April 18, 2024

DealBook: S.E.C. Said to Weigh Inquiry of Sokol’s Lubrizol Trades

David L. SokolMario Anzuoni/ReutersDavid L. Sokol and Warren E. Buffett say he has done nothing wrong.

David L. Sokol said he thought he did nothing illegal when, as a top lieutenant of Warren E. Buffett, he bought shares of a company while orchestrating Berkshire Hathaway’s acquisition of it.

Mr. Buffett agrees.

But neither is the ultimate arbiter.

The Securities and Exchange Commission is weighing whether to formally investigate Mr. Sokol’s purchases of stock in the company, Lubrizol, according to a person briefed on the matter who was not authorized to speak publicly.

Securities lawyers say rules surrounding insider trading are murky, making it difficult to handicap whether Mr. Sokol could face legal liability.

“The decision whether to bring a case against Sokol will turn on a close analysis of the facts,” said Richard L. Scheff, a lawyer at Montgomery, McCracken, Walker Rhoads. “It will also turn on his state of mind as to why he was trading in Lubrizol when he was.”

A spokesman for the S.E.C. declined to comment. Mr. Sokol did not return requests for comment.

Mr. Buffett disclosed the trading in a press release on Wednesday announcing Mr. Sokol’s resignation from Berkshire. Mr. Sokol accumulated about $10 million shares of Lubrizol, a chemical maker, in January, just days before he suggested an acquisition of the company.

Two months later, Berkshire agreed to buy Lubrizol for $9 billion. The announcement of the deal increased the value of Mr. Sokol’s stock by $3 million.

The news of Mr. Sokol’s trading in Lubrizol comes at time when federal authorities have cracked down on insider trading. The hedge fund manager Raj Rajaratnam is on trial in Federal District Court in Manhattan in the biggest insider trading case in a generation. Earlier this week, the Justice Department brought criminal charges against a longtime Food and Drug Administration employee, accusing him of trading on confidential drug information.

Central to the regulators’ decision to bring a case is whether Mr. Sokol traded stock on material nonpublic information in violation of a duty of trust or confidence owed to the company or its shareholders — the legal definition of insider trading.

Did Mr. Sokol trade on information that was nonpublic?

In December, Mr. Sokol asked bankers at Citigroup to reach out to Lubrizol about a possible acquisition by Berkshire. Citigroup relayed his interest to the Lubrizol chief executive, who “indicated that he would inform his board of Berkshire’s possible interest,” according to a Lubrizol securities filing.

A few weeks later, Mr. Sokol bought about $10 million worth of Lubrizol stock.

Securities lawyers say regulators could take the view that such information — that is, investment bankers approaching Lubrizol about a potential deal with Berkshire — was confidential, or nonpublic.

Did Mr. Sokol trade on nonpublic information that was material?

This is a close call, say legal experts.

The Supreme Court recently said that information was material if it would have “significantly altered the total mix of information made available” to a “reasonable investor.”

An average investor would probably have viewed the news that Berkshire had approached Lubrizol as relevant in a decision to buy shares in the company. News of potential acquisitions — particularly those by Mr. Buffett — move stocks.

But Mr. Sokol, securities lawyers say, has a defense on this point. Even though he bought Lubrizol stock after initiating a potential transaction, the possibility of a deal actually happening was remote.

“Dave’s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea,” Mr. Buffett said in his release. “In addition, of course, he did not know what Lubrizol’s reaction would be if I developed an interest.”

Mr. Buffett added: “Furthermore, he knew he would have no voice in Berkshire’s decision once he suggested the idea; it would be up to me and Charlie Munger, subject to ratification by the Berkshire board, of which Dave is not a member.”

Did Mr. Sokol violate a duty to Berkshire or its shareholders?

Mr. Buffett said in his release that he felt that Mr. Sokol’s purchases were in no way unlawful. When Mr. Sokol approached Mr. Buffett about Lubrizol, he said that he owned stock in the company.

“It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings,” Mr. Buffett said in his letter.

But a regulator could argue that Mr. Sokol had violated his duty to Berkshire by breaching the company’s insider trading policy, said Steven M. Davidoff, a securities law professor and a columnist for The New York Times.

Berkshire’s insider trading policy states that executives “who have access to confidential information are not permitted to use or share that information for stock trading purposes or for any other purpose except the conduct of the company’s business. All nonpublic information about the company should be considered confidential information.”

Did Mr. Sokol know that his actions were unlawful, or that there was a high likelihood they were unlawful?

The legal term scienter — or having knowledge of wrongdoing — is a critical element of any insider trading case.

A crucial question is whether Mr. Sokol bought Lubrizol knowing he was going to suggest the deal to Mr. Buffett.

“I don’t believe that I did anything wrong,” Mr. Sokol told CNBC in an interview on Thursday. “I can understand the appearance issue, and that’s why we made it public.”

Article source: http://feeds.nytimes.com/click.phdo?i=83a4cd60f94755a9fae6078906fbd315

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