Ex-Berkshire Exec Is One Lucky Dog

03/31/2011 11:38 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

This much is beyond dispute, coming as it does straight from sainted business icon Warren Buffett:

A top executive and presumed heir apparent at Buffett’s Berkshire Hathaway (BRK.B)—a man who also happened to be the instigator of Berkshire’s pending purchase of Lubrizol (LZ) and the principal go-between in the early stages of takeover negotiations—purchased a $10 million stake in Lubrizol in his personal account, just days before pitching the deal to Buffett.

Hey, happens to all of us. No sooner do we plow a few million into our favorite stock speculation than the boss decides it’s a swell home for his spare $9 billion. What a lucky guess! Congratulations, David Sokol, on your perspicacity.

Of course, it’s a lot more convoluted than that. Sokol actually bought a much smaller stake in Lubrizol, worth not quite $250,000, back in December, one day after instructing a Citigroup banker to express preliminary interest on Berkshire’s behalf to Lubrizol’s chief executive. A week later he sold those shares, for reasons unknown.

Yet two weeks after that, he plunked down the $10 million—just as Lubrizol’s board was meeting to discuss his approach. Less than two weeks after that, he was pitching the acquisition to Buffett.

At that point, according to Buffett, Sokol mentioned in “a passing remark” that he owned “stock” in the company. Buffett did not ask “about the date of his holdings or the extent of his holdings,” he admits pointedly.

Buffett states that neither he nor Sokol believe that Sokol’s Lubrizol purchases “were in any way unlawful.” Moreover, he says he did not ask for Sokol’s resignation even after learning of all the facts, and has gone out of his way to praise Sokol’s accomplishments at the company.

Yet, unlike the two prior times Sokol tried to leave, this time Buffett chose not to dissuade him.

So those are the facts, and most legal experts quoted on the matter suggest that while the appearance stinks, odds are that Sokol is not legally liable.

The man risks a charge of excessive chutzpah, however, by insisting to The Wall Street Journal that his resignation “had absolutely nothing to do” with Lubrizol, and finding “nothing...embarrassing” in Buffett’s disclosure about his trading activities. This is a man whose mentor famously preaches that employees refrain from any actions that might conceivably be perceived as unethical.

According to Sokol’s letter of resignation, he plans to “invest my family’s resources...to create enduring equity value and hopefully an enterprise which will provide opportunity for my descendants and funding for my philanthropic interests.”

His next act of charity should be to donate all of his profits on the Lubrizol deal.

The feudal age had this neat concept of noblesse oblige, so that even as the lords plundered towns and exploited peasants, they could at least aspire to higher moral ground.

But those guys didn’t need to worry about change-of-control severance agreements—which is how, for example, Lubrizol’s executives stand to reap another nifty little windfall from the Berkshire deal quite apart from their stock options.

Distracted as they are by such business arcana, the modern lords—pardon me, executives—can do no wrong unless informed to the contrary by a very expensive lawyer. And Sokol’s lawyer isn’t even stopping him from going on TV—that’s how confident he is that everything is kosher.

The trouble is, such a narrow definition of moral leadership offends the peasants and the townspeople. To steal to feed one’s children is one thing, and to use a liberal interpretation of business expenses another. (Former Hewlett-Packard (HPQ) CEO and current Oracle (ORCL) president Mark Hurd couldn’t keep tabs for his dinners with his corporate-hostess friend off his expense reports.)

But to use one’s wealth and special status to secure a further edge in the supposedly free and efficient markets offends us laypeople’s admittedly unsophisticated notions of fair play and lordly duty.

As it happens, there’s an insider-trading trial going on involving a big hedge-fund manager and lots of secretly taped conversations between the high and mighty looking for just such an edge. Raj Rajaratnam’s web of insider sources allegedly reached into the boardroom of Goldman Sachs (GS), the upper management ranks of IBM (IBM) and so on.

No one’s accusing Sokol of a crime, but his conduct does serve to remind everyone, one more time, how often corporate insiders seem to have most of the luck.

Buffett, a longtime champion of the small investor and the wage earner, should know this as well as anyone. But as so often is the case, it’s not just what you know, it’s who you know.

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