Posted on 01 Apr 2011
The sudden resignation of one of Warren Buffett's top deputies after some dubious stock purchases may be the most serious issue yet that the Berkshire Hathaway has to face, and could soil the principled image he’s spent decades cultivating.
Pegged by many as Buffett’s successor, David Sokol quit this week after it came to light he owned millions of dollars worth of Lubrizol shares, a chemicals company he pitched to Buffett as a good takeover target and which Berkshire agreed to buy March 14.
“At first blush, it doesn’t appear to be squeaky clean,” said Timothy Vick, who owns Berkshire shares and is a senior portfolio manager at Sanibel Captiva Trust Co. “There is a lot more unanswered questions than answered. Deal flow at Berkshire just doesn’t run through Buffett’s office. All the business unit leaders should be trained in conflicts of interest.”
Sokol, regularly praised by Buffett in the past, said he had considered resigning two years ago. Of Berkshire’s many subsidiaries, Sokol ran the utility MidAmerican and was credited with the swift turnaround at NetJets.
“The troubled resignation hurts Berkshire’s reputation,” said Egan-Jones, an independent credit-rating service.
Buffett said in a letter Wednesday he and Sokol don’t believe the Lubrizol trades were unlawful. Buffett said Sokol had told him he owned Lubrizol shares when Sokol first approached him about Berkshire perhaps buying the company.
If that’s the case, why didn’t Buffett tell Sokol to sell his Lubrizol stock when he had reached his decision to make Lubrizol an offer?
Berkshire agreed to buy Lubrizol for roughly $10 billion. Lubrizol shares jumped 27% that day, making Sokol’s 100,000 Lubrizol shares that much more valuable.
The Securities and Exchange Commission is considering looking at the deal for possible insider-trading violations, The Wall Street Journal said, citing a person familiar with the matter.
But proving Sokol did anything wrong will be tough, insider-trading lawyers told MarketWatch. Read why SEC may not bring insider-trading charges.
This is not the first time Buffett has come under regulators’ scrutiny.
Take General Re, a unit of Berkshire Hathaway that federal regulators charged in 2006 with helping AIG artificially inflate its loss reserves by $500 million in some reinsurance transactions. General Re’s former Chief Executive Officer Ronald Ferguson was eventually sentenced to two years in prison.
In the case, Buffett was questioned by investigators, including the office of then hard-charging New York Attorney General Eliot Spitzer.
Around the time of the federal investigation, Buffett had said he spoke infrequently with the managers of almost all of Berkshire’s subsidiary businesses, leaving operating decisions to them. In the case of Gen Re and AIG, Buffett said he wasn’t briefed on how the transactions were to be structured.
The Gen Re-AIG dealings shed light on the murky world of finite reinsurance, ensnaring another Berkshire subsidiary, National Indemnity, which was run — and still is — by Ajit Jain.
Jain is also considered a possible successor to Buffett.
Securities regulators from New York to Australia took a hard look at National Indemnity’s dealings. But no charges were ever filed.
In 2010, The Wall Street Journal reported that the SEC was examining disclosures Berkshire made about its $34 billion purchase of Burlington Northern Santa Fe Corp. railroad.
The regulator was looking at when Berkshire told other Burlington shareholders it intended to snap up the whole railroad, the newspaper said
Sure, Buffett has plenty to oversee. Berkshire owns dozens of companies, ranging from California-based See’s Candies to Israel’s Iscar, a metal-tools-cutting firm. And Buffett has made no secret that the purpose of his $38 billion cash stockpile is to make more acquisitions.
In the Sokol case, “it doesn’t change your opinion of Berkshires principals and culture, but it shows you how much more difficult it gets as the institution gets more complicated,” said Thomas Russo, a partner at Lancaster, Penn.-based Gardner Russo & Gardner, which is a longtime Berkshire investor.
Berkshire’s payroll had swelled to about 260,000 employees by Dec. 31.
Mutual-fund manager Jeff Auxier, another longtime Berkshire investor, said he doesn’t think Buffett’s reputation as a studious, law-abiding investor will emerge from this latest fracas unscathed.
“They aren’t trying to hide anything. It was a honest turn of events ... it’s unfortunate,” said Auxier.
But he said he was “surprised” Sokol was allowed to buy so much stock in a non-Berkshire entity, regardless of whether it might someday be a takeover target