SEC Must Investigate Berkshire Hathaway’s Sokol for Lubrizol Trades

The attempts to explain away David Sokol’s personal trading in Lubrizol shares just before Berkshire Hathaway’s acquisition are strange. The SEC needs to investigate.

It doesn’t matter when and what Sokol told Warren Buffet. Sokol was working for Berkshire Hathaway at the time he was interacting with Lubrizol and trading its shares. Sokol’s defense that he did not have ultimate control on approving the acquisition deal is about as lame as it gets. And we are supposed to believe that his resignation is unconnected to these events?

Sokol didn’t buy Lubrizol stock after reading about the company in the newspaper. He actually met with the Lubrizol CEO James Hambrick. I doubt the discussions centered on Sokol’s personal portfolio.

This morning, Sokol said that if he had to do it again, he would have still bought the stock, but would not have proposed it to Buffett as an acquisition target. So lets get this straight. Sokol, in his capacity as a Berkshire executive, receives from bankers a takeover possibility for Berkshire. Impressed with the suggestion, he would have withheld the proposal from his employer, and traded the stock himself? From Sokol’s perspective, it would have been better if Berkshire did not buy Lubrizol?

Berkshire Hathaway would have been Sokol’s victim, but the public is an actual victim. Insider trading is illegal because any gains are at the expense of other investors.  After Sokol received possible takeover targets from Citigroup, he acted on information not available to the investing public. (He told the bankers that Lubrizol was the only one in which he was interested.) Sokol bought more shares at the time he knew the Lubrizol board was discussing Berkshire’s interest in an acquisition, a fact not available to the public.

Some economists, including the late Milton Friedman, have suggested that insider trading should be legal. For the time being, it is not. It appears that Sokol likely violated the law on the basis of misappropriation. He did not trade Berkshire stock on the basis of non-public information, but traded shares in another company on the basis non-public information gained in the course of his employment by Berkshire. In other words, Sokol stole Berkshire’s data for personal use.

This is a serious matter. From the “sorry to see Dave go” tone of the Buffett’s press release to Sokol’s flippancy on CNBC this morning (he wished his granddaughter a happy birthday), it is clear that years of uncritical media coverage are affecting Berkshire’s response.

Berkshire Hathaway is not just any company, and Warren Buffet is just not any CEO. If you hold yourself our as “holier than thou,” you must receive the same scrutiny as anyone else, especially when you stumble. Buffet cannot be portrayed as a “victim” of Sokol as long as Buffet repeats and accepts Sokol’s fictions, like he resigned because of his family or to pursue philanthropy.


Flaherty interview on KVEL radio, Salt Lake City, 4/5/11