Published on March 31, 2011

David Sokol appeared on CNBC earlier today to discuss his resignation from Berkshire Hathaway which was announced by Warren Buffett in a very unusual press release on Wednesday afternoon.  In an article posted last night, we reconstructed a timeline of the relevant events and argued that regardless of the legal status of his transactions in Lubrizol stock, Mr. Sokol used very poor judgment in the events leading up to Berkshire’s offer to acquire Lubrizol.  Nothing in the CNBC video has changed this opinion, for the reasons we will explain below.

Mr. Sokol’s interview lasts approximately thirty minutes and readers are encouraged to view the video in its entirety below (RSS feed readers can access the video on CNBC’s website.)

Private Investor or Agent for Berkshire?

It is worth examining several of Mr. Sokol’s statements because they appear to demonstrate, at a minimum, significant confusion regarding his role as a private investor and his role as an agent for Berkshire.

At several points during the interview, Mr. Sokol insists that there was no conflict of interest and that his initial interest in Lubrizol was based on his own research based on publicly available information along with the analysis provided by Citigroup bankers.  However, Mr. Sokol was apparently dealing with Citi as an agent for Berkshire based on the information clearly provided in Lubrizol’s proxy statement:

On December 13, 2010, Mr. Sokol and Citi met to discuss the list of companies. During the course of the meeting, Mr. Sokol said that the only company on Citi’s list that he found interesting was Lubrizol. When Mr. Sokol learned from Citi’s representatives that Citi had an investment banking relationship with Lubrizol and its Chairman, President and Chief Executive Officer, Mr. James L. Hambrick, he asked one of the Citi representatives to inform Mr. Hambrick that he was interested in speaking with him and discussing Berkshire Hathaway and Lubrizol [emphasis added], if Mr. Hambrick were available. Mr. Sokol also advised Citi that Berkshire Hathaway does not engage in hostile transactions [emphasis added], and that Mr. Hambrick should understand that if they met and nothing came of the meeting, their meeting would remain confidential.

On the following day, Mr. Sokol made his first purchase of Lubrizol stock which he proceeded to sell on December 21 for “tax planning reasons” according to the interview.  His larger purchase was made in early January as described in our previously published timeline.

Mr. Sokol repeatedly characterizes his actions as one of a private investor seeking to invest his family’s wealth.  We can sympathize with Mr. Sokol’s desire to invest his assets in companies with prospects for excellent future returns.  However, it is clear and obvious from the Lubrizol proxy that Mr. Sokol was working on Berkshire’s behalf, not on his own behalf as a private investor.

Mr. Sokol states during the interview that Lubrizol may have “inferred” that he was acting on Berkshire’s behalf.  This is disingenuous at best given the fact that he directed his contacts at Citi to specifically mention Berkshire Hathaway as described in the Lubrizol proxy and quoted above.  Is Mr. Sokol claiming that the Lubrizol proxy is incorrect regarding the characterization of his meeting with Citi’s bankers on December 13?  If so, he did not make that claim during the CNBC interview.

“I’m Not a Decision Maker”

Mr. Sokol claims that he was not a decision maker and had no authority when it comes to committing a single dollar of Berkshire’s capital toward investments in securities.  However, it is obvious that he had some role in the process or he would not have been engaged with Citi in an explicit attempt to open discussions with a company that was a prospective acquisition target for Berkshire.

It is also obvious that Mr. Sokol had a role in presenting this information to Warren Buffett and making a recommendation for Berkshire to proceed.  Although obviously Warren Buffett will make his decision based on his own evaluation of the acquisition target, for Mr. Sokol to suggest that he has no role in the matter is clearly inaccurate.  He was the point man on the acquisition up to the point where price was discussed, at which point Mr. Buffett took the lead. 

“I Shouldn’t Have Mentioned Lubrizol”

Perhaps the most revealing and most disturbing part of the interview involved Mr. Sokol’s only expression of regret — the fact that in retrospect he would have made his personal investment in Lubrizol but would not have told Warren Buffett about the company.  How does this square with the timeline of events that clearly show that Mr. Sokol was acting on Berkshire’s behalf on December 13 prior to any of his personal transactions?  Is Mr. Sokol suggesting that it is ethical to spend time and resources on a search for acquisition targets for Berkshire only to put his own personal interests above Berkshire’s when an attractive prospect appeared?

