May 24, 2024

DealBook: Sokol Is Accused of Misleading Buffett on Trades

David L. SokolNati Harnik/Associated Press David L. Sokol is accused of “misleadingly incomplete disclosures.”

9:02 p.m. | Updated

Berkshire Hathaway directors have accused David L. Sokol, once considered a possible successor to Warren E. Buffett, of misleading the company about his personal stake in a lubricant manufacturer that Berkshire recently agreed to acquire.

Mr. Sokol, who resigned in March, never told Mr. Buffett that he had bought his stake in Lubrizol after Citigroup bankers pitched the company as a potential takeover target, according to a report by the audit committee of the Berkshire board that was released on Wednesday.

“His misleadingly incomplete disclosures to Berkshire Hathaway senior management concerning those purchases violated the duty of candor he owed the company,” the report says, which adds that Mr. Sokol may have failed his fiduciary duty under the law of Delaware, where Berkshire is incorporated.

The accusations are a stark turnaround for Berkshire, which had been careful not to criticize its former star manager. Indeed, when Mr. Buffett announced Mr. Sokol’s resignation on March 30, he said, “Neither Dave nor I feel his Lubrizol purchases were in any way unlawful.”

Berkshire’s annual shareholder meeting is on Saturday, an event in Omaha known as the Woodstock of capitalism that is attended by thousands. Investors and journalists had been expected to try to question Mr. Buffett about Mr. Sokol and the Lubrizol trades. The board’s report, which finds no fault with Mr. Buffett’s handling of the affair, could mute some of the scrutiny facing Berkshire.

The report also concluded that Mr. Sokol defied Berkshire’s insider trading policies by accumulating the personal stake in Lubrizol while orchestrating a potential takeover of the company. Munger, Tolles Olson, Mr. Buffett’s longtime outside law firm, helped prepare the report, which was presented to Berkshire’s board on Tuesday night. Ronald L. Olson, a partner at the firm, sits on Berkshire’s board.

Berkshire’s board and audit committee are considering whether to pursue “possible legal action against Mr. Sokol to recover any damage the company has sustained, or his trading profits,” the report says.

The Securities and Exchange Commission, meanwhile, is investigating Mr. Sokol’s trading, according to people close to the inquiry.

But Mr. Sokol’s lawyer, Barry W. Levine of Dickstein Shapiro, disputed several major assertions in the report, saying that his client had not traded improperly or violated company policies. Mr. Levine said that Mr. Sokol had been looking at a personal investment in Lubrizol since summer 2010, before Citigroup bankers had pitched Lubrizol. And he said that his client had told Mr. Buffett “twice, not once” about his ownership of Lubrizol shares before Mr. Buffett began discussions with the company.

“I am profoundly disappointed that the audit committee of Berkshire Hathaway would authorize the issuance of its report to the public without the care and decency to ask even a single question of Mr. Sokol,” Mr. Levine said in a statement.

Mr. Olson said that Mr. Sokol had been offered the opportunity, through his lawyer, to be interviewed by the audit committee but declined.

As a Berkshire manager, Mr. Sokol had stressed the importance of integrity and ethics to his employees. In his 2007 self-published book, “Pleased, But Not Satisfied,” Mr. Sokol, wrote: “Integrity is merely doing what is right, even when no one else is looking. It is being honest and candid. It is being forthright and candid.”

Mr. Sokol, 54, resigned from the company 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 buy Lubrizol for $9 billion — causing Lubrizol’s shares to surge and increasing the value of Mr. Sokol’s holding by some $3 million.

The shift in Berkshire’s position toward Mr. Sokol came, the audit committee’s report says, because Mr. Buffett and the company did not have the full story in March. Mr. Sokol’s conversations with Mr. Buffett and others at Berkshire about his investment in Lubrizol were “intended to deceive” and “its effect was to mislead,” the report said.

