What the Sokol scandal could mean for Berkshire Hathaway

Marketplace Staff Apr 6, 2011

What the Sokol scandal could mean for Berkshire Hathaway

Marketplace Staff Apr 6, 2011

Bob Moon: Warren Buffett stunned the investment world last week when he announced one of his top executives was leaving Berkshire Hathaway. David Sokol had been one of a handful of likely successors to Buffett.

But there was some other news in that press release. Sokol had bought $10 million worth of shares in a chemical company called Lubrizol, which, as it happened, he then suggested that Berkshire Hathaway should buy.

In today’s Wall Street Journal, Leslie Scism and her colleagues report that Buffett has long had a policy in place against trading in companies in which his company might invest.

Hi Leslie.

Leslie Scism: Hi.

Moon: Let’s go back a little. While Sokol’s departure was announced, what did Buffett have to say about it?

Scism: First, Warren had a lot of very complimentary things to say about Dave. He said that Dave’s contributions have been extraordinary; he had delivered a great performance as a manager. As for the transaction, the press release didn’t mention that the company has a long-standing policy in place that seems to cover the kind of transaction Mr. Buffett described Dave Sokol as having made in the shares of Lubrizol.

Moon: But the implication there is that he was not happy about it.

Scism: This is clearly a very odd press release, and Warren Buffett opens the press release saying, this press release will be unusual. Clearly it was very carefully worded, but it left people scratching their heads: What exactly does Mr. Buffett think here? Some of the answers have come out as the Wall Street Journal got its hands on a copy of that internal policy. We could tell there was a different story going on at the company, where the company was concerned about whether Mr. Sokol had violated the policy. That wasn’t mentioned at all in this March 30th release, which has prompted an additional round of questions about how Mr. Buffett has handled all this.

Moon: You point out that there is a very specific rule here about company officials trading in firms in which Buffett might have an interest. Tell us more about those specifics.

Scism: In this policy, which we reviewed, there are several references to how the executives who are covered by this policy may not trade in any securities if they’re in possession of material, non-public information about those stocks. There is a question as to whether the words “material, non-public” are at play in this particular transaction.

Moon: Now Sokol made this investment a week before he suggested that Berkshire Hathaway buy this company. What does he himself have to say about this?

Scism: He has said that he made the decision to invest in Lubrizol using publicly available information. Just whatever any other investor in America could get their hands on. And in fact, he had no way of knowing that even if he recommended this stock to Mr. Buffett, that Mr. Buffett would be interested or would proceed with the deal.

Moon: Now the questions that are being raised about this, though, are all the more surprising because this is the Oracle of Omaha; Buffett has a reputation here. I mean, if this were a company without such a public face, do you think it would get this much attention?

Scism: No, I think you’re exactly right. Few executives in corporate America are as revered as Mr. Buffett. He’s a man known for his integrity as well as his investment acumen. So a lot of people are saying, how could this happen at his company?

Moon: So what’s next in this case, and particularly for Warren Buffett?

Scism: Mr. Buffett isn’t really saying much about this right now. He is expected to field a lot of questions on this when he holds Bershire’s annual meeting on April 30th. Buffett-watchers are wondering if this will tarnish the legacy that he was hoping to leave behind for this very important insurance and industrial conglomerate.

Moon: Leslie Scism has been digging into this story for the Wall Street Journal. Thank you for joining us.

Scism: Thank you very much.

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