These are not good facts for Sokol. From the Berkshire
board's report on Sokol's trading:
Mr. Buffett was initially unimpressed with Lubrizol as
apotential acquisition, but told Mr. Sokol to let him know what he learned at
the meeting. He also told Mr. Sokol that he was unfamiliar with the lubricants
and additives part of the chemicals industry. During the conversation, Mr.
Buffett asked Mr. Sokol how he had become familiar with Lubrizol. Mr.
Sokol mentioned that he owned the stock. He did not disclose:
· the amounts and timing of his purchases;
· the fact that he bought the shares after
discussing Lubrizol with Citi and after Mr. Sokol had narrowed the bankers'
initial list of 18 chemicals companies to one, namely Lubrizol;
· the fact that Mr. Sokol had bought shares
after Mr. Sokol (acting as a senior representative of Berkshire Hathaway
scouting acquisition candidates) hadasked for Citi's help arranging a meeting
with Lubrizol's CEO to discuss Lubrizol and Berkshire; and
· the fact that Mr. Sokol bought shares after
learning that Citi had discussed his request for a meeting with Lubrizol's CEO,
who told Citi that he would discuss Berkshire Hathaway's possible interest in a
transaction with the Lubrizol board.
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. Because Mr. Sokol's comment about owning the
shares was inresponse to Mr. Buffett's question how Mr. Sokol had come to know
the company, it implied that Mr. Sokol had been following Lubrizol as an owner
of itsshares, and in that way came to think of Lubrizol as a possible Berkshire
As I have noted before this looks more like a loyalty
claim than a federal insider trading case. And it doesn't look good for
Sokol on that level. The report concludes that even if Sokol was not in
the possession of material information required to make a federal case, he was
in possession of confidential information, Berkshire's confidential
information. And by trading on Berkshire's confidential information, he
was usurping a corporate opportunity.
It's worth noting that there is a derivative suit already
pending - no surprise (Download
Kirby v Sokol complaint). In that complaint, the directors are named
as defendants in addition to Sokol. Prof Bainbridge notes that there is no case against the directors. And he's right. I
suspect that what going on here is that the plaintiffs are just looking for a
way to argue that demand would be futile - based on the argument that directors
would be personally liable in the event plaintiffs were to win. I don't
think this is really going to be a winning argument - mostly because the
plaintiffs allege no actual facts to back that up.
Anyway, this new report from the directors of Berkshire
provides more evidence to use against Sokol in a Kirby's case against him.
Though, if I were counsel to Berkshire, my next step would be to try to
take over the case from the shareholder plaintiffs and have the board pursue it
on behalf of the company themselves.
Update: Yikes! This is
starting to get ugly! Sokol's attorney responds with a statement:
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
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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