Most notably, Mr. Sokol failed to tell Mr. Buffett about the central role that Citigroup played in spawning the Lubrizol deal, according to the report. Mr. Buffett is known to mistrust Wall Street, while Mr. Sokol often flew to New York to huddle with bankers about potential deals.

Mr. Sokol first expressed interest in a Lubrizol acquisition in December, after Citigroup bankers recommended the company as a possible takeover target. Mr. Sokol jumped at the idea.

Citigroup then played matchmaker between Mr. Sokol and Lubrizol’s chief executive, James L. Hambrick, shuttling information between the two executives.

On Dec. 17, a Citigroup banker called Lubrizol’s chief executive to let him know about Berkshire’s possible interest. That same day, Citigroup told Mr. Sokol, then chairman of MidAmerican Energy and NetJets, that Mr. Hambrick planned to discuss the matter with his board.

On Jan. 5, 6 and 7, Mr. Sokol accumulated nearly 100,000 Lubrizol shares.

Soon after, Mr. Sokol suggested a Lubrizol deal to Mr. Buffett, who was initially cool to the idea.

When Mr. Buffett asked Mr. Sokol what started his interest in Lubrizol, Mr. Sokol said he owned the stock.

Mr. Sokol did not disclose that he bought the shares only after Citi pitched the company as a potential takeover target. And Mr. Buffett did not ask about the extent of his stake in the company.

The details of Mr. Sokol’s purchases — and Citi’s involvement in the deal — were not known until a bank representative told Mr. Buffett after the deal was announced on March 14.

“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,” the report said.

The report did not take Mr. Buffett to task for failing to press Mr. Sokol for additional details. Some analysts and corporate governance experts have criticized Mr. Buffett for trusting Mr. Sokol’s original account of the situation.

“It did not cross Mr. Buffett’s mind at that time that Mr. Sokol might have bought Lubrizol shares after seeking through investment bankers to initiate discussions with Lubrizol concerning a possible Berkshire Hathaway acquisition of Lubrizol,” the report said.

Shortly before Berkshire publicly disclosed Mr. Sokol’s resignation, he had one last chance to set the record straight.

Mr. Buffett allowed Mr. Sokol to edit for accuracy an advance copy of the press release announcing his resignation.

Mr. Sokol deleted only one sentence that implied that he resigned because the Lubrizol trades would hinder his chances of succeeding Mr. Buffett.

Mr. Sokol, according to the report, said the sentence was inaccurate.

Berkshire Hathaway audit report

Statement from Barry W. Levine, lawyer for David Sokol

I am profoundly disappointed that the Audit Committee of Berkshire Hathaway would authorize the issuance of its report to the public without the care and decency to ask even a single question of Mr. Sokol. Mr. Sokol had been associated with the Berkshire Hathaway companies for 11 years. During this time, his indefatigable efforts helped create enormous value for the Berkshire shareholders. He deserved better. While I take issue with much of the Committee’s report, I briefly make the following points. If the Audit Committee had asked, it would have learned that:

Mr. Sokol had been studying Lubrizol for personal investment since the summer of 2010; such investments are specifically allowed by his employment agreement.

Mr. Buffett was told twice, not once, about Mr. Sokol’s ownership of Lubrizol stock before Mr. Buffett engaged in any discussions with Lubrizol.

Contrary to the Audit Committee’s statement, Mr. Sokol’s Lubrizol shares were not acquired pursuant to a “100,000 limit order.” Rather, they were purchased as a result of several limit orders, over a period of days, at specified prices, for the day only, in order to acquire the stock at low prices. At that time, Mr. Sokol had no reason to anticipate that Mr. Buffett would have any interest whatsoever in Lubrizol.

I have known Mr. Sokol and have represented his companies in business litigation since the mid 1980s. I know him to be a man of uncommon rectitude and probity. He would not, and did not, trade improperly, nor did he violate any fair reading of the Berkshire Hathaway policies.

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