The news of Mr. Sokol’s resignation and the circumstances surrounding the Lubrizol situation were disappointing when first reported last night.  If the goal of Mr. Sokol’s appearance on CNBC was to explain why his actions were appropriate, he clearly failed because his explanation does not reconcile with the version of events described in Lubrizol’s proxy statement.

Clearly, David Sokol’s primary goal is to invest his personal assets and to build his own business.  That is a perfectly legitimate goal and one that he can now pursue without conflicts of interest with Berkshire.  It was not legitimate, ethical, or fair to Berkshire for Mr. Sokol to attempt to act as an agent for Berkshire and to simultaneously take positions in an acquisition target.  The question of legality is not one we are qualified to comment on but should become clear in due course as the SEC will no doubt investigate the matter thoroughly.

Disclosure:  Long Berkshire Hathaway.

Sokol: My Mistake Was Suggesting Lubrizol to Buffett
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18 thoughts on “Sokol: My Mistake Was Suggesting Lubrizol to Buffett

  • March 31, 2011 at 11:47 am
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    What is more bizarre than Sokol’s actions and attempt at spinning them is the fact that Warren Buffett, according to the letter he put out, doesn’t see anything wrong with what Sokol did. Of course, Buffett also didn’t see anything wrong with speaking to Hank Paulson and other senior government officials on a regular basis during the financial meltdown in Sept-Oct 2008 and then investing in fire sale deals with Goldman and GE because he was confident that the government would pull out all the stops to bail out the financial system. Speaking to Hank Paulson on a regular basis probably gave him a better sense of what the government would do than the average investor had. Buffett was even proposing bailout actions in writing to the Treasury in that time frame; I believe he was the first to suggest that Treasury put up taxpayer funds to create leverage for hedge fund purchases of mortgage backed securities from the banks. That idea ultimately resulted in the \PPIP\ (public-private investment partnership) program.

    Has it been reported where Sokol’s brokerage account was? Did the Citi bankers know that Sokol was front running a potential Berkshire acquisition target? I wonder how many of the Citi bankers tipped off friends, family and hedge fund managers (their own accounts are probably pretty closely scrutinized) about Sokol making a large purchase of Lubrizol stock. Is it possible a guy as smart as Buffett doesn’t see all the ethical problems here? If what Sokol did was OK, why did Buffett even put out that letter yesterday?

    No worries for BRK shareholders about potential enforcement actions from the SEC. Buffett has been a leader of the government’s Plunge Protection Team efforts for both the Bush and Obama administrations and received the Presidential Medal of Freedom in recognition of his efforts. Near the height of the financial panic in October, 2008, he wrote the infamous NY Times Op-Ed urging people to buy U.S. stocks and said he’d be doing so in his personal account. Of course, his personal account represents about 1% of his net worth and nobody that I know of has ever reported on whether Buffett actually followed through on his promise there or not. The other 99% of his net worth is in Berkshire Hathaway stock, and for the next 3 quarters (at least), Berkshire was a net liquidator of U.S. stocks while it plowed money into fixed income deals that weren’t available to the public, like the Goldman and GE preferred stock deals and a 15% note with Harley Davidson.

    And of course, Buffett’s cheerleading for the government bailout of financial institutions couldn’t possibly have had anything to do with Berkshire’s large stakes in Wells Fargo, American Express, Moody’s, etc.

    If Buffett ever had a moral compass I think it broke a few years ago.

    • March 31, 2011 at 11:50 am
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      “What is more bizarre than Sokol’s actions and attempt at spinning them is the fact that Warren Buffett, according to the letter he put out, doesn’t see anything wrong with what Sokol did.”

      That is not what Buffett’s press release said. He said that he didn’t see anything UNLAWFUL about Sokol’s actions. There is a huge difference between Warren Buffett’s notion of what is ethical and proper and what is lawful. Nowhere did he say that he approved of Sokol’s behavior. Reading between the lines, the opposite conclusion is the more obvious one.

      • March 31, 2011 at 12:29 pm
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        Warren Buffett has talked about writing his annual shareholder letters in plain English as if he was writing to his sisters. Now you’re suggesting that Buffett must be read between the lines, that he’s written something that is on the surface positive about Sokol, but is actually negative and the key to understanding this is that he used a narrow word, “unlawful” instead of a broader one, “unethical”.

