December 10, 2019

DealBook: Buffett Takes Sharper Tone in Sokol Affair

Warren Buffett, left, said that David Sokol 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.”

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DealBook: Fresh Details on Berkshire’s Lubrizol Deal and Sokol

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

Whether regulators bring an insider trading case against David L. Sokol — a former top deputy of Warren E. Buffett who was central to Berkshire Hathaway’s decision to buy Lubrizol — will hinge in part on whether he bought stock based on nonpublic, material information.

Now, fresh details are emerging about what Mr. Sokol knew, and when.

A preliminary proxy filed on Monday by Lubrizol indicates that Mr. Sokol was aware in mid-December that Lubrizol’s chairman and chief executive, James L. Hambrick, planned to talk with his board about a possible acquisition by Berkshire. Mr. Sokol was informed about the discussions by Citigroup on Dec. 17. In early January, Mr. Sokol bought nearly 100,000 shares of Lubrizol, a manufacturer of specialty chemicals.

It was previously unknown whether Mr. Sokol, who abruptly resigned last month, knew that Lubrizol’s chief had discussed a potential deal with his board.

The revelation casts a new spotlight on Mr. Sokol’s decision to take the nearly $10 million stake in Lubrizol as he worked behind the scenes on a potential deal to acquire the company. Some legal experts have questioned whether Mr. Sokol traded on inside information unavailable to the public, namely that a possible bid for Lubrizol was in the works.

The Securities and Exchange Commission is looking into Mr. Sokol’s stock purchases, according to people close to the agency.

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 statement last month, noting that Mr. Sokol made the trades before pitching the Lubrizol deal to Berkshire.

Mr. Sokol first expressed interest in a Lubrizol deal in December, shortly after meeting with Citigroup bankers who recommended the industrial manufacturer as a possible takeover target.

On Dec. 17, a Citi banker called Mr. Hambrick to inform him of Berkshire’s possible interest in the company, the Lubrizol regulatory filing said. Mr. Hambrick told Citi that he would inform his board about Berkshire’s possible interest.

“Later on December 17, 2010, Citi informed Mr. Sokol that Mr. Hambrick had indicated that he would discuss Berkshire Hathaway’s possible interest with the Board,” the filing said.

Mr. Sokol bought more than 96,000 Lubrizol shares on Jan. 5, 6 and 7. On Jan. 6, the Lubrizol board held a “special meeting” to discuss Berkshire Hathaway’s possible interest in the company, according to the Lubrizol filing. The board agreed right away to hire lawyers to advise on a possible deal.

“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 another addition in the Lubrizol filing.

On Jan. 14, Mr. Sokol and Mr. Hambrick talked on the phone about the “corporate cultures and philosophies” at their respective companies, according to the filing. They agreed to meet in person later in the month.

Mr. Sokol first mentioned a possible Lubrizol deal to Mr. Buffett on Jan. 14 or 15, according to Mr. Buffett. Mr. Sokol made a “passing remark” to Mr. Buffett about his stake in Lubrizol, Mr. Buffett said.

“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 wrote in his letter announcing Mr. Sokol’s resignation. “In addition, of course, he did not know 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.

Mr. Sokol resigned on March 30 as disclosures emerged about his stake in Lubrizol. The company said in the filing on Monday that it “first learned” of Mr. Sokol’s share purchases at the time of his resignation.

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Sokol’s Ways Questioned in Past Suits

The most serious lawsuit centered on the accounting of an irrigation project by MidAmerican Energy, where Mr. Sokol was chief executive when Berkshire bought it in 1999.

In a rebuke last year, the judge ruled in that case that MidAmerican had improperly changed its accounting on the project and criticized Mr. Sokol directly. The change in accounting was “intended to eliminate the minority shareholders’ interests,” the judge wrote, awarding more than $32 million to the minority shareholders. The case had taken more than five years to work its way through the courts. During that time, Warren E. Buffett, the chief executive of Berkshire, expressed confidence in Mr. Sokol by broadening his portfolio beyond MidAmerican to include Netjets, a company that sells fractional use of private aircraft.

After Mr. Sokol took over Netjets in July 2009, some critics complained about his management style and his strategy for shrinking the company, which had been ailing even before the financial crisis did more severe damage.

Under Mr. Sokol’s direction, the aircraft company filed a suit last November seeking to learn which employees had provided information to Alice Schroeder, the author of “The Snowball,” the best-selling biography of Mr. Buffett. Ms. Schroeder declined to supply the information, and her lawyer characterized the action as a witch hunt. The suit was dropped on Monday.

