DealBook: Buffett Takes Sharper Tone in Sokol Affair

Left, Daniel Acker/Bloomberg News; Nati Harnik/Associated PressWarren Buffett, left, said that David L. Sokol “violated the code of ethics.”

OMAHA — The billionaire Warren E. Buffett offered on Saturday his sharpest criticism yet of a former top lieutenant at his investment company, Berkshire Hathaway, saying that David L. Sokol had violated company trading policy and calling Mr. Sokol’s actions “inexplicable and inexcusable.”

Addressing a gathering of thousands of investors at Berkshire’s annual shareholders meeting here, Mr. Buffett spoke at length publicly for the first time about the controversy involving Mr. Sokol, who resigned from Berkshire a month ago after it was revealed that he had bought shares in the chemical maker Lubrizol before pitching that company to Mr. Buffett as a potential takeover target.

“I don’t think there’s any question about the inexcusable part,” Mr. Buffett said. “He violated the code of ethics. He violated our insider trading rules. He violated the principles I lay out every two years.”

Since disclosing Mr. Sokol’s trades one month ago, Berkshire has conducted what it says are more thorough inquiries into the matter and found more of what Mr. Buffett called “pretty damning evidence” that it has forwarded to the Securities and Exchange Commission.

A lawyer for Mr. Sokol, who was the chairman of Berkshire’s MidAmerican Energy Holdings, said in a statement last week that his client “would not, and did not, trade improperly,” and did not violate Berkshire’s policies.

Still, Mr. Buffett, 80, conceded that he had erred in not asking more questions of Mr. Sokol about his investment in Lubrizol, especially as Mr. Sokol was presenting the company as a possible acquisition. “I obviously made a big mistake by not saying ‘well, when did you buy it?’ ” Mr. Buffett said.

Mr. Buffett said he first grew concerned about the Lubrizol deal after a conversation with a longtime Berkshire broker, John Freund of Citigroup, who mentioned the investment bank’s role in highlighting the chemical company to Mr. Sokol as a potential acquisition for Berkshire. That began a series of inquiries by Berkshire and its outside law firm.

The cloud hanging over Berkshire in the aftermath of Mr. Sokol’s departure lent a more serious tone to the annual meeting, which in most years is a lighthearted celebration of the conglomerate’s astoundingly consistent success.

More traditional elements of Berkshire shareholder meetings were present earlier in the day. Mr. Buffett took a tour of exhibitions in the Qwest Center, including those set up by Burlington Northern Santa Fe, See’s Candy and Dairy Queen, all owned by Berkshire. Over 100 shareholders and photographers pressed close to the Berkshire chief, with passersby straining to get even a blurry photo of themselves next to the back of Mr. Buffett’s head.

During a stop at the Justin Brands booth for college-themed cowboy boots, Mr. Buffett was greeted by four University of Nebraska cheerleaders, who chanted “Go Big Red.”

While the reporters on stage, including one from The New York Times, appeared to ask most of the questions about Mr. Sokol, shareholders appeared focused on broader questions about investment strategy and Berkshire’s performance.

Among their biggest concerns is the performance of a core Berkshire profit engine, its reinsurance business. Because of this year’s run of natural disasters — including the Japan and New Zealand earthquakes and the recent plague of tornadoes that has swept across the South —Berkshire’s insurance operations are likely to post an underwriting loss for the year, Mr. Buffett added.

Still, the Sokol affair has provided the biggest challenge to Mr. Buffett’s reputation since the billionaire came to the rescue of Salomon Brothers 20 years ago when the investment bank was battered by a bond trading scandal. The Salomon bailout yielded one of the clearest and harshest statements on business ethics that Mr. Buffett has ever uttered: “Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.”

But in disclosing Mr. Sokol’s trade last month, Mr. Buffett wrote in a public letter only that he did not view the actions as unlawful, and his uncritical response was widely criticized for being too tame.

Last Wednesday, Berkshire’s board took a much tougher stance, accusing Mr. Sokol of intending to deceive and mislead Mr. Buffett. The directors wrote in a lengthy report that they were considering suing Mr. Sokol and were fully cooperating with regulators. The Securities and Exchange Commission is already looking into the matter, people briefed on the matter have said.

On Saturday, though he was harsh in his assessment of Mr. Sokol’s trading actions, he pointedly declined to personally attack Mr. Sokol, instead highlighting the executive’s years of service and good performance.

Mr. Sokol, according to his now-former boss, once turned down an additional $12.5 million in compensation, instead asking that it be given to his second-in-command at MidAmerican Energy, a unit of Berkshire Hathaway. Mr. Buffett wondered aloud what could drive an executive who turned down $12.5 million to make improper trades a decade later that yielded $3 million.

Mr. Buffett acknowledged that his initial press release on Mr. Sokol’s departure might have seemed too supportive of his former lieutenant. “What I think bothers some people is that there wasn’t some big sense of outrage” in the news release, Mr. Buffett said. “I plead guilty to that. But this fellow had done a lot of good.”

Both Mr. Buffett and his longtime business partner, the Berkshire vice chairman Charles Munger, said that by the time the board delivered its report on Mr. Sokol, the company had already turned over evidence to the S.E.C. and had saved the firm money by not firing him.

“I feel like you don’t want to make important decisions in anger,” Mr. Munger said, defending Berkshire’s press release. “You can always tell a man to go to hell tomorrow.”

In resigning, Mr. Sokol said that he never aspired to succeed Mr. Buffett, again leaving open the question of who would eventually take over Berkshire. Mr. Buffett was characteristically vague about his plans, except that his son Howard would eventually become Berkshire’s unpaid chairman. As to who would eventually become chief executive, Mr. Buffett told one shareholder. “The guy who’s the leading candidate now, I would lay a lot of money on the fact that he’s straight as an arrow.”

Later in the meeting, Mr. Buffett repeatedly praised one perennial candidate: the head of Berkshire’s reinsurance operations, Ajit Jain, whom he described as exceptionally loyal and having a mind “like a machine.”

Article source: http://dealbook.nytimes.com/2011/04/30/buffett-takes-sharper-tone-in-sokol-affair/?partner=rss&emc=rss