Wrapping Up on David Sokol (for now)

It has been about 3 weeks since my last post on David Sokol.  Since then the news has died down and things have quieted on this topic,  so I thought I would try to wrap things up and move on.  Since my last post on this topic we have seen the following news items:

It has been widely reported, and as Reuters is reporting,  that Warren Buffett now feels David Sokol deceived him and broke the law.    The Wall Street Journal is reporting that this apparently serious enough for the Board of Directors of Bershkshire Hathaway is considering filing a lawsuit against David Sokol.  For David Sokol what appears to the be the most problematic is the revelation that he bought shares after asking investment bankers to initiate talks with Lubrizol.  This is not just a matter of semantics,  this is a real legal problem for Mr. Sokol,  and there is no question that he should have been well aware that it was something he shouldn’t have done well before he bought the shares.

So as things now appear to be quieting down,  where does all of this leave David Sokol?  In my opinion,  not in a good position.  I’ve read the memo from Warren Buffett regarding Insider Trading Policies.  In the memo it states very clearly that Berkshire personnel are to “refrain from purchasing or selling such securities” when they possess material nonpublic information.  The information in Mr. Sokol’s possession was clearly nonpublic and most definitely material.  It also states that the fines can be the greater of $1 million or 3 times the profit.  In this case,  Mr. Sokol may be looking at a fine of up to $9 million.  OUCH!

Mr. Sokol (and Berkshire Hathaway) is now facing a Derivative Shareholder’s lawsuit in Delaware State Court.  I’ve reviewed the complaint, and while it does not state the specific statute that it claims Mr. Sokol violated,  it looks like they are pressing their claim based upon a Delaware statute that is substantially similar to Section 16(b) of the Securities Exchange Act of 1934.  If this is the case,  then this is going to be a very black and white case that Mr. Sokol will loose; and he is going to be forced to disgorge his profits and pay the plaintiff’s legal fees.  In the eyes of the law, either you did it or you didn’t; and he has already admitted to making the trades.  He is toast on this one.

The only real question is why the SEC hasn’t taken legal action????  This one of the most clear cut instances of insider trading I have ever seen in the 20+ years I have been in the securities and finance industry.  From an enforcement standpoint,  this case looks to be a slam dunk.  I can’t find one legitimate reason why the SEC is not prosecuting this case.  I can only think 2 reasons why the SEC has not filed a civil suit in this case;  it’s either due to incompetence on the part of the SEC or because Warren Buffett has been such a big supporter of President Obama.  Either way, the SEC needs take some action and show they are for equal treatment of everyone,  not selective enforcement which seems all to often to be the case.

My guess is that the next time we hear about David Sokol life won’t be going all that great for him.  But then again he made a very stupid decision, and as one of the WWF announcers once said,  “stupidity should be painful.

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