Warren Buffett, do yourself a favour, buy out the whole damn company. Shareholders are a pain in the ass.
What Did Buffett Know and When Did He Know It? (Updated)
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By Avi Salzman
The Berkshire Hathaway (BRKB) report on top Berkshire executive David Sokol’sresignation makes Sokol’s deception seem much more extensive than it appeared inChairman and Chief Executive Warren Buffett’s initial letter announcing the resignation. The investigation also sheds new light on Buffett’s role, and makes parts of the letter he released announcing Sokol’s resignation seem enigmatic, if not outright evasive. We’ve outlined the committee’s basic findings in a previous post.
Sokol apparently met with Citigroup bankers to suss out potential acquisition targets in December. Of 18 chemical companies Citi analyzed for him, Sokol zeroed in on Lubrizol (LZ) and asked Citi to see whether its CEO James Hambrick would meet with him.
Meanwhile, Sokol started buying Lubrizol shares the day after he met with the Citi bankers. And he kept buying even after his friends at Citi told him that Hambrick would meet with him and intended to pass along his interest to Lubrizol’s board. When Sokol eventually went to Buffett with his recommendation that Berkshire buy Lubrizol, he didn’t mention the Citi bankers, or the timing of his share purchases. The report described the meeting at which Sokol first talked to Bufffett about 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) had asked 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.”
But Buffett, who said in his letter that Sokol’s resignation “came as a surprise to me,” was apparently suspicious of Sokol as early as March 15, the day after the Lubrizol deal was announced:
“A Citi representative with whom Berkshire Hathaway did business congratulated Mr. Buffett on the merger agreement, and told Mr. Buffett that Citi’s investment bankers had brought Lubrizol to Mr. Sokol’s attention…At Mr. Buffett’s request, Berkshire Hathaway CFO Marc Hamburg phoned Mr. Sokol on March 15. Mr. Hamburg asked Mr. Sokol for the details of his Lubrizol stockholdings. Mr. Sokol provided the dates and amounts of his Lubrizol purchases. Mr. Hamburg also asked about Citi’s role in introducing Mr. Sokol to Lubrizol. Mr. Sokol answered that he thought he had called a banker he knew at Citi to get Mr. Hambrick’s phone number. When Mr. Hamburg commented that it sounded as if the banker must have exaggerated his role when he spoke with his colleagues, Mr. Sokol did not contradict him.
Berkshire learned between March 17 and March 25 that Sokol had bought shares even after asking Citi to set up the meeting with Hambrick, which the audit committee says was a violation of Berkshire’s insider trading policies. Buffett got back from a trip to Asia on March 26, and received Sokol’s resignation letter on March 28. But Buffett said in his letter that he had talked to Sokol on March 27 “about various operating matters and received no hint of his intention to resign.” So even after Berkshire had learned that Sokol had bought the shares, a violation of Berkshire policies, Buffett spoke to Sokol and didn’t even bring the purchases up, and then was surprised by his resignation?
The audit committee doesn’t push the Buffett angle, and it’s unclear whether it will dent the Oracle’s reputation. Obviously, the details about Sokol are much more damning.
One more interesting revelation: Although Sokol had been mentioned numerous times as a Buffett successor, a position that comes with the unspoken title as “greatest investor in the world,” Sokol told Buffett he wasn’t interested in the job. Of course, it’s easy to say that on your way out.
“On March 29, Mr. Buffett provided Mr. Sokol an opportunity to review for accuracy a draft Mr. Buffett had prepared of a press release announcing Mr. Sokol’s resignation and disclosing Mr. Sokol’s Lubrizol trades. At Mr. Sokol’s request, Mr. Buffett deleted from the release the one passage Mr. Sokol said was inaccurate: a passage that implied that Mr. Sokol had resigned because he must have known the Lubrizol trades would likely hurt his chances of being Mr. Buffett’s successor. Mr. Sokol told Mr. Buffett that he had not hoped to be Mr. Buffett’s successor, and was resigning for reasons unrelated to those trades. Except for that deletion, Mr. Sokol concurred in the accuracy of the press release. For example, Mr. Sokol left unchanged the statement that when Mr. Sokol made his purchases, he “did not know what Lubrizol’s reaction would be” if Mr. Buffett developed an interest in a transaction. Mr. Sokol also left unchanged Mr. Buffett’s statement that he had “held back nothing in this press release”
(Update: Sokol’s lawyer Barry Levine has responded to the board, saying that Sokol’s trades were above board and that he had been considering a Lubrizol investment before meeting with the Citi bankers. He said Sokol told Buffett twice about his Lubrizol investment, not once. Levine also claimed that the Berkshire committee didn’t seek to interview Sokol — the board has since responded that Sokol was interviewed 3 times and that Sokol’s lawyer had not responded to another attempted interview.)
