December 6, 2023

DealBook: New Details Emerge on Sokol and Lubrizol Deal

David L. SokolDaniel Acker/Bloomberg News David L. Sokol resigned from Berkshire Hathaway on March 30.

9:18 p.m. | Updated

David L. Sokol, a former top deputy to Warren E. Buffett, knew more about Lubrizol’s interest in a potential deal with Berkshire Hathaway than previously disclosed — a revelation that comes as the government examines Mr. Sokol’s personal stake in the chemical manufacturer.

A regulatory filing on Monday shows that Mr. Sokol was aware in mid-December that Lubrizol’s chief executive planned to talk to his board about a possible acquisition by Berkshire. A few weeks later, Mr. Sokol bought nearly 100,000 Lubizol shares.

The fresh details once again cast a spotlight on Mr. Sokol’s decision to take a $10 million stake in Lubrizol while orchestrating a potential takeover of it.

The Securities and Exchange Commission is considering whether to open a formal investigation into Mr. Sokol, according to people close to the agency. His legal liability, in part, hinges on whether he acted on material, confidential information for his own personal gain.

Mr. Sokol, who abruptly resigned his managerial post at Berkshire last month, saw the value of his Lubrizol stake rise by $3 million after Berkshire announced its $9 billion bid for the industrial company.

“I think someone could look at this set of facts and say there’s a potential problem here,” said Richard L. Scheff, a former federal prosecutor who is now a criminal defense lawyer at Montgomery, McCracken, Walker Rhoads. “This raises a concern for me.”

Even so, the insider trading rules are murky. And the government may find it difficult to prove Mr. Sokol’s trades were anything more than “innocent purchases,” said Daniel J. Hurson, a former lawyer in the S.E.C.’s enforcement office who is now in private practice.

Mr. Sokol has said that he did nothing wrong, and Mr. Buffett has agreed.

“Neither Dave nor I feel his Lubrizol purchases were in any way unlawful,” Mr. Buffett said in a letter last month about the resignation, noting that Mr. Sokol made the trades before pitching the Lubrizol deal to Berkshire.

The preliminary proxy filed by Lubrizol on Monday provides greater detail about Mr. Sokol’s dealings.

Mr. Sokol first expressed interest in a Lubrizol acquisition in December, after Citigroup bankers recommended the industrial manufacturer as a possible takeover target.

On Dec. 17, a Citigroup banker called Lubrizol’s chief executive, James L. Hambrick, to let him know about Berkshire’s possible interest in the company, the new regulatory filing said. Mr. Hambrick told the banker that he would share Berkshire’s possible interest with the Lubrizol directors.

That same day, Citigroup told Mr. Sokol, then chairman of MidAmerican Energy and NetJets, about the board’s planned discussions — a previously unknown part of the timeline.

“That sounds pretty material to me,” Mr. Hurson said. “If I was still at the S.E.C., I’d be interested in the case.”

Mr. Sokol started accumulating Lubrizol stock shortly thereafter. From Jan. 5 through Jan. 7, Mr. Sokol bought more than 96,000 shares of the company.

The Lubrizol board held a “special meeting” on Jan. 6 to discuss Berkshire Hathaway’s possible interest in the company, and the board agreed right away to hire lawyers to advise on a potential acquisition.

“On or about January 10, 2011, Mr. Hambrick requested that Citi contact Mr. Sokol to inform him that he should expect a call from Mr. Hambrick and thereafter Citi so informed Mr. Sokol,” according to the latest Lubrizol filing.

Roughly four days later, Mr. Sokol and Mr. Hambrick talked on the phone about the “corporate cultures and philosophies” at their respective companies. They agreed to meet in person later in the month.

Mr. Sokol suggested a Lubrizol deal to Mr. Buffett on Jan. 14 or 15, according to Mr. Buffett’s letter. At the time, Mr. Sokol made a “passing remark” about his stake in Lubrizol to Mr. Buffett, who did not ask about “the date of his purchase or the extent of his holdings.”

Some analysts and corporate governance experts have criticized Mr. Buffett for not demanding further details.

“This is damaging to Berkshire’s reputation,” said Greggory Warren, a senior stock analyst at research firm Morningstar. “It brings up questions about Berkshire’s internal controls.”

Mr. Buffett indicated in his letter that “Dave’s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea” or “what Lubrizol’s reaction would be if I developed an interest.”

Although Mr. Buffett was originally skeptical of the deal, he later became convinced. Berkshire ultimately agreed on March 14 to acquire Lubrizol for $9 billion.

On March 30, Mr. Buffett announced the departure of Mr. Sokol in a letter that detailed the trades.

That’s when Lubrizol “first learned” of Mr. Sokol’s personal stake, the company said in the filing on Monday.

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