Buffett’s chief disciple resigns

2011-04-02 12:44

The man widely seen as the leading successor to Warren Buffett at Berkshire Hathaway has resigned after disclosing that he bought shares in chemical company ­Lubrizol before pushing Buffett to acquire the firm.

David Sokol’s resignation is a reputational blow for Buffett, the 80-year-old Oracle of Omaha, who prides himself on his folksy fair-dealing image and hand-picks managers who can run businesses in a similarly transparent manner.

“Obviously Warren Buffett prides himself on transparency and this would not appear to be transparent,” said Berkshire shareholder Michael Yoshikami of YCMNET Advisors in California.

“It’s surprising and always amazes me that these types of events occur because it just seems so unnecessary,” he added.

Buffett said that he did not think Sokol broke the law and that Sokol resigned because he wanted to ­create a family business of his own and devote more resources to ­philanthropy.

Nonetheless, the sequence of events raises questions about conflicts of interest and the strength of Berkshire’s internal controls.

Buffett said this week that Sokol bought Lubrizol shares in December last year, sold them, then bought more in early January.

Sokol subsequently presented Buffett with the idea of buying the company and made what Buffett called a “passing remark” that he owned some Lubrizol stock.

Buffett said he did not probe Sokol’s stock ownership further.

The 96?060 shares Sokol bought between January 5 and 7 would have generated a profit for him of at least $2.98?million (R20.16 million) based on ­Lubrizol’s share price over those three days and the price at which Buffett agreed to buy the company.

Bloomberg reports that Sokol is being investigated by US regulators. A source, who declined to be identified because the investigation was secret, said the Securities and Exchange Commission was probing whether Sokol bought shares in Lubrizol on inside ­information.

Sokol defended himself in an interview this week with Fox Business, saying: “There was no inside information. The only reason ­Warren Buffett mentioned it in the release is because it would have to be brought up anyway when ­Berkshire put the purchase up for a vote. It’s a disclosure issue.”

Buffett took pains in his statement to make it clear that he did not fire Sokol, and that Sokol ­offered his resignation after ­having asked twice before in recent years to retire.

Buffett said he discovered the extent of Sokol’s Lubrizol ­holdings on March 19, but insisted that his resignation this week came as a ­surprise.

A recent regulatory filing by ­Lubrizol makes it clear that Sokol had the idea of buying Lubrizol well before taking it to Buffett.

Lubrizol said Sokol had a meeting with bankers at Citigroup in December at which they ­discussed a list of 18 companies ­Citi had compiled for Sokol as ­potential acquisition targets.

Lubrizol said Sokol told the Citi bankers that Lubrizol was the only name on the list he liked.

The next day, according to ­Buffett’s statement, Sokol began buying stock and eventually presented the idea of buying out ­Lubrizol to Buffett on January 14 or 15. Buffett said he was originally not in favour of the idea but warmed to it after Sokol told him of a ­January 25 conversation with ­Lubrizol’s chief executive.

Berkshire ultimately announced its purchase of Lubrizol for $135?per share, a 28% premium, on March 14.

John Coffee, a Columbia University law professor, called the disclosure “embarrassing” for Berkshire.

“It’s the kind of behaviour that, as a matter of corporate governance, sophisticated companies try to avoid,” he added.
Legal experts were divided on whether Sokol could be held liable in court for his actions.

Evan Stewart, a managing partner at law firm Zuckerman Spaeder in New York, said: “He could be. At a minimum, he showed extremely bad judgment in not ­disclosing to Mr Buffett that he had taken a fairly significant ­position in the company a week ­before he pitched the benefits of the company to Mr Buffett.”

But others said there was the possibility the sequence of events could be explained away.

“The legal issue is what Sokol knew about Berkshire’s ­interest in acquiring a position in Lubrizol when he was buying shares in ­January,” said Stuart Slotnick, a partner at Buchanan Ingersoll & Rooney in New York.

“Warren Buffett’s job is to ­purchase stock and companies. If Sokol goes to Buffett and says ‘I love this stock, I bought some for myself, you should look at it,’ there’s nothing inappropriate in Buffett doing his own analysis and making a purchase, as long as no trading decisions are made on the basis of material, non-public ­information,” said Slotnick.

One securities lawyer, who spoke on condition of anonymity because his firm does not permit staff to speak to the media publicly, said he could “see reasons for ­Buffett to be annoyed” but did not see a crime in what happened.

Most Buffett watchers thought Sokol was the top candidate of the three or four Berkshire executives most frequently mentioned as ­future CEOs of the company, given the legendary investor’s enthusiasm for him.

In his yearly letter to shareholders this year, Buffett praised Sokol for engineering a turnaround at NetJets, a business where he had no prior experience, and for his accomplishments at MidAmerican.

A year earlier, he called Sokol “an enormously talented builder and operator”, and in 2009 he proclaimed that Sokol would run any business with which he was associated “in a first-class manner”.

The issue of succession is crucial for Berkshire Hathaway because Buffett personifies the company. He built Berkshire up from a small insurance firm to one of the largest insurers and conglomerates in the United States.

Berkshire did not release Sokol’s March 28 letter of resignation, though Buffett said that in the ­letter Sokol had mentioned his ­desire to pursue philanthropic ­efforts.

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