David Sokol broke Berkshire Hathaway Inc. (BRK/A)’s ethics rules by investing in a company as he pushed for its takeover, according to Chairman Warren Buffett, who said he regrets not pressing Sokol earlier for details.
“He violated our insider-trading rules and he violated the principles I lay out every two years to our managers,” the 80- year-old chief executive officer said today at Berkshire’s annual meeting in Omaha, Nebraska.
Buffett’s remarks today contrast with his comments March 30 when he announced that Sokol, 54, was leaving and praised him for “extraordinary” contributions to Berkshire. The company’s audit committee said April 26 that Sokol misled Buffett and violated the firm’s rules through his trades in Lubrizol Corp. (LZ), which Buffett agreed on March 14 to buy for about $9 billion.
Sokol bought about $10 million of Lubrizol Corp. shares in January while representing Berkshire in discussions about buying the lubricant maker. Buffett said previously that Sokol had made a “passing remark” about a personal investment in the company, and the committee said in a report that the billionaire chairman was unaware of the timing of Sokol’s trades or that he was working with Citigroup Inc. bankers to deal with Lubrizol.
“I made a big mistake by not saying, ‘well, when did you buy it?’” Buffett told shareholders today.
“At best, the report makes Buffett look naive,” said Elizabeth Nowicki, a professor at Tulane University Law School and former attorney with the U.S. Securities and Exchange Commission, in an interview before the meeting. “At worst it looks like he didn’t immediately follow up the moment he knew that things were smelling bad.”
Lubrizol jumped 28 percent on the New York Stock Exchange on March 14 when Buffett announced a deal to buy the company. The committee said Berkshire should weigh suing Sokol to recover his trading profits.
Buffett is revisiting a topic he’d previously said would be off limits. Buffett said in a March 30 statement that he’d held back nothing from his comments that day and would refer future inquiries to his written remarks. Berkshire will post a transcript “as soon as possible” of Buffett’s Sokol-related comments from today’s meeting, the company said April 27 when it released the committee’s report.
“The tone has changed almost 180 degrees from that very vague press release that Buffett issued a little while ago that I believe raised more questions than answers,” said David Rolfe, chief investment officer at Wedgewood Partners, a Berkshire shareholder, in an interview before the meeting. “Some of Buffett’s harshest critics are defanged now.”
‘In the Open’
Sokol “would not, and did not, trade improperly, nor did he violate any fair reading of the Berkshire Hathaway policies,” according to a statement from William Levine, a lawyer for Sokol at Dickstein Shapiro LLP in Washington.
Buffett said Sokol didn’t attempt to disguise his trades. “He essentially did it right out in the open,” Buffett said. Buffett said in the March 30 statement that he didn’t believe his trades were unlawful.
Sokol had run an energy utility for Berkshire, and was previously considered a potential CEO candidate as Buffett expanded his duties to include scouting for acquisitions and overseeing luxury-travel and roofing units. Sokol had no chance of being CEO after the trades, and if he were dismissed from the firm, it would have been for cause, Buffett said today.
Buffett oversees the heads of Berkshire’s more than 70 subsidiaries with the help of Vice Chairman Charles Munger, 87, and a staff of about 20 at the company’s headquarters. Berkshire employs more than 250,000 people across industries spanning insurance, energy and consumer goods, and Buffett entrusts operational authority to the CEOs of the individual units.
‘Trusts You Completely’
“His management style is wonderful because he trusts you completely, and 99 percent of the time it works,” William Child, chairman of Berkshire’s R.C. Willey Home Furnishings retailer, said April 29 on the sidelines of the Value Investor Conference in Omaha. “The secret is picking the right people.”
Berkshire is facing “governance challenges” that may hurt the company’s credit quality, Moody’s Investors Service said April 1, citing Sokol’s stock trades and resignation.
“It seems to me that the corporate governance did its job,” said Roy Smith, finance professor at the Stern School of Business at New York University and former banker at Goldman Sachs Group Inc. “They found the problem, they took care of it and issued a report. I say give him a break.”
The audit committee said it authorized the release of the Sokol report to reinforce the company’s ethics rules.
The public release of the document shows that Berkshire “takes its policies very seriously, and that its instruction to all its representatives to play in the middle of the court is company policy, not public relations,” the panel said. “We expect this report to send a loud message that those policies are designed to be read broadly.”
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