In the post on Tuesday we wrote and discussed several
points about Warren Buffet, Berkshire Hathaway and David Sokol. One of the
issues was disclosure to the Securities and Exchange Commission (SEC) of any
possible securities violations. Another issue was the support provided by
Warren Buffet at the time of the resignation of David Sokol in March. Writing
in the DealB%K
column of the New York Times on May 2,
Andrew Ross Sorkin, said that one of Warren Buffet's mantras is "Lose money for
the firm and I will be understanding; lose a shred of reputation for the firm
and I will be ruthless."
The public support given by Buffet to Sokol after his
resignation certainly appeared at odds with this mantra. As quoted in the Wall
Street Journal, when company executive David Sokol resigned on March 30, Buffet
said that he thought Sokol's actions were not "in any way unlawful" when Sokol
purchased stock in a company, Lubrizol, that he later recommended his employer,
Berkshire-Hathaway, purchase. However, is his article, Sorkin said that he had
come to another understanding. Sorkin quoted an unnamed friend of Buffet who
said, "Warren knew that the second that press release hit the wires, Sokol's
professional career was over...If you worked at Berkshire-Hathaway, you got the
message loud and clear."
It may still seem that Buffet's public pronouncement of
support is inconsistent with the stated 'understanding' of Berkshire-Hathaway
employees. Indeed Buffet's partner Charlie Munger said, "I think we can concede
that that press release was not the cleverest press release in the history of
the world." He went on to say "The facts were complicated, and we didn't
foresee appropriately the natural reaction." One might suppose the natural
reaction to which Munger is referring is that if you publicly support an
ex-employee, it is not a sign of criticism.
Tempering all of this, as reported by Sorkin, is that
even when making this public pronouncement of support, Buffet was notifying the
SEC about Sokol's conduct. Sorkin reported that "the day he issued the release,
Berkshire called the Securities and Exchange Commission and briefed them on Mr.
Sokol's trades, which Mr. Buffett described to me as "pretty damning evidence."
"Calling the head of the enforcement division of the S.E.C. and laying out a
pattern of trading that you know is going to result in something - Dave [Sokol]
probably thought it was pretty harsh," Mr. Buffett told me. The SEC. is now
investigating the matter, people briefed on the inquiry said. In a statement after
the Berkshire meeting, a lawyer for Mr. Sokol issued a statement, saying "the
stock trades did not violate the law or Berkshire policy."
Sorkin also reported that "As for Berkshire's compliance
programs, which are not nearly as tough as those at most investment firms, Mr.
Buffett clearly believes that he must run his company based on a modicum of
trust. "We can have all the records in the world and if somebody wants to trade
outside them or something, you know, they're not going to tell us they're
trading in their cousin's name," Mr. Buffett said. Mr. Munger added. "I think
your best compliance cultures are the ones which have this attitude of trust
and some of the ones with the biggest compliance departments, like Wall Street,
have the most scandals."
We certainly applaud the fact that Buffet timely notified
the SEC. However, to publicly praise someone for conduct which may have
violated securities law and led to that employee's resignation and expect such praise
to send a signal of reproach still leaves us, as it did initially with Andrew
Ross Sorkin, "scratching my head about his reaction."
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