Warren Buffett was misled by former Berkshire Hathaway Inc. executive David Sokol about his dealings before the takeover of Lubrizol Corp., a Berkshire audit committee concluded.
Sokol, who resigned last month after Buffett revealed his stake in Lubrizol, failed to disclose the role Citigroup Inc.’s investment bankers played in steering him toward the engine-lubricant maker, according to a report released by Omaha, Nebraska-based Berkshire’s audit committee yesterday.
The following is a timeline of events leading up to Berkshire’s acquisition of Lubrizol, Sokol’s resignation, and the publication of the audit report:
Dec. 13, 2010: David Sokol, who advises Buffett on acquisition targets, meets with investment bankers at Citigroup Inc. to discuss a list of three companies in the chemicals industry, according to the audit committee report. He asks the bankers to set up a meeting for him with James Hambrick, chief executive officer of engine-lubricant maker Lubrizol.
Dec. 14: Sokol buys 2,300 shares of Lubrizol, a partial fill of a 50,000 share order, according to the report.
Dec. 17: Citigroup bankers call Hambrick, according to the report. Hambrick says that he will inform the Lubrizol board of Berkshire’s possible interest in the company. The bankers inform Sokol of Hambrick’s response.
Dec. 21: Sokol sells the Lubrizol shares he bought on Dec. 14.
Jan. 5, 6, and 7, 2011: Sokol buys a total of 96,060 shares of Lubrizol. The stake, as reported by the audit committee, would have been worth about $9.92 million on Jan. 7, based on the closing price on the New York Stock Exchange.
Jan. 14: Sokol and Hambrick talk on the telephone and generally discuss the corporate cultures and philosophies at Berkshire and Lubrizol, according to a regulatory filing from Lubrizol. They arrange to meet in person on Jan. 25.
Jan. 14 or 15: Sokol suggests to Buffett that Berkshire buy Lubrizol. “Initially, I was unimpressed,” the Berkshire chairman said in a March 30 statement. Buffett asks Sokol how he had become familiar with Lubrizol, and Sokol mentioned that he owned the stock, according to the audit committee report. Sokol did not disclose the amounts or timings of his purchases, according to the report.
Jan. 25: Sokol meets with Hambrick in Cleveland. The Lubrizol CEO provides publicly available results and forecasts through 2013, and internal forecasts for 2014 and 2015, according to the Lubrizol filing. The two men don’t discuss a price for a potential acquisition. Hambrick offers to meet with Buffett.
Jan. 27: Buffett calls Roger Altman, founder and chairman of Evercore Partners Inc., Lubrizol’s investment banker, according to the audit committee report. Buffett said in the March 30 statement that he “quickly warmed to the idea” of purchasing Lubrizol after hearing from Sokol about the Jan. 25 meeting.
Feb. 8: Hambrick meets Buffett in Omaha. Buffett offers to acquire Lubrizol for $135 a share in cash, 20 percent more than the closing price that day on the New York Stock Exchange.
March 14: Berkshire says it agreed to buy Lubrizol for about $9 billion. The shares rise to $134.68 in New York. Sokol’s stake, if he still owned it, would have jumped about $3 million to $12.9 million. A Citigroup representative congratulates Buffett, which is the first time he learns of the bank’s role introducing Lubrizol to Sokol, according to the report.
March 15: Buffett asks Berkshire Chief Financial Officer Marc Hamburg to call Sokol and ask about his Lubrizol holdings and Citigroup’s role, according to the audit committee report. Sokol tells Hamburg he thought he had gotten Lubrizol CEO Hambrick’s phone number from a Citigroup banker he knew.
March 17-25: Berkshire collaborates with Lubrizol on the preparation of a preliminary proxy statement and learns of Citigroup’s role, according to the audit committee report.
March 22: Buffett says Berkshire’s directors would support Ajit Jain as the company’s next head if the reinsurance executive decides to seek the post. “He’s not only excelled at every single task he’s taken on in insurance, but he’s behaved in a way that’s been totally honorable,” Buffett says at a news conference in Bangalore.
March 28: Sokol sends a resignation letter to Buffett, who said Sokol tried to quit twice before and been persuaded to stay.
March 30: Buffett says that he accepted Sokol’s resignation and that he feels the former Berkshire manager’s share purchases were legal.
March 31: Sokol tells CNBC, “I don’t believe I did anything wrong,” according to a transcript on the station’s website. “I was making an investment that I believe in.”
April 27: Berkshire publishes its audit committee report, saying that Sokol violated the company’s insider-trading rules and misled the company about his stake in Lubrizol. 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.