered injury,” (iv) “the closeness of the connection between the defendant’s conduct and the injury suffered,” (v) “the moral blame attached to the defendant’s conduct,” and (vi) “the policy of preventing future harm.” 26 Id. at 400–01. “Deciding whether to impose a duty of care turns on a careful consideration of ‘the 27 sum total’ of the policy considerations at play, not a mere tallying of some finite, one-size-fits-all 28 set of factors.” Id. at 401. 23 24 12 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 13 of 22 United States District Court Northern District of California 1 The first two factors weigh in favor of finding the requisite special relationship here. The 2 agreement to transfer the WATT shares to the Fairbairns’ Fidelity Charitable DAF was intended to 3 benefit the Fairbairns by giving them an immediate tax deduction while retaining the right to defer 4 until a later date transferring the liquidated assets to the charities of their choice. They also had the 5 right to pass on their DAF to their children. Further, Fidelity Charitable’s solicitation of the 6 Fairbairns’ donation, and Kunz’s testimony that he wanted the Fairbairns to know how Fidelity 7 Charitable’s services could benefit them, show that the transaction was designed to benefit the 8 Fairbairns in addition to those charities that ultimately might receive the proceeds of the 9 Fairbairns’ DAF. It was certainly foreseeable that how Fidelity Charitable handled the liquidation 10 could affect the Fairbairns by reducing their tax deduction and the amount of money in their DAF 11 available for giving. But, as described above, those two factors, alone, are not sufficient to find a 12 duty of care. In any event, the Court need not finally resolve whether Fidelity Charitable owed the 13 Fairbains a duty of care under California law because, as described below, they have not 14 persuaded the Court that even if a duty was owed, that it was breached. 15 16 ii. Assuming Fidelity Charitable owed a duty of care to the Fairbairns, the next questions are 17 what is that duty and whether it was breached. The Fairbairns argue that Fidelity Charitable’s 18 duty was to act as a reasonably prudent investor would have acted under the circumstances. Those 19 circumstances, of course, include that Fidelity Charity is a 501(c)(3) corporation and that it was 20 trading shares to which it owned legal title, albeit subject to the donors’ advisory rights, including 21 rights to advise on how the donated assets are invested. See Bullis v. Sec. Pac. Nat. Bank, 21 Cal. 22 3d 801, 809 (1978) (noting that the courts must decide the standard of care required under the 23 particular circumstances of the case); see also CACI 600 Standard of Care (“A/An] [insert type of 24 professional] is negligent if [he/she/nonbinary pronoun] fails to use the skill and care that a 25 reasonably careful [insert type of professional] would have used in similar circumstances”). The 26 Fairbairns’ theory is that Fidelity Charitable breached the standard of care of a prudent investor by 27 liquidating all 1.93 million donated shares of WATT in the last 2.5 hours of trading on December 28 29, 2017. While they do not contend it was unreasonable for Fidelity Charitable to begin 13 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 14 of 22 1 liquidation of the WATT shares on December 29, they contend the trading should have been 2 spread out over several days, although they do not posit how many days were required to make the 3 liquidation non-negligent. 4 5 At around 10:48 a.m. on December 28, 2017, Kyle Casserino advised Fidelity Charitable’s 6 Director of Investments, Mike McClean, that Fidelity Charitable would receive several large 7 blocks of WATT stock, exceeding $100 million in value. McClean observed that the stock was not 8 thinly traded and, indeed, on December 27 had traded 42 million shares. Casserino responded that 9 the stock price had risen 170% that day. McClean then noted that prior to December 27, it had 10 11 United States District Court Northern District of California iii. only been trading at around 300,000 shares per day. (Ex. 948.) On December 28 and 29, 2017, Fidelity Charitable received the Fairbairns’ 1.93 million- 12 WATT shares in four separate transfers, each known as a “tranche.” The first tranche of 700,000 13 shares arrived from Morgan Stanley on December 28. The other three arrived on December 29 14 (two from Morgan Stanley and one from the Fairbairns’ account with the Fidelity Family Office). 15 At McClean’s direction, Fidelity Charitable began selling the first tranche of 700,000 16 shares at 1:26 p.m. ET. Shortly before 2:00 p.m. McClean messaged Gerald Celano, the Fidelity 17 Capital Markets trader executing the trades, that there might be two additional tranches of WATT 18 coming: 318,000 and possibly another 343,000. Celano responded that with their current WATT 19 selling they were pressuring the price “a bit,” and that adding additional tranches would not help. 20 (Ex. 213.006.) McClean replied that they could always sell the last two tranches in the last two 21 hours of the day and estimated that the daily trading volume of WATT would be 25 million 22 shares. McClean suggested extending the trading of the first two tranches to 3:45 p.m. (they had 23 initially decided to sell through 3:30 p.m.) to ease the pressure. Celano agreed it might “ease 24 some down pressure.” McClean then advised Celano that Fidelity Charitable would have the 25 paperwork for another approximately 313,000 shares by 3:30 p.m.; Celano responded that the 26 lows of the day for WATT were “ugh.” (Ex. 213.007.) 