David Sokol, the former head of Berkshire Hathaway (BRK.A) units MidAmerican Energy Holdings and NetJets, abruptly exited Warren Buffett's empire on Wednesday. Although the SEC claims not to be investigating the reasons, Sokol's actions regarding a recent $9.7 billion Berkshire acquisition raise important questions. Sokol's departure was head-spinningly fast, and it highlights how afraid Buffett is of anything that might damage the smooth PR sheen he has spread over himself.

Despite pulling in $59.5 million in the last five years from MidAmerican alone, Sokol might have felt wasn't getting paid enough. So he hatched a little plan: He would recommend to Buffett that Berkshire use its cash hoard to buy lubricant maker Lubrizol, then lubricate his pocket with tens of thousands of its shares. The "good" news for Sokol is that two months later, Berkshire announced it would spend $9.7 billion to acquire Lubrizol, according to Dealbook.

While that deal immediately boosted the value of Sokol's Lubrizol holdings by 27%, Buffett feared that news of Sokol's windfall would become a public embarrassment, and tossed him out of Berkshire.

Sokol as Costanza: "Was That Wrong?"

In this, Sokol reminds me of Seinfeld character, George Costanza, whose boss at Pendant Publishing, Mr. Lippman, learned that Costanza had used his office desk to engage in "relations" with Pendant's cleaning lady. When Lippman confronted him about it, Costanza exclaimed, "Was that wrong? Should I not have done that? I tell you, I gotta plead ignorance on this thing, because if anyone had said anything to me at all when I first started here that that sort of thing is frowned upon... you know, cause I've worked in a lot of offices, and I tell you, people do that all the time."

According to The Wall Street Journal, Sokol's initial interest in Lubrizol was piqued during a Dec. 13 meeting with Citigroup (C) bankers to discuss a list of "possible transactions." According to Dealbook, Sokol bought 2,300 shares of Lubrizol on Dec. 14, which he then sold on Dec. 21.

Then, I imagine, he got his nerve back and bought a fresh batch of 96,060 additional shares on Jan. 5, 6 and 7. The next week, Sokol pitched Buffett on the idea of purchasing Lubrizol. Buffett got Berkshire's board to approve the deal on March 13, and announced it March 14.

Sokol's brazen behavior looks like insider trading, but would it pass the legal test? According to a lawyer Dealbook quoted anonymously, insider trading requires the perpetrator to possess "material nonpublic information at the time he bought or sold the stock and to have breached a duty [of trust] to his employer, Berkshire Hathaway."

This lawyer suggested that Sokol would be off the hook because he didn't know Berkshire was going to buy Lubrizol in January -- when he mentioned his Lubrizol stake to Buffett in January as "a passing remark." This last bit is crucial because it suggests that Buffett knew Sokol owned shares in Lubrizol two months before Berkshire acquired it.

So what key facts spurred this parting of ways? Maybe Buffett knew that it wouldn't look good in the press when the report about Sokol's Lubrizol shares was filed with the SEC. Buffett has long admonished his people not to do anything that would make them uncomfortable with their families and friends were it to appear in the local newspaper, but his failure to realize in January that Sokol's Lubrizol holdings would be a problem suggests a gap between his talk and his walk.

Buffett as Spin Master

Buffett is well known for his investment skills, but as I wrote on DailyFinance in May 2010, his public relations skills are also formidable. Decades ago, he hired a Fortune reporter, Carol Loomis, to write his annual reports, and he is popular with business journalists for giving detailed background briefings to selected reporters. These moves and others seem to have won him the embrace of the media. How else to explain how Buffett always comes out smelling like a rose, despite the many contradictions between his words and and his actions, among them:

Heirs to the Berkshire Throne

But investors likely care more about who will succeed Buffett than about his ability to spin the media. With Sokol out, four possible successors remain for his CEO job (he plans to have a different person take his investment management role). According to Dealbook, they are:

  • Ajit Jain, the head of Berkshire's reinsurance operations;
  • Tad Montross of General Re,
  • Matt Rose of Burlington Northern Santa Fe; and
  • Tony Nicely of Geico.
When it comes to picking investments and maintaining the great public reputation that Buffett enjoys, I doubt anyone can succeed him. Berkshire Hathaway is like Apple (AAPL) in this: Its cash flow prospects in significant measure depend on having a rare genius at the helm.

For Berkshire, the biggest mistake investors could make is to assume that everything will stay the same after that genius leaves the stage. Yet the departure of former top successor candidate Sokol under a cloud raises the question: Was Buffett aware of Sokol's apparent ethical blind spot before he came on board in 2000, or did he just discover it this month?