The lawsuits would have been “yellow lights: if not danger signals, at least warning signs,” Ms. Schroeder said in an interview on Monday. “Disputes in business are common, but both of these speak to the integrity of the management, not just ordinary business wrangling.”

Some others have questioned Mr. Sokol’s hard-charging style as well. Michael Lissack, who was an investment banker at Smith Barney in the late 1980s, worked with Mr. Sokol when he ran Ogden Projects, the resource recovery subsidiary of the Ogden Corporation.

He characterized Mr. Sokol as “very bright” but at times wondered about his motivation. “There is nothing wrong with being tough,” Mr. Lissack said. “There is something wrong with only looking out for No. 1 when you pretend to be a team player.”

The Netjets suit was dropped less than a week after Mr. Sokol said he was resigning from Berkshire, which acknowledged that he had owned shares of Lubrizol, a specialty chemicals company, before Berkshire announced it would acquire the company.

Investment bankers talked with Mr. Sokol about Lubrizol as a possible acquisition target. In January, Mr. Sokol accumulated about $10 million in shares of Lubrizol and had a discussion with Lubrizol’s chief executive. Mr. Sokol subsequently promoted the company to Mr. Buffett, Mr. Buffett has said.

Two months later, when Berkshire agreed to buy the company, Mr. Sokol’s shares soared about $3 million in value.

After the resignation, Mr. Buffett said that he did not believe the purchases were unlawful. He also said that they were made before Mr. Sokol had discussed Lubrizol with Mr. Buffett, so he could not have known whether Mr. Buffett would be in favor of a deal.

At Netjets, Mr. Sokol faced a difficult task because of the recession and because, by most accounts, the company had grown bloated. Ms. Schroeder, who tracks Berkshire and its companies, noted that Netjets had shown improvement, but added that public information was very limited because the company was a tiny part of Berkshire.

The Netjets lawsuit “claimed that some employees, or at least one employee, had violated his or her confidentiality agreement with Netjets by forwarding an internal e-mail from Mr. Sokol distributed to more than 2,000 of the companies’ employees,” said Cameron Stracher, of counsel to Levine, Sullivan, Koch Schulz, the firm representing Ms. Schroeder.

In January, the company started a proceeding in Ms. Schroeder’s home state of Connecticut to subpoena her to produce her sources. “To sue to get an e-mail that was distributed companywide is clearly a witch hunt,” Mr. Stracher said.

Michele L. Noble, a partner at Thompson Hine, the firm representing Netjets, said she could not comment on the company’s decision to withdraw its suit. Mr. Sokol did not return e-mails, and a company spokeswoman declined to comment.

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DealBook: Potential Buffett Successor Suddenly Quits

David SokolDaniel Acker/Bloomberg NewsDavid Sokol.

David Sokol, a potential successor to Warren E. Buffett at Berkshire Hathaway, has abruptly resigned, according to a company announcement.

The resignation comes as Mr. Sokol’s investment in Lubrizol, a specialty chemicals company that Berkshire recently announced it would acquire, faces some scrutiny.

“Dave brought the idea for purchasing Lubrizol to me on either Jan. 14 or 15. Initially, I was unimpressed, but after his report of a January 25 talk with its C.E.O., James Hambrick, I quickly warmed to the idea,” Mr. Buffett said in a statement. “Though the offer to purchase was entirely my decision, supported by Berkshire`s board on March 13, it would not have occurred without Dave`s early efforts.”

Mr. Sokol purchased 2,300 shares of Lubrizol on Dec. 14, which he then sold on Dec. 21, according to Mr. Buffett. On Jan, 5, 6 and 7, Mr. Sokol bought 96,060 shares “pursuant to a 100,000-share order he had placed with a $104 per share limit price,” Mr. Buffett’s statement said.

“Neither Dave nor I feel his Lubrizol purchases were in any way unlawful,” Mr. Buffett said. “He has told me that they were not a factor in his decision to resign.”

Mr. Buffett said in the company announcement that he did not ask for Mr. Sokol’s resignation, which “came as a surprise to me.” Mr. Sokol had twice before mentioned resigning, but Mr. Buffett was able to persuade him to say, he said.

“Dave’s contributions have been extraordinary,” Mr. Buffett said.

Mr. Buffett said he had spoken with Mr. Sokol the previous day and “received no hint of his intention to resign. This time, however, I did not attempt to talk him out of his decision and accepted his resignation.”

