Sokol Violated Berkshire Insider-Trading Rules, Audit Finds
David Sokol violated Berkshire Hathaway Inc. (BRK/A)’s insider-trading rules and misled the company about his personal stake in Lubrizol Corp. (LZ), which he recommended as a takeover target to Chairman Warren Buffett, the firm said.
Berkshire will cooperate with any government investigations related to Sokol’s Lubrizol transactions and weigh suing the former manager to recover his trading profits, according to a report from Omaha, Nebraska-based Berkshire’s audit committee.
Sokol’s purchase of about $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.
Buffett, 80, is facing questions about his oversight of managers and criticism for not condemning the stock trading that preceded Sokol’s resignation from Berkshire. Buffett had said March 30 in announcing Sokol’s departure that he didn’t believe the trades were unlawful.
“They’re throwing Sokol under the bus,” said Stephen Bainbridge, a professor at the UCLA School of Law who has written and taught about corporate governance.
Sokol, 54, told Buffett in January he had a stake in Lubrizol, which the billionaire chairman took to mean that Sokol had been following the company as a shareholder and then deemed it a takeover candidate, the audit committee found. Buffett didn’t realize until March 14, when the $9 billion deal was announced, that investment bankers at Citigroup Inc. had brought Wickliffe, Ohio-based Lubrizol to Sokol’s attention as a potential target, according to the report.
Sokol’s “misleadingly incomplete disclosures to Berkshire Hathaway senior management concerning those purchases violated the duty of candor he owed the company,” according to the report.
Buffett learned of Citigroup’s role introducing Sokol to Lubrizol only when a representative from the bank called to congratulate him on the deal, according to the report. Sokol told CNBC last month that he did nothing wrong. Attempts to reach Sokol for comment weren’t immediately successful.
‘Gloves are Off’
“The gloves are off,” said Michael Yoshikami, chief investment strategist at Berkshire shareholder YCMNet Advisors. Buffett’s “response was benevolent, and now the audit committee is coming back and saying, ‘You might be benevolent but, as a protector of the values of the firm, we don’t think benevolence is appropriate.’”
Sokol joined Berkshire in 2000 when he sold MidAmerican Energy Holdings Co., which he led, to Buffett for about $9 billion. Under Berkshire, Sokol retained a minority equity stake in MidAmerican and expanded the unit by buying a natural gas pipeline and power producers in California and the U.K.
Buffett had sent Sokol to China to scout an investment in carmaker BYD Co. and tasked the executive with the turnaround of NetJets Inc., Berkshire’s luxury-flight unit. Buffett biographer Andrew Kilpatrick had said Sokol was the most likely candidate to replace the billionaire as chief executive officer.
Sokol told Buffett before the March 30 statement that he hadn’t hoped to become CEO, according to the report. Sokol made the statement when given an opportunity to review a draft of Buffett’s comments for accuracy.
The draft had a passage, which Buffett excluded from the eventual report, “that implied that Mr. Sokol had resigned because he must have known the Lubrizol trades would likely hurt his chances of being Mr. Buffett’s successor,” according to the report.
Buffett said March 14 he would pay $135 a share for 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.
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