        I rest my case.

        • March 31, 2011 at 12:31 pm
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          You’re entitled to your opinion, but it is precisely his reputation for writing clearly that leads me to my conclusion. He did not write “David acted in an ethical manner” but that he acted “lawfully”.

          If he wanted to say it was ethical, he could have. He chose not to. There is meaning in that fact.

  • March 31, 2011 at 3:29 pm
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    Ravi, why do you persistently defend Buffett? I was an admirer of Buffett and still respect his investment acumen. However, let’s call a spade a spade in this situation. Buffet was at best hypocritical when he did not FIRE Sokol on the spot. Taking Buffett’s writing at face value (since you seem to believe everything he says), that’s essentially what he did — he let the matter slide. Remember, it was Buffett who said during the Salomon days, “lose a shred of reputation for the firm, and I will be ruthless.” Clearly Buffett did not follow through here because he valued Sokol more than his own moral compass.

    I know you (and many Buffett followers) deeply respect Buffett and it would probably damage your ego and business if you criticize him. But look at Alice Schroeder. She was making money off of Buffett, yet she had the courage to call out Buffett when she disagreed with him. And she got a lot of criticism from Buffett faithfuls. At least I admire Schroeder for being honest.

    • March 31, 2011 at 3:32 pm
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      Jim, you are entitled to your opinion although your insinuation that I am biased due to business considerations is utterly absurd given the importance of Berkshire to me as an investment versus whatever limited revenue that comes from The Rational Walk. 99% of the content here is entirely free and written because I enjoy thinking about and covering Berkshire and other financial topics. Economic returns on The Rational Walk are heavily negative, not positive when opportunity costs are considered.

      You have the right to think that I’m biased. I have explained why I evaluated the situation as I did in the articles. I have nothing further to add beyond what I’ve already said, particularly if you’re going to question my motives.

      • March 31, 2011 at 5:23 pm
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        I always find myself defending Buffett, too. Maybe I’m a Buffett apologist, but from where I’m sitting, I feel like people are always trying to catch Buffett doing something wrong. The GS investment is a good example of that. Some people chose to be really tough on him over that. Buffett’s reputation for honesty has been earned over the last 50+ years. Some people just have a hard time believing that someone could get that rich without slitting a few throats.

  • March 31, 2011 at 3:47 pm
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    I just find it amusing that everyone is throwing Sokol under the bus (and rightly so), yet almost no one is blaming Buffett, who must be glad that he’s dodging the PR bullet. Let’s just hope that at the upcoming shareholder meeting someone ask Buffett whether he was being hypocritical in this situation.

    • March 31, 2011 at 3:50 pm
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      “dodging the PR bullet”

      Are you kidding? Have you been following the news today? The coverage has been absolutely brutal.

  • March 31, 2011 at 4:03 pm
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    I don’t read all the media pieces but the few articles I’ve seen, it appears Sokol is taking a lot more heat than Buffett. But if Buffett is getting mauled by the media, then that’s good. At least it’s fair coverage.

  • March 31, 2011 at 4:12 pm
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    This is reminiscent of the Gen Re – AIG scandal in the sense that the communications between Sokol and Buffett will be heavily scrutinized and parsed as they were between Ferguson and Buffett. CNBC really blew it by not digging into the communications that ensued following Sokol’s March 19th transaction disclosures. I have the sense that a rebellious youth rose to the surface in Sokol. As demonstrated in this morning’s interview, he doesn’t have Buffett’s modesty and restraint , showing moments of disregard for Berkshire and Munger.

    • March 31, 2011 at 4:20 pm
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      “As demonstrated in this morning’s interview, he doesn’t have Buffett’s modesty and restraint , showing moments of disregard for Berkshire and Munger.”

      Particularly true regarding his offhand comment regarding Munger and BYD, a totally different situation in which Munger had taken a long term equity position in a company he believed strongly in and then Berkshire came in much later an bought a 10% stake through a private placement. I don’t know the exact timing but I know Munger didn’t just get into BYD and call up Buffett the next week to pitch the deal. Sokol made it sound like Munger put in a quick trade in BYD right before proposing the deal to Buffett.