27 28 About 15 minutes before the market close, Fidelity Charitable had the last tranche of 343,000-WATT shares available to sell. McClean asked Celano if there was available volume to 14 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 15 of 22 1 sell the shares before market close and that he hoped to get a favorable pairing on the close of the 2 market. Celano responded: “nasdaq . . . we’re flying blind. you want to put a chunk there 3 anyway?” McClean told him to go ahead. (Ex. 216.002.) 4 5 following messaged chat: 6 McClean: “I’m afraid to ask for the WATT details. But we had to get it sold.” 7 Celano: 8 9 United States District Court Northern District of California Fifteen minutes later, when the market closed, McClean and Celano engaged in the “ugly. do you want the individual averages or the combined.” (Ex. 216.002.) In the end, Fidelity Charitable sold the 1.93 million shares on December 29 at an average 10 price of $22.82 per share, approximately 30% less than its closing price the previous day. Its sale 11 of 1.93 million shares was 6.7% of the WATT daily trading volume for December 29, and its 12 participation rate (percentage of sales during the period Fidelity Charitable was selling WATT 13 (1:26 p.m. to 4:00 p.m.)) was 15.3%. iv. 14 15 The Court finds that assuming Fidelity Charitable owed the Fairbairns a duty of care in the 16 liquidation of the donated WATT stock, the Fairbains have not proved that Fidelity Charitable’s 17 liquidation violated that duty. 18 First, Fidelity Charitable’s December 29, 2017 liquidation was consistent with its 19 published policies. See Bullis v. Security Pac. Nat. Bank, 21 Cal. 3d 801, 809 (1978) (considering 20 the defendant’s published policies in evaluating whether it breached the standard of care). Fidelity 21 Charitable’s Policy Guidelines: Program Circular states: “Fidelity Charitable processes 22 contributions periodically throughout the day and will liquidate contributions as quickly as 23 possible after all the requisite paperwork has been received, and after the assets have been 24 received in good order.” (Ex. 183.007.) For publicly traded securities in particular, it discloses: 25 “Upon receiving the appropriate paperwork and the donated securities in good order, Fidelity 26 Charitable will generally sell the securities at the earliest date possible, but reserves the right to 27 sell at any time.” (Ex. 183.008.) Further, again with respect to publicly traded securities, its 28 policy at the time was to sell donated shares as soon as possible provided the volume in the market 15 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 16 of 22 1 is sufficient. A draft internal Trading Procedures manual states that Fidelity Charitable’s “trading 2 objectives are to liquidate stock contributions as quickly as possible, in line with market volume at 3 the time of trading activity, in an effort to reduce financial risk and to make funds available in the 4 Giving Account.” (Ex. 198.003.) For Mike McClean, that policy generally meant selling less 5 than 10% of the daily trading volume with a participation rate of less than 20%. United States District Court Northern District of California 6 Fidelity Charitable’s trading decisions on December 29 were consistent with these policies. 7 Upon learning that neither Emily nor Malcolm were control persons on December 29, Daniel 8 Bergschneider, Fidelity Charitable VP of Investments, wrote to a whole team of Fidelity 9 Charitable employees, including Mike McClean: “we should then be free to sell shares of WATT 10 upon receipt.” (Ex. 219.004.) Mclean then began to sell the stock “as quickly as possible” after 11 all the paperwork had been received; he was aware of the explosion in WATT volume and 12 specifically checked the volume before initiating the trading. At around 2 p.m., while the first two 13 tranches were being sold and Fidelity Charitable was awaiting the last two tranches to become 14 available for sale, Steve Brooks, Fidelity Charitable Vice-President, asked McClean, 15 Bergschneider, and Josh Johnson, a Fidelity Charitable Senior Analyst, whether it made sense to 16 sell the entire donation that day, especially since WATT was having “a pretty negative day.” 17 McClean responded that Fidelity Charitable was “selling in line with volume,” that the Fairbairns’ 18 donated WATT shares would be about 6% of the volume, and that Fidelity Charitable would “not 19 hold these shares on the speculation that the price may improve next week.” (Id.) Before 20 proceeding with selling the last two tranches he estimated the volume on the day would be 25 21 million shares and decided that was sufficient to continue selling. As