Sokol defends share buys while working for Buffett

Stephen Foley
Friday 01 April 2011 00:00 BST
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David Sokol, the man who had been expected to succeed Warren Buffett as head of Berkshire Hathaway, insisted that he did nothing illegal or unethical by buying shares in a chemicals company before recommending that the billionaire investor make a takeover bid.

Mr Sokol's public defence of his share trading came less than a day after Mr Buffett stunned Berkshire shareholders by announcing Mr Sokol's resignation and revealing that the executive stands to make a $3m (£1.9m) profit from his three-month investment in Lubrizol shares.

Berkshire announced the $9bn takeover of Lubrizol, one of the largest acquisitions in the conglomerate's history, earlier this month. Mr Sokol's purchases of shares in Lubrizol began on 14 December last year, the day after he picked the company from a list of potential bid targets drawn up by Berkshire's bankers at Citigroup. Early in the new year, Mr Sokol went to Mr Buffett to suggest he explore a bid.

"I don't believe I did anything wrong," Mr Sokol said during a television appearance yesterday. The purchases of Lubrizol shares did not amount to insider trading because takeover decisions rest not with him but with Mr Buffett and Berkshire's board, which he is not a member of. "The thing people need to understand is I've never had any authority at Berkshire to invest a dollar in stocks... I didn't have any inside information. I made the decision to buy the shares because I thought it would be a good investment for my family and I would do it again tomorrow."

Mr Sokol submitted to an extended interview on CNBC to explain his decision to leave Berkshire after more than a decade running several of its most important subsidiaries, a decision both he and Mr Buffett have characterised as entirely separate from the share trading revelations.

Mr Sokol is hoping to start a "mini-Berkshire" to make his family and their descendants rich, he said.

In the interview he said that neither his billionaire boss nor the board had spoken to him about the timing of his purchases in Lubrizol, which he disclosed to them two weeks ago. Mr Sokol told Mr Buffett that he had shares when he first brought Lubrizol to his attention, but was not asked how many or when he bought them.

Mr Buffett, who turned 80 last year, has always said he has no plans to retire but has a secret "just-in-case" succession plan agreed with the Berkshire board. It involves splitting his role into two, a chief executive job that had been expected to fall to Mr Sokol, and an investment manager post or posts. Mr Sokol said he did not know if he was a chosen successor.

The executive also said Mr Buffett had twice talked him out of leaving the company, but made no attempt to do so when he tendered his resignation this week. "The timing was right" to leave, Mr Sokol said, after the Lubrizol deal was agreed and before Berkshire shareholders gather for their annual meeting in Omaha next month.

During his interview, Mr Sokol said that Berkshire has in the past acquired companies in which its managers have some shares, and it would have been a "disservice" to Berkshire not to have suggested Lubrizol as a target, just to avoid the appearance of impropriety.

However, he conceded it was clear to Citi that he was working on Berkshire's behalf when he ordered a list of "possible transactions in several industries, including the chemical industry" last autumn – as disclosed in a recent SEC filing. After picking Lubrizol from that list, he asked to set up a meeting with Lubrizol chief executive James Hambrick for, as the SEC filing says, "discussing Berkshire Hathaway and Lubrizol".

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