      I have zero basis for this speculation but if I had to guess, I would say that Sokol’s disclosure on his purchases to Hamburg was forwarded to Olson for legal review. Olson and/or Munger probably spoke to Sokol. Sokol then may have realized that he was forever tainted within Berkshire and decided to resign. This scenario would be consistent with Buffett not having personally asked Sokol to resign and not necessarily being aware of it before getting the resignation on Monday. Maybe Sokol was trying to even the score if Munger forced him out. We’ll probably never know. But I do know that it was a low class and totally off base thing to say.

  • March 31, 2011 at 4:27 pm
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    Hi Ravi,
    I have been following your blog from Germany for some time and would like to thank you for all your hard work you share with us. Sometimes it is very difficult to stay rational between Buffett-bashers and Sokol-bashers and brutal news coverage. I think Sokol did not behave perfectly and the TV interview was kind of confusing. But I don’t think he could have done any better. The timeline speaks for itself. Buffett did a great PR job. Did he behave hypocritical? I don’t believe so. He did draw his lines VERY precisely and who wants to intend has no difficulty at all to do so. As a shareholder I am totally satisfied with how he saved the saveable.
    Tobias

  • March 31, 2011 at 4:55 pm
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    My opinion is that Sokol will be charged with insider trading and Berkshire Hathaway will be fined for insufficient controls of employee transactions. I fully understand where Sokol is coming from in his own defense, but I just don’t think he understands the law here. Just because he thought there was a low probability that Berkshire would buy LZ, and that he was not the ultimate decision maker, does not mean he can buy as many shares as he wants. He was engaged as an agent for Berkshire in a potential M&A transaction for a specific company, thus he cannot buy shares of that company for his own account. It’s as simple as that. It doesn’t matter if a deal ultimately happens or not.

    • March 31, 2011 at 8:48 pm
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      Who in the government do you think has the guts and the stature to sanction Berkshire Hathaway after Buffett has basically done public relations for the Treasury Department over the last 2 1/2 years and was rewarded with the nation’s highest civilian honor, The Presidential Medal of Freedom?

  • April 1, 2011 at 4:42 pm
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    I actually think that there was more damaging information in the press release. The fact that Sokol tried to resign twice before. This points out two very large issues: 1) that it may be very difficult to get a replacement for Buffett as CEO. If the man that was arguably first in line for the job had seriously offered to resign twice before, his desire to be in the role was obviously limited. Given that Buffett is paid $100k/yr, when the comprable CEO would get tens of millions, what is the exact offer going to be to entice someone? Which leads to 2) Buffett has said so much about the “culture” at Berkshire, how people “skip to work” and how managers are rich enough that they have no real needs – is this true and what does it mean for the future of the company. Sokol had been there well over a decade and was one of the “All-Stars,” constently being publically praised by Buffett. How deep is this culture really?? When Warren goes what happens. Do the managers of the business have the “culture” in them or do they just have allegence to one man. Certainly, Sokol’s behavior does not suggest that the culture runs deep…

    • April 1, 2011 at 8:48 pm
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      Jon, regarding your comment on the $100K pay, Berkshire pays executives extremely well. Sokol pulled in tens of millions of dollars just from his work at MidAmerican based on the utility’s 10-K filing. And I’m sure he pulled in more from his work at NetJets that isn’t disclosed. The next CEO of Berkshire will be paid well, I am sure of it. He probably could make more elsewhere but I don’t think the right guy for the job is going to do this purely for money.

      I am hoping Ajit Jain reconsiders – he is the perfect and obvious choice.

  • April 2, 2011 at 3:10 am
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    To me, Buffett’s press release comes across as very very frosty.

    True to form, Buffett never ever criticizes anyone by name (I can’t think of a single counter-example). However, Buffett knew when he wrote the release that the main thing that would come across is the link between Sokol’s resignation and the LZ trades. Reading it had to feel like a punch to the gut to Sokol.

    Also, Buffett mentions that Sokol sent his resignation through an intermediary. This is not how you quit on good terms, and to specifically mention this in a mass media release is as close as Buffett ever comes to publicly saying that he is furious and not on speaking terms with someone.

    Sokol is obviously a hardworking and savvy businessman, but I’ve always had my doubts that his aggressive management style fit Berkshire as a CEO candidate, so perhaps this is for the best.

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