The announcement included an excerpt from Mr. Sokol’s resignation letter.

“As I have mentioned to you in the past, it is my goal to utilize the time remaining in my career to invest my family`s resources in such a way as to create enduring equity value and hopefully an enterprise which will provide opportunity for my descendants and funding for my philanthropic interests,” he said. “I have no more detailed plan than this because my obligations from Berkshire Hathaway have been my first and only business priority.”

Mr. Sokol, 54, helped run several Berkshire subsidiaries, including MidAmerican and NetJets, and has been seen as Mr. Buffett’s right-hand man.

Mr. Buffett has said he has no plans to step aside anytime soon. Still, the succession race at Berkshire has been among the most watched in America. Mr. Buffett, 80, has previously said he was likely to split his job in two — into separate chief executive and investing functions.

Mr. Buffett has spent years getting the right people in place. In late November, Berkshire tapped Todd Combs, manager of a small hedge fund in Connecticut, to potentially succeed him as chief investment officer. Mr. Combs was hired to oversee a sizable portfolio that would likely grow as he got comfortable with it and Berkshire’s operations.

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You’re the Boss: This Week in Small Business: We’re Watching Japan, Libya and Hugo Chávez


What’s affecting me, my clients and other small-business owners this week.

THE QUAKE IN JAPAN, A GOOFBALL IN VENEZUELA Japanese earthquake damage is estimated at $310 billion and could be the costliest natural disaster ever. Japanese exports suffer. Kate Rogers of Fox revisits how to protect your business from catastrophe. “Small-business owners can determine if they should be seeking disaster coverage by weighing their investment in the business itself, among other factors. If the business is the sole form of income, the risk is much greater than if it is a hobby or part-time project.” Elsewhere around the world, the war industry gets a boost in Libya. And Hugo Chávez of Venezuela says capitalism may have destroyed life on Mars.

REAL ESTATE FALLS, JOBS RISE Mark Thoma says commodity prices are increasing because of world demand. A small-business owner in Georgia is trying not to pass on the cost of high gas prices. Detroit’s population declines 25 percent. Existing-home sales fall to the lowest on record. Meredith Whitney, an investment adviser, says, “Unless the government comes out with a 50-year mortgage, this market is in trouble longer term.” Gallup’s job-creation index is the highest since September 2008. Durable goods orders fall.

ANNE HATHAWAY AND WARREN BUFFETT The Fed earns $79 billion and predicts that the recovery is taking hold. Nonetheless, one of its officials warns that the United States is approaching insolvency. Meanwhile, Warren E. Buffett predicts growth but some think his company’s stock is buoyed by Anne Hathaway. Household balances sheets continue to improve. Scott Grannis says “the Philadelphia Fed Business Outlook Survey came in very strong. It hasn’t been this strong since the economic boom times of the early 1980s. It’s very difficult to ignore the mounting evidence of a strong economic recovery.” Architect billings increased slightly in February.

DEFICIT THRILLS The Committee for a Responsible Federal Budget is thrilled to see 64 senators calling for comprehensive deficit reduction. But Stan Collender, a budget expert, isn’t thrilled at all: “Does a letter that is so vanilla that it could have been written at any time over the past 40 years really indicate any movement on the current budget debate?” James Pethokoukis of Reuters says he thinks President Obama’s budget is wildly dangerous.

A NEW DEFINITION OF SMALL BUSINESS Timothy F. Geithner says that American small businesses need greater access to capital to spur innovation. The Small Business Administration, facing even more cuts, is for the first time in more than 25  years proposing to change the way it defines small businesses. JPMorgan Chase says it will cease its debit card rewards program because of new legislation that would restrict fees. Missouri gets $27 million in incentives for small-business growth. The Small Business Savings Account Act makes its way through Congress.

TAKING CREDIT The health care legislation celebrates its first anniversary and Ezra Klein defends it by saying, “Is it a perfect piece of legislation? Not even close. Will everything work as expected? Almost certainly not. But for all its flaws, it’s a good law. And it’s worth trying.” Many small businesses are still not taking advantage of the health care tax credit.

TECHNOLOGY UPGRADES A Google project manager pitches cloud computing: “Web-based software is much less costly for buyers than traditional software, and programmers can be so much more innovative, that it’s worthwhile for an entrepreneur to say, O.K., let’s start from scratch.” Paul Mah, an information technology expert, gives us eight reasons to upgrade to Internet Explorer 9. Firefox 4 is released. Microsoft jumps to second in video search and introduces a new PC tool for small business. Netflix suffers an outage. BlackBerry’s tablet is scheduled to arrive in April. ATT buys T-Mobile but not for the reason you think. And boy. has computer technology come a long way in 10 years.

