Berkshire Hathaway Inc. directors, including billionaire founder Warren Buffett, won dismissal of shareholder claims over challenged stock trades by former Berkshire executive David Sokol.
Investors can’t sue Berkshire’s board because it hasn’t decided whether to sue Sokol, who headed a Berkshire unit, over his stock trades in Lubrizol Corp. during a two-month period starting in December 2010 while Sokol was evaluating the chemical company as a possible Berkshire acquisition, Delaware Chancery Court Judge Travis Laster concluded yesterday.
“There could be some good reasons” to delay suing Sokol to recover $3 million in profits he made from the Lubrizol stock trades and that inaction doesn’t open the board to shareholders’ derivative suits, Laster said.
A Berkshire audit committee concluded in April that Sokol, who headed Berkshire’s NetJets Inc. subsidiary, violated the company’s insider-trading policies and misled Buffett and other officials about his stake in Lubrizol, which he was recommending as a Berkshire takeover target.
Sokol’s purchase of more than $10 million in Lubrizol stock while facilitating Buffett’s deal to buy the lubricant maker “violated company policies, including Berkshire Hathaway’s Code of Business Conduct and Ethics and its insider-trading policies and procedures,” according to the report. Sokol left Berkshire in March 2011 after questions were raised about the stock trades.
Buffett didn’t immediately respond to a request for comment e-mailed to his assistant, Carrie Kizer.
Investors sued Berkshire directors in state court in Wilmington, Delaware, last year alleging the board was dragging its feet in making the decision whether to sue Sokol for usurping a corporate opportunity with the stock trades.
Shareholders filed a so-called derivative action which would return any recovery from insurance covering directors to the investment firm’s coffers.
Robert Weiser, a New York-based lawyer for Berkshire investors seeking to sue the board over Sokol’s trades, told Laster yesterday that shareholders had to press the case against the former executive because of directors’ unwillingness to do so.
The board “had declined to prosecute its claims” against Sokol, Weiser said. “We believe it’s inexcusable for directors to sit on this claim.”
Barry Levine, a New York-based lawyer representing Sokol, said the executive disputes investors’ claim that the Lubrizol trades violated federal securities laws. He told Laster that Sokol wasn’t a proper target of investors’ suits since he wasn’t an officer or director of Berkshire.
The fact that Sokol signed a form acknowledging he’d comply with Berkshire’s ethical policies didn’t put him in the class of Berkshire executives who could be properly named in a derivative case, Levine added. “He doesn’t qualify as a de facto officer or director,” the lawyer said.
William Lafferty, a Wilmington-based lawyer for Buffett and other Berkshire directors, said the U.S. Securities and Exchange Commission reportedly has opened an inquiry into Sokol’s Lubrizol trades and Berkshire officials could be waiting for the outcome of that probe before taking any action against Sokol.
“The court should not allow the plaintiffs to hijack” the board’s right to decide whether to sue over Sokol’s trades, Lafferty said.
Prior to dismissing the case, Laster said the board’s delay in making a decision on whether to seek to recoup the profits from Sokol’s Lubrizol case clearly raised questions in investors’ minds.
“If somebody isn’t doing something with a litigation asset that looks really strong, you have to wonder” about the inaction, the judge said.
The case is In re Berkshire Hathaway Inc. Shareholders Litigation, CA 6392, Delaware Chancery Court (Wilmington).