September 19, 2020

DealBook: Berkshire Report Faults Sokol

David L. SokolNati Harnik/Associated Press David L. Sokol

Berkshire Hathaway said on Wednesday that its audit committee had determined that David L. Sokol, once considered a possible successor to the company’s chief executive, Warren E. Buffett, had violated the company’s standards of ethics in his purchases of shares of Lubrizol.

Mr. Sokol resigned in March after it emerged that he had personally bought $10 million worth of stock in Lubrizol shortly before bringing the company to Mr. Buffett’s attention. Berkshire later agreed to purchase Lubrizol for $9 billion, causing its shares to surge and increasing the value of Mr. Sokol’s holding by $3 million.

The audit committee found that Mr. Sokol’s conversations with Mr. Buffett and others at Berkshire Hathaway were “intended to deceive” and “its effect was to mislead.”

According to the report, Mr. Sokol’s purchases came to light as a result of a call from Citigroup:

On the morning of March 14, Berkshire Hathaway and Lubrizol announced the signing of the merger agreement. A Citi representative with whom Berkshire Hathaway did business congratulated Mr. Buffett on the merger agreement, and told Mr. Buffett that Citi’s investment bankers had brought Lubrizol to Mr. Sokol’s attention. This was the first time Mr. Buffett heard that investment bankers played any role in introducing Lubrizol to Mr. Sokol, and did not square with Mr. Sokol’s remark in January that he had come to know Lubrizol by owning the stock.

At Mr. Buffett’s request, Berkshire Hathaway C.F.O. Marc Hamburg phoned Mr. Sokol on March 15. Mr. Hamburg asked Mr. Sokol for the details of his Lubrizol stockholdings. Mr. Sokol provided the dates and amounts of his Lubrizol purchases. Mr. Hamburg also asked about Citi’s role in introducing Mr. Sokol to Lubrizol. Mr. Sokol answered that he thought he had called a banker he knew at Citi to get Mr. Hambrick’s phone number. When Mr. Hamburg commented that it sounded as if the banker must have exaggerated his role when he spoke with his colleagues, Mr. Sokol did not contradict him.

The report says Mr. Sokol’s response “fell short of the degree of candor required of a corporate fiduciary, and suggests his answer to Mr. Buffett’s earlier inquiry noted above was intended to deceive.”

The report says Mr. Sokol “voluntarily resigned” from all his Berkshire positions and that he would not receive any severance benefit as a result.

Here are some other highlights from the report:

On March 29, Mr. Buffett provided Mr. Sokol an opportunity to review for accuracy a draft Mr. Buffett had prepared of a press release announcing Mr. Sokol’s resignation and disclosing Mr. Sokol’s Lubrizol trades. At Mr. Sokol’s request, Mr. Buffett deleted from the release the one passage Mr. Sokol said was inaccurate: a passage 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. Mr. Sokol told Mr. Buffett that he had not hoped to be Mr. Buffett’s successor, and was resigning for reasons unrelated to those trades. Except for that deletion, Mr. Sokol concurred in the accuracy of the press release. For example, Mr. Sokol left unchanged the statement that when Mr. Sokol made his purchases, he “did not know what Lubrizol’s reaction would be” if Mr. Buffett developed an interest in a transaction. Mr. Sokol also left unchanged Mr. Buffett’s statement that he had “held back nothing in this press release.”

The following is the Berkshire Hathaway audit committee’s report on Mr. Sokol and his purchase of Lubrizol. shares.

Berkshire Hathaway audit report

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