it turns out, the daily trading 22 volume of WATT shares was even greater. An hour after concluding the trades he estimated 23 Fidelity Charitable’s participation rate was 13%, showing that he was paying attention to that 24 metric as well. 25 The Fairbains’ insistence that Fidelity Charitable’s policy was to liquidate in such a way as 26 to avoid any price impact on the stock price is not persuasive. Notwithstanding McClean’s 27 message to Celano at the close of the market on December 29 that he “had to sell all the shares,” 28 Fidelity Charitable’s written policies gave it room to make judgments as to how and when to sell 16 United States District Court Northern District of California Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 17 of 22 1 publicly traded shares. (See e.g., Ex. 183.008 (“Fidelity Charitable will generally sell the 2 securities at the earliest date possible, but reserves the right to sell at any time.”) (emphasis 3 added).) That discretion coupled with Fidelity Charitable’s goal of selling in line with market 4 volume means it was concerned with price impact, but it does not mean any adverse price impact. 5 Fidelity Charity needed to balance its objective of liquidating donated shares without speculating 6 about price with responsibly selling the shares; to not, in other words, sell at just any price. 7 McClean’s testimony about a Fidelity Charitable objective of acting “responsibly in liquidations 8 so as not to adversely affect the market price of the security” (Ex. 205.001, Dkt. No. 242 at 315), 9 does not mean that Fidelity Charitable’s policy was to not adversely affect price at all. McClean 10 explained that the policy meant that Fidelity Charitable uses algorithms to sell large blocks of 11 stock in line with the volume. There is no dispute that it used such algorithms on December 29 for 12 the WATT trades. 13 Second, the Fairbairns have not met their burden of proving through other evidence that a 14 reasonably prudent DAF would not have sold all 1.93 million-WATT shares under the December 15 29, 2017 market conditions and instead would have spread out the liquidation over several days. 16 The Fairbairns focus on two metrics to prove a violation of the standard of care: (1) that Fidelity 17 Charitable sold 8.6% of WATT’s outstanding shares, and (2) that Fidelity Charitable’s 18 participation rate for the WATT sales was 15.3%. The 8.6% of outstanding shares amounted to 19 less than 7% of the daily trading volume; the Fairbairns do not claim that it violated the standard 20 of care to trade at that percentage of daily trading volume. Their expert Dr. Harris never explained 21 why the percentage of outstanding shares—as opposed to participation rate—mattered and, in any 22 event, did not opine that trading 8.6% of WATT’s outstanding shares violated the standard of care. 23 The Fairbairns’ focus on the participation rate fares no better. McClean testified that to 24 trade “in line with volume” he aims for a participation rate below 20%. The Fairbairns insist that 25 such an approach and, in particular, Fidelity Charitable’s December 29 WATT participation rate 26 of 15.3%, violated the standard of care. For this argument they rely on their expert Dr. Domowitz. 27 He opined that studies have shown that approximately 80% of traders have participation rates of 28 less than 5%, and that maybe only 1% of the orders had participation rates greater than 10%. 17 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 18 of 22 United States District Court Northern District of California 1 Dr. Domowitz’s testimony does not satisfy the Fairbairns’ burden of proof. First, and 2 dispositively, at the time he prepared his expert report he was not aware that Fidelity Charitable 3 was a 501(c)(3) corporation that had legal title to the WATT shares at the time of liquidation; he 4 apparently believed that the Fairbairns had contracted with Fidelity the for-profit institution to sell 5 shares that the Fairbairns legally owned. He was also not familiar with Fidelity Charitable’s stated 6 Program Circular policy that it sells donated shares as soon as possible; indeed, even at the time of 7 his trial testimony he appeared wholly unfamiliar with the Circular. And he did not know that 8 Fidelity Charitable is not regulated by the SEC. That lack of understanding helps explain why 9 when testifying to what he believes is the standard of care “in the industry” he quoted from an 10 SEC report stating that "[a]n adviser must execute securities transactions for clients in such a way 11 that the client’s total costs or proceeds in each transaction are the most favorable under the 12 circumstances." (Dkt. No. 244 at 633.) That report is inapposite as Fidelity Charity was not the 13 Fairbairns’ advisor—Fidelity Charity was the client vis-à-vis the trading as it owned the WATT 14 shares at the time of liquidation. While it still may have had some duty to the Fairbairns given 15 their ongoing advisory rights, that duty is not the same as the duty an advisor owes a client, 16 especially given that Fidelity Charitable’s published policy was to liquidate donated publicly 17 traded stock “as soon