THE GROWING APPS MARKET Information Week reports that 38 percent of small- and medium-size businesses depend on mobile apps. Amazon introduces an Android app store, and Apple is not pleased. Minda Zetlin of Inc. asks if you should make a tablet app for your business: “The answer is likely a yes if one, your product or service is one where having tablet access could benefit customers; and two, your customers are the type who use tablets.” Just in time: a flood of royal wedding apps.

SPEAKING OF THE BIG WEDDING General Electric releases a much-needed William and Kate refrigerator. Jack Daniels introduces a new product — perhaps to help us forget the royal wedding. Danny Wong gives us three winning ideas to consider. A dating site features a new single man every day. Score plans an e-business learning Web site for small business. Small Business Television is rebranding itself and has introduced a new Web site. Small Business Opportunities magazine is doing the same. A small business introduces its first electric car. Sales of e-books have doubled. The group buying industry is projected to grow to $2.7 billion this year.

TWITTER’S TAX BREAKS Casey Hibbard explains how one company used social media to make $300,000 in a weekend. Robert Scoble discovers the future of work: “Just when we thought we figured out the new ’social enterprise’ market along comes Convofy.” Twitter shows San Francisco’s businesses how to save a bundle on taxes. A one-legged wrestler shows us how to become a national champ.

IT’S GOOD TO BE GREEN A woman in Canada gets a standing ovation for being green. The Manhattan Chamber of Commerce holds its green marketing event on Wednesday. The Clinton Global Initiative holds its university conference this week with a focus on entrepreneurship and a live webcast.

ADVICE FOR SXSW: HAND OUT PILLOWS The Global Entrepreneurship Congress meets in Shanghai this week. April 2 is International Pillow Fight Day. The South By Southwest conference: as seen from a bunch of social media video bloggers — which is yet another reason I won’t attend next year. American Airlines offers a big promo for California business travelers. John Jantsch wants to know the worst business advice you ever received. A third-base coach gives life advice.

SEARCHING FOR HELP WITH SEARCH An American Express survey finds that more than half of small-business owners say they need help with search-engine marketing. A video about why it’s not important to go viral goes viral. Dharmesh Shah shares a few low-cost advertising ideas for start-ups and cautions readers to “think of advertising not as a long-term traffic strategy but as a testing tool to improve your Web site and find out more about your ideal visitor.” An advertising blog discusses how to develop a relationship with the media. Lucy Thornton comes up with a few good marketing themes for April.

A 100-MILLION-MEMBER NETWORK LinkedIn officially reaches 100 million members. Seems like a good time to read the co-founder’s 10 rules for entrepreneurial success.

TRIED TALKING? Whitson Gordon of Lifehacker gives us his top 10 tricks for working while on the go. Example: “Whether it’s that old, dead iPod or the smartphone you’re already carrying with you, you probably have gigs of unused storage lying around waiting to be filled with portable apps, files and other digital travel necessities.” Melanie Brooks of explains why she uses a leather day planner instead of a smartphone. Greg Schinkel warns against hiding behind our keyboards: “Before you hit ‘reply to all’ and send back a zinger to someone who maligned you, stop and go talk to the person.”


BEST WAY TO GET YOUR CUSTOMERS TO LOVE YOU Ben Yoskovitz talks about the benefits of delighting your customers: “The rewards are immense. Loyal, rabid fans tweet shamelessly about how incredible you are, how valuable your Web application is and how successful your start-up will be.”

BEST WAY TO MARKET WITHOUT A BUDGET Shisha Dublin-Green explains how to market without a marketing budget: “Form an alliance: if you have a hair salon that’s mostly frequented by women with young children and elderly women, you can offer a service whereby you arrange to do their grocery shopping whilst they’re in the salon. You may decide to form an alliance with a local reputable grocer or delivery service to provide this for your customers. This could also be a way to reach out to new customers via your local grocer.”

BEST ADVICE FOR BOOTSTRAPPERS The Smart Bear says that the things money cannot buy are still the most valuable things: “Show proof of your ability to master the things money cannot buy — your ability to learn, change and improve.”

THIS WEEK’S QUESTION: How do you bring in customers without spending a lot? We do free webinars every month.

Gene Marks owns the Marks Group PC, a Bala Cynwyd, Pa., consulting firm that helps clients with customer relationship management. You can follow him on Twitter.

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