Munger Says He Told Buffett of Stake in BYD, Recused Himself

Berkshire Hathaway Inc. (BRK/A) Vice Chairman Charles Munger said his family was invested in BYD Co. “for years” before his company took a stake in the Chinese automaker and that he disclosed the financial interest to his business partner Warren Buffett.

“I certainly suggested that Berkshire look at investing in something that the Mungers were already invested in, but we’d been in it for years,” he said yesterday in a phone interview.

The Munger investment was cited last week by former Berkshire manager David Sokol in a CNBC interview as precedent for his purchase of Lubrizol Corp. (LZ) shares before recommending the company as a takeover target to Buffett. Sokol, whose resignation from Omaha, Nebraska-based Berkshire was announced by Buffett on March 30, said there was nothing unethical about purchasing about 96,000 Lubrizol shares in January.

“I don’t believe I did anything wrong,” Sokol said, according to a transcript on CNBC’s website. “Mr. Munger owned a significant piece of BYD before he mentioned it to me to go look at it.”

Munger, 87, said his family invested with money manager Li Lu in BYD through a partnership that has a stake of about 3 percent and that he urged Sokol, then the leader of Berkshire’s energy business, to scout the business.

“I had Dave look at it, because I knew I couldn’t talk Warren into buying into the damn thing by myself,” Munger said. “It’s a new technology-type investment. But David went over there, and he made the deal for Berkshire.” Buffett is Berkshire’s chairman and chief executive officer.

Berkshire’s Investment

Berkshire invested about $230 million in BYD in 2008 and holds a stake of almost 10 percent in the company. The investment was valued at $1.18 billion at the end of 2010, Buffett said in the company’s annual report. BYD, based in Shenzhen, has said it aims to begin selling electric and hybrid cars in Europe by the end of next year.

Munger said his family holds a “little more” than half of the fund with the BYD investment, and that he didn’t participate in Berkshire’s discussions on its deal.

“I recused myself,” Munger said. “But there’s no question about it, that I caused Dave’s original interest.” He declined to comment further.

BYD has dropped 30 percent since Dec. 31 in Hong Kong trading and fell 40 percent last year after increasing fivefold in 2009. The stock fell 0.7 percent to HK$28.80 as of 10:55 a.m.

Lubrizol Deal

Buffett, 80, said March 14 he would pay $135 a share, or about $9 billion, for Wickliffe, Ohio-based Lubrizol, compared with the closing price of $105.44 on the New York Stock Exchange in the last trading day before the announcement. Sokol’s investment may have given him a profit of about $3 million, according to Buffett’s disclosure and data compiled by Bloomberg. Buffett said in the statement that Sokol made a “passing remark” about his stake in Lubrizol.

The Munger investment in BYD is different from Sokol’s in Lubrizol because of the longer amount of time that elapsed before Berkshire announced its intention to acquire shares, said James Cox, a professor of corporate and securities law at Duke University Law School in Durham, North Carolina.

“What really matters is the close time sequence that we all now know that Sokol made the investment,” he said.

SEC Probe

The Securities and Exchange Commission is probing whether Sokol, 54, bought shares in Lubrizol on inside information that Berkshire was considering buying the company, according to a person who declined to be identified because the investigation is secret. The SEC is seeking records from Sokol’s brokerage and examining trading data from the Financial Industry Regulatory Authority, the person said last week. Buffett said March 30 that he doesn’t think Sokol’s purchases were unlawful.

Munger’s account of the BYD investments doesn’t raise “any taint or question mark” for Berkshire, said John Coffee, a securities law professor at Columbia University.

“There’s always going to be some possibility that a director will have some interest in a company that your firm is looking at for a transaction and you disclose that and you recuse yourself,” Coffee said.

Buffett didn’t immediately respond to a message left with an assistant for comment.

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

Charles Munger, vice chairman of Berkshire Hathaway Inc., said his family was invested in BYD Co. “for years” before his company took a stake in the Chinese automaker. Photographer: Daniel Acker/Bloomberg

4:34

April 6 (Bloomberg) -- Alice Schroeder, a Bloomberg News columnist and author of "The Snowball: Warren Buffett and the Business of Life," talks about Berkshire Hathaway Inc. Vice Chairman Charles Munger's investment in Chinese automaker BYD Co. before Berkshire took a stake in the company and former Berkshire manager David Sokol's purchase of Lubrizol Corp. shares before recommending the company as a takeover target to Buffett. Munger said his family was invested in BYD “for years” before his company took a stake in the automaker and that he disclosed the financial interest to Buffett. Schroeder speaks with Betty Liu, Dominic Chu and Jon Erlichman on Bloomberg Television's "In the Loop." (Source: Bloomberg)

5:02

April 6 (Bloomberg) -- Jeffrey Matthews, founder of hedge fund Ram Partners LP and author of "Pilgrimage to Warren Buffett's Omaha," talks about Warren Buffett's management of Berkshire Hathaway Inc. in light of recent disclosures involving two company executives. Former Manager David Sokol bought 96,060 shares of Lubrizol Corp. in early January before recommending that Berkshire acquire the company, and Vice Chairman Charles Munger said his family was invested in BYD Co. before Berkshire took a stake in the Chinese automaker and that he disclosed the financial interest to Buffett. Matthews speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)