If Buffett has known about this for a long time -- and Dealbook suggests he knew Sokol owned Lubrizol shares two months before the deal -- it suggests one of two things. Either Buffett has his own ethical blind spots, or he isn't supervising his people well enough.

When it comes to insider trading, perhaps George Costanza was right: People do do that all the time.



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Kate Jonson

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November 27 2011 at 4:09 PM Report abuse rate up rate down Reply
Dereck

Major Fraud Alert


The entire Federal Banking System under FirstGov has been "Consumed" and "Levied" by way of a Maryland State Circuit/District Court Ruled “Appropriation and Garnishment” of all Future Earnings prior to and after 2004 against Bank Of America by way of the F.D.I.C. Regulations Prohibiting failing Banks from Merging with other failing Banks between the Dates of 08/04/08 and 10/09/09.

Bank of America violated the 21st Century Act: Final Amendments to Regulation CC Section: http://www.federalreserve.gov/boarddocs/press/bcreg/2004/20040726/attachment.pdf

seeking reimbursement of Credit, Loan, and Finance Balances as a "Bank Entity" and not a "Nonbank Consumer" as specified on Pages 85 and 86.

The person they sued through a LLC. Debt Collection Company and Law Firm was the "World Fortune Owner" who "Counterclaimed" and won.

Now all Contracts of any Corporations (Including Employment) under the "Controlling Interest" of any Investment Bank Worldwide are "Null and Void", and are also under the stipulated Rules and Regulations of an "Closely-held S Corporation rendering all Employed under Legal Actions against “Domination”, and also means that "No Corporation can hold Shares" (Proving Warren Buffetts claims of Corporate Stock purchases Fraud) officially making every Stock Exchange on the Planet a "Ponzi Scheme" by default.

Businesses owned by the States (Public Corporations) are being sold Stock Shares by Corporations also under the Federal Banking System in this Worldwide "Ponzi Scheme". The World Fortune Company Merrick Inc. Sweden is dissolving Millions and Billions of Dollars from "All Levels of Government"in the U.S. of Financing based upon Years of "negligent inaction" involving this case.

The Federal Government has already been forced to discontinue supplying the Financing States use to pay their debts, Persons in Government Offices may want to begin to take their jobs more seriously, these are different times from 10 Years ago and you will not be accepted civil servants here just because you say you are here to do the right thing.

May 29 2011 at 12:22 AM Report abuse rate up rate down Reply
cabo79

Martha Stewart got time, do you think this guy will? Old Martha didn't do the pay-off thing.

April 01 2011 at 9:40 AM Report abuse rate up rate down Reply
havecash

The guy at Berkshire is a crook and so is Buffett since they both "knew" about the purchase before the Lubrizol offer was made.

The SEC should have some balls and file a forfeiture suit against both of them. So should some shareholders of Lubrizol file a class action again both men and against Berkshire Hathaway.

April 01 2011 at 8:28 AM Report abuse rate up rate down Reply
gentlmnjm

If the media would do their job Scumbag old codgers like buffet would be exposed for the criminals they are! He runs a crime family plain and simple and they pay protection money to the polititians.

April 01 2011 at 8:16 AM Report abuse rate up rate down Reply
HuntnFreak123

Lets face it if you are the priviledged few of one of the govt lackies, you go strat to jail for tax fraud, embezzlement or some other made up garbage,

April 01 2011 at 4:22 AM Report abuse rate up rate down Reply
manzanas

search goggle key words sokol philppines hydro project law suit he should have been in jail for that one.

April 01 2011 at 12:10 AM Report abuse rate up rate down Reply
Condley

Everyone in the business gets insider informaion. You can trade all day long and it's almost imposible to buy or sell any stock that you do not have some sort of privileged information about. Even if they are a competitor, you can get inside info from mutual clients, and then trade on the info all day long. That's just the nature of the business and no government regulations will stop it. What's even better is to watch those crooked politicians hold hearings on insider trading. All the time sitting back and pretending to be so righteous. Now that's the pot calling the kettle black!

March 31 2011 at 11:54 PM Report abuse +2 rate up rate down Reply
1 reply to Condley's comment
cabo79

Add the fact that your Congressmen and Senators are EXEMRT from insider trading laws and you get a better picture of what is going on.

April 01 2011 at 9:43 AM Report abuse rate up rate down Reply
Roni

Technically it may not be insider trading but you could make the argument that due to Sokol's position in the company and his relationship with Buffet he would have a good idea of whether or not Buffet would go through with the purchase of Lubrizol. The only way it would ever be