Berkshire Hathaway accuses former executive prior to annual meeting

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April 28, 2011 - 7:00pm

When Berkshire Hathaway shareholders converge on Omaha for the company's annual meeting they'll hear from investing icon Warren Buffett. But they might also have some pointed questions for the Oracle of Omaha. Shortly after helping arrange the $9 billion takeover of the chemical company, Lubrizol, David Sokol - the man once thought to be Buffet's successor at Berkshire - quit the company. That was followed by questions over a possible case of insider trading in the Lubrizol deal. Grant Gerlock of NET News talks to New York Times business reporter, Ben Protess, for more on the controversy.

GRANT GERLOCK: Let's back up a bit and cover where this all started and that was with Berkshire Hathaway buying the chemical company, Lubrizol. It was a $9 billion deal. David Sokol was credited with setting it up, right? But not long after that deal went through he resigned from Berkshire Hathaway and that was a big surprise at the time.

BEN PROTESS: Well, he had, you know, a couple times before had tried to resign. So it was not totally out of the blue, right? He had kind of mentioned his intentions to leave Berkshire at some point. But for all intents and purposes this immediate kind of abrupt resignation out of nowhere was a shock.

GERLOCK: But then the Securities and Exchange Commission is apparently looking into the Lubrizol deal that he helped put through before he resigned. What are they trying to find out?

PROTESS: The basic question is was he, when he purchased roughly 100,000 shares of Lubrizol in early January, was he making those trades based on non-public, material, inside information? Okay, so the question is - he knew at that time that Lubrizol's board was going to be discussing the potential takeover by Berkshire - so the question is, is that a material fact and is that not public? That's for the S.E.C. to decide, but certainly a lot of lawyers in the securities industry looking at those set of facts have raised questions and concerns about that information.

GERLOCK: Because he bought those shares and then when Berkshire Hathaway bought the company, bought Lubrizol, the value of his shares shot up because the stock price shot up.

PROTESS: Correct. By about $3 million. You know, it's not clear exactly if he still owns the shares or not. Roughly, after the deal was announced he would have made about a $3 million profit.

GERLOCK: Okay. So the question is, is this a case of insider trading?

PROTESS: Definitely.

GERLOCK: So then this week, just a few days before the shareholders meeting in Omaha Berkshire puts out a statement sort of giving their side of the story. What was their take on Sokol's actions?

PROTESS: Their take is that he was deliberately misleading them about his personal stake in Lubrizol, and he had the chance to set the record straight on several occasions and failed to do so, according to this report. What it centers on is that Mr. Sokol failed to tell Mr. Buffett that Citigroup had sort of orchestrated this whole deal, right? Citigroup originally brought Lubrizol to Mr. Sokol's attention back in December and then after that, Mr. Sokol made all of his trades. He never told Mr. Buffett that Citigroup was involved and that he had met with Citigroup and they had pitched Lubrizol as a good takeover target. Basically the audit committee report found that that was a serious omission.

GERLOCK: When Sokol resigned, Warren Buffett put out a release. He said he didn't think anything happened that was unlawful. Does this latest release change that suggestion?

PROTESS: The latest audit committee report does not say that the laws were broken. It does say that Mr. Sokol violated the company's own insider trading and ethics policies. That does not mean that the company's policies are the same as the federal government's. It does not mean that Mr. Sokol actually did break the law. It does raise questions about it however, and it also raises questions about whether or not Berkshire will at some point pursue legal action against Mr. Sokol. They didn't say they would. They said they're considering down the road the possibility of potentially suing Mr. Sokol to recover any kind of damages.

GERLOCK: Sokol responded by saying Berkshire knew more about his stake in Lubrizol, knew more about the situation than maybe they were letting on. He says he told Warren Buffett about it at least once, maybe twice. If that's true would that possibly be trouble for Buffett or for Berkshire?

PROTESS: Well, it's not really trouble because Mr. Buffett did disclose originally, back when he announced Mr. Sokol's resignation, Mr. Buffett did disclose that there was a discussion - one discussion - about the Lubrizol shares. So back in January when Mr. Sokol first brought Lubrizol to Berkshire's attention there was some discussion, it was a passing reference basically in this conversation to the fact that Mr. Sokol had shares, owned shares in Lubrizol. So this does not totally come out of the blue. This was known. The question that some people have raised is why didn't Mr. Buffett press for more details. Why didn't he press for well, how many share do you own and when did you purchase those shares? If you had purchased them 3 years ago, no big deal. If you purchased them 2 months ago while you knew that the Lubrizol board was meeting to discuss, or was at least in informal discussions about a deal, that's a different set of facts.

GERLOCK: Do you think Berkshire Hathaway is trying to create some separation from Sokol, hopefully trying to avoid more scrutiny from the S.E.C.? Or is this maybe more a way to avoid questions from reporters and shareholders this weekend?

PROTESS: Well, certainly the latter. I certainly think that the timing of the report is noteworthy in that it came 3 days before the meeting this weekend. Originally Mr. Buffett said this is it. This is what I've said. I'm not saying anything further. I'll refer you, if you ask me a question, I'll refer you back to the press release. That's changed. I think that increasingly as Berkshire was criticized in the media and all this negative attention was swirling around the company and Mr. Buffett, I think they finally realized that they had to say something and this audit committee report is one step in that direction. The timing is incredibly noteworthy. The question is will it actually deflect or stymie any of the questions or attention that has been focused on the company? That remains to be seen. We'll have to see on Saturday.

GERLOCK: An important thing to keep in mind is that David Sokol wasn't just another executive. He was, at one time anyway, expected to be Warren Buffet's successor. People thought that Buffett maybe saw something of himself in Sokol. They both kind of worked their way up from Omaha. Does that make Sokol's resignation and these recent accusations from Berkshire more surprising?

PROTESS: Yes it does in the sense that he was a leading contender to take over for Mr. Buffett. Now, again Mr. Sokol had said in the past I would like to leave at some point and do my own thing. So it's not that Mr. Buffett had put all the hopes and dreams of Berkshire on the back of Mr. Sokol, but absolutely he was a leading contender. And given that his status and how well regarded he was at the company it does come as a rude shock for Berkshire and for Mr. Buffett.

GERLOCK: For shareholders at this weekend's meeting, what are the open questions that are likely to come up?

PROTESS: Well, certainly one is why did Mr. Buffett not press for more detail originally. The question is if someone were to say to you I have shared in a company and by the way I think this is a good company for us to buy I think it's a natural question for Mr. Buffett to then reply and say how many do you have and when did you purchase those shares? I think that he's going to be pressed to answer questions about did he take too much of a hands-off approach when it came to this situation. Listen, it reflects on his broader leadership style. My colleague and boss, Andrew Ross Sorkin wrote a story this weekend basically addressing it calls into question Mr. Buffett's entire approach to management, right, which is although he's incredibly involved in day to day activities he has a hands-off approach with his managers and Mr. Sokol was one of the top managers at the company. Should and could he have been more involved in Mr. Sokol's affairs? And that's a question that he's bound to get this weekend.

GERLOCK: Ben Protess. Thanks for getting us up to date.

PROTESS: Thank you so much.

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