as possible.” Thus, Dr. Domowitz’s testimony is not probative of the 18 standard of care for a DAF. 19 Apart from his lack of relevant expertise, Dr. Domowitz testified that even in the for-profit 20 world there is no industry standard for an acceptable participation rate when liquidating stock not 21 owned by the liquidator. Further, his testimony about participation rates generally being less than 22 5% when trading according to a VWAP algorithm was based on his own study from 2004 when 23 very few traders were using algorithms. And while he augmented his opinion with his own 24 experience (which was not as a trader), he explained that he had a variety of conversations and 25 sessions with institutional traders and learned that for institutional traders the participation rate 26 would rarely exceed 10%. Putting aside that his testimony was based on institutional traders, not 27 DAFs, he said “rarely” exceed 10%, not “never”. And he never addressed the anomalous 28 circumstances on December 29 when WATT was trading at unprecedented volume and price. 18 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 19 of 22 1 Indeed, Emily testified that she had expected WATT’s price would increase “a little” upon FCC 2 approval; even she apparently had not anticipated its exponential growth in volume and price. In 3 summary, Dr. Domowitz’s testimony is not persuasive that a participation rate of 15.3% is 4 unreasonably high for a DAF which does not speculate on price when the share price, while 5 falling, is still more than twice as high as it was trading just three days earlier and the volume 6 more than 90 times greater. United States District Court Northern District of California 7 Third, the Court disagrees with the Fairbairns’ assertion that Fidelity Charitable (other than 8 McClean) believed that the December 29 WATT volume was not sufficient to liquidate all 1.93 9 million shares of donated WATT stock. They rely on a December 28 email from Daniel 10 Bergschneider, Fidelity Charitable Vice-President, Investments (Ex. 292), but they did not call 11 him as a witness. Bergschneider was not suggesting that the liquidation of WATT would need to 12 be sold over a few days even if volume was trading at over 25 million daily shares; it is more 13 probable he was referring to the WATT volume reverting to its historical norm of 300,000 shares 14 per day in the new year, as McClean testified. And the Fairbairns misinterpret a December 29 15 email from Josh Johnson, a Fidelity Charitable Senior Analyst (whom the Fairbairns also did not 16 call as a witness). (Ex. 978.) Johnson did not suggest that the shares should not be sold 17 immediately once the paperwork was all in good order. He merely expressed that there was no 18 rush to get the paperwork all in order; that is, there was no urgency in having the control person 19 issue resolved because as long as the shares were transferred to Fidelity Charitable by December 20 29 the gift would be effective as of that day (and thus the Fairbairns would obtain their tax 21 deduction). 22 The Fairbairns also contend that Fidelity Charitable breached the required standard of care 23 by submitting four separate parent orders (the four tranches) to four separate trading algorithms, 24 and for much of the 2.5 hours of trading having two or three algorithms trading at the same time. 25 Their theory is that these four separate orders were competing against each other in the market and 26 driving down the price of the WATT stock because each algorithm does not know what the other 27 is doing. While the Fairbairns rely on Dr. Domowitz to support this contention (Dkt. No. 250 at 28 88-89), Dr. Domowitz, disclaimed any such opinion: 19 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 20 of 22 1 Q: And you have not offered an opinion that the algorithms in this case were, quote, 2 competing; correct? 3 A: That is right. 4 (Dkt. No. 244, 707:21-23.) In contrast, Fidelity Charitable’s expert Mr. Zarcu testified that the 5 separate algorithms did not compete. While the Fairbairns offer attorney argument as to why Mr. 6 Zarcu’s opinion is “a non-sequitur” (Dkt. No. 250 at 89), they have not submitted expert evidence 7 on this issue to meet their burden of proof. 8 United States District Court Northern District of California 9 Instead, the Fairbairns rely primarily on Fidelity Charitable’s own hindsight reaction to the use of four separate trading algorithms. On January 27, 2018—after the Fairbairns had 10 complained about the liquidation—Eric Christesen, the Fidelity Family Office’s head trader, told 11 McLean that he would have added the subsequent tranches to the original algorithm, “increasing 12 the size of the single order so they are not competing with each other (assuming I knew it was the 13 same end client).” (Ex. 595.002.) McClean responded: “I agree and I assumed that’s what would 14 happen. I was surprised to hear from [Fidelity Capital Markets] that they were in 4 separate 15 tranches.” (Ex. 595.001.) Casserino also told another Fidelity Charitable employee in February 16 2018 regarding the December 2019 WATT litigation: “trading was bad, we had 4 separate 17 VWOPs competing with one another on this asset plus they submitted he paperwork to FFOS on 18 Thursday when the shares were ideal for gifting, and hey didn’t move them over until Friday due 19 to the lending situation.” (Ex. 939.007.) 