It has been a couple of weeks since Warren Buffett’s startling announcement that David Sokol bought shares of Lubrizol for his personal account ahead of Berkshire’s acquisition of the company. For a time it looked like Warren’s efforts to get out in front of the issue with the press had been successful. However, last week Reuters reported on April 19th, that “Berkhire, Buffet Sued Over Sokol’s Trades.” I thought that now might be a good time to take a look at Mr. Sokol’s activity, what he has done wrong, and the liability he and Berkshire Hathaway may have incurred.
Let’s take a quick look at the news report on the lawsuit. Here is what the report says in a nutshell. It looks like Mason Kirby, a shareholder in Berskhire Hathaway has filed a suit in the Delaware Chancery Court against Warren Buffet, the Entire Board of Directors of Berkshire Hatahaway, and David Sokol. The Reuters Report says the lawsuit seeks to have David Sokol give up his profits and seeks damages against Berkshire’s for damage to the company’s reputation. While I have not yet received a copy of the lawsuit (but I am working on it), it looks like the lawsuit may be alleging what is known as a 16(b) violation and breach of fiduciary duty. 16(b) refers to Section 16(b) of the Securities Exchange Act of 1934, and the breach of fiduciary duty probably relates to Berkshire’s Code of Conduct.
Let’s take a look at how Buffett, Sokol, and Berskhire got to this point in time.
Prior to all of this, David Sokol was the President & CEO of NetJets, and Chairman of MidAmerican Energy Holdings Company. He was also widely regarded as the heir apparent to Warren Buffett at Berkshire Hathaway.
The Seattle Times Business/Technology Section published the following timeline (their info is in ITALICS) of Sokol’s activities based upon statements from Buffett, Sokol, and documents Lubrizol filed with Regulators. I’ve added my commentary and questions inline for ease of understanding:
May of 2010, Warren Buffett send out a memo titled “Insider Trading Policies and Procedures” Evidently these policies and procedures had been in place for over 10 years.
“– Sokol says he became interested in Lubrizol sometime last fall and started researching it as a possible investment, primarily for his personal portfolio.” This statement to me seems to be rather vague and somewhat evasive.
“– Dec. 13: Sokol met with investment bankers from Citigroup to discuss investment ideas, including Lubrizol. Sokol says he asked one of those bankers to set up a meeting with Lubrizol’s CEO but didn’t say Berkshire was interested in buying Lubrizol.” The Wall Street Journal has a pretty decent article on this meeting. In reviewing the article it become clear that the Citigroup bankers thought they were pitching a company for Berkshire to buy. Sokol never states that he is having the meeting for a specific purpose. My guess is a little bit of both personal and professional. Nothing wrong with that.
“– Dec. 14: Sokol says he tried to buy 50,000 Lubrizol shares but could only buy 2,300 at the price he wanted, so he sold those a week later.” My guess is it was too small of a position to matter or be worth the trouble to keep track of for his portfolio. Common practice, and nothing wrong with it.
“– Dec. 17: Lubrizol says the Citi investment banker told the company Sokol wanted to meet Lubrizol CEO James Hambrick and Berkshire might be interested in the company. ” Shows intent and mindset of David Sokol. This could prove to be a problem.
“– Jan. 5-7: Sokol bought 96,060 Lubrizol shares as part of a 100,000-share order he had placed with a $104-per-share limit price.” It looks like Lubrizol called a special meeting of the Board of Directors to be held on January 6th. If Sokol knew about this, which I am pretty sure he did, then placing this trade was a clear case of insider trading. Why else would he suddenly buy this large of a position???
“– Jan. 12: Citi banker called Sokol to schedule a call with Hambrick.” Pretty straight forward.
“– Jan. 14: Sokol talked with Hambrick on the phone about Lubrizol. And Sokol told Buffett Lubrizol was willing to talk about being acquired by Berkshire.” I’ve got to be honest, at this point it looks like Sokol knew the Lubrizol and Buffet would both be interested before he placed the order for 100,000 shares on January 5th.
“– Jan. 25: Sokol and Lubrizol met for dinner in Cleveland to discuss whether the companies would be a good fit. Buffett said he remained skeptical about acquiring Lubrizol until after that dinner conversation.” A skeptical personal would that Warren Buffett is covering his friend’s you know what.
“- Jan. 27: Sokol helped arrange a meeting between Hambrick and Buffett.” Pretty straight forward.
“– Feb. 8: Buffett met with Hambrick in Omaha and offered to buy all of Lubrizol’s outstanding stock for $135 cash per share.” It should be noted this is 31 days after Sokol purchased his last share in Lubrizol.
“– Feb. 9-March 13: Lubrizol and Berkshire negotiated the details of the deal.”
“- March 14: Berkshire announced plans to acquire Lubrizol for $135 a share if regulators and shareholders approve.”
“– March 19: Sokol disclosed the details about when he bought his Lubrizol stock after Berkshire’s chief financial officer inquired.”
“– March 30: Buffett announced Sokol’s resignation and disclosed his Lubrizol stock purchases.”
Thursday March 31st, David Sokol appears on CNBC and defends his purchase of Lubrizol shares. According to a Reuters Article on the Interview, it looks like Sokol was rather defiant. I remember watching the interview; and I thought his claims that he thought the chances of Lubrizol being bought were rather thin and that he had a responsibility to his family to buy the shares were all a bunch of hogwash.
It now looks like Lubrizol hired Evercore Partners to represent the company in its buyout talks with Warren Buffett, and Sokol knew Evercore had been hired. If this is true, then Sokol has problems regarding insider trading, front running, and breach of fiduciary duty.
If I was Warren Buffett, I would ticked off at David Sokol in an unbelievable way. Warren’s excuses defending his friend look weak, and the New York Times opinion page slams him for it. I do not believe Warren’s story about Sokol making “passing remarks” about Lubrizol to him, it sounds like a weak attempt at covering someone’s rear. To make matters worse, the SEC is weighing whether to launch a formal investigation. I doubt this will happen as Warren is too politically connected to our current President. But here is the rub; there is this private lawsuit and if it goes far enough the SEC might be pressured into doing something. Or there might be changes at the SEC, and new management decides to go after Sokol and Buffett.
If there is a formal investigation, I think Sokol is toast and stands a good chance of going to jail. With this civil lawsuit, it may not be a case of “if” he goes to jail, but “when.”
Will let you know more as I find out more.