20 The Court treats these statements as a party admission and therefore non-hearsay. See Fed. 21 R. Evid. 801(d)(2). These statements, however, do not satisfy the Court that it was a breach of the 22 standard of care for Fidelity Charitable to liquidate the WATT shares in four separate algorithms 23 (or that it was a breach to not ensure that Fidelity Capital Markets place them in a single parent 24 order). Christesen followed up his opinion with “[o]bviously this is hindsight and maybe that is 25 not your procedure.” (Ex. 151.001.) He did not believe it was below the standard of care to trade 26 simultaneously with separate algorithms, otherwise how could Fidelity Charitable have a different 27 procedure? In any event, the Fairbairns chose not to call Christesen as a witness. While they 28 called Casserino as a witness, and questioned him about exhibit 939, they did not question him 20 United States District Court Northern District of California Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 21 of 22 1 about his competing VWOP remark so it impossible to know the basis for his statement. For all 2 the Court knows he was merely parroting what the Fairbairns—wealthy, successful hedge fund 3 managers—were saying. These statements fail to persuade. 4 The Fairbairns also take issue with Fidelity Charitable’s failure to “take a break” during the 5 liquidation by using price limits so that they could at least stop and reassess after the price dropped 6 a certain amount. However, the “child orders” which the parent orders were broken into did have 7 price limits. Dr. Harris’s testimony that he found it surprising that the parent orders did not also 8 have price limits does persuade the Court that it was a breach of the duty of care for Fidelity 9 Charitable not to do so. There was no evidence presented at trial that placing price limits on 10 parent orders is standard practice for a DAF when liquidating shares of stock in line with volume 11 and under circumstances similar to those that existed on December 29. The same absence of 12 evidence exists for the Fairbairns’ insistence that Fidelity Charitable should have sought a natural 13 buyer for the large block of shares by utilizing a block broker. There is no evidence that this is a 14 practice that DAFs follow when liquidating high volume publicly traded securities in accordance 15 with their stated policy to sell as soon as possible after the paperwork is in good order. The 16 Fairbairns’ reference to PZN is inapposite. PZN was a thinly-traded stock, not a stock trading at 17 historically high volume and price as was WATT. It is not that Fidelity Charitable could not have 18 consulted a block trader—it could—it is that the Fairbairns have not demonstrated that it was a 19 breach of the duty of care to not do so. 20 Finally, much of the expert trial testimony focused on whether Fidelity Charitable’s 21 liquidation of 1.93 million-WATT shares on December 29, 2017 had an adverse effect on the 22 market price. Based on the expert testimony, the trading more likely than not did have such an 23 effect. Even Celano, the Capital Markets trader liquidating the shares, believed the trading was 24 exerting some downward pressure on market price. But that price impact matters only if Fidelity 25 Charitable did something, or failed to do something, that breached the standard of care for a 26 DAF’s liquidation of a donated publicly traded stock under the circumstances present on 27 December 29, 2017. It did not. 28 21 Case 3:18-cv-04881-JSC Document 257 Filed 02/26/21 Page 22 of 22 *** 1 United States District Court Northern District of California 2 When insisting that Fidelity Charity owed them a duty of care, the Fairbairns repeatedly 3 argued that Fidelity Charitable could not simply “throw away the WATT stock certificates.” And 4 their expert Professor Galle testified that a soup kitchen charity with a donated golf course could 5 not sell the golf course for pennies on the dollar just because the charity does not speculate on 6 price. Agreed. But the evidence as to what happened with Fidelity Charity’s liquidation of the 7 WATT stock on December 29, 2017 is leagues away from these examples. While Fidelity 8 Charitable did not the sell the shares to which it held legal title in the manner the Fairbairns— 9 sophisticated hedge fund managers—would have done, and while in hindsight Fidelity Charitable 10 might have handled the donation differently, the Fairbairns have not come close to proving that 11 what Fidelity Charitable did violated the standard of care for a DAF under the anomalous 12 circumstances of late December 2017. Judgment is entered in Fidelity Charitable’s favor on the 13 negligence claim as well. 14 15 16 IT IS SO ORDERED. Dated: February 26, 2021 17 18 JACQUELINE SCOTT CORLEY United States Magistrate Judge 19 20 21 22 23 24 25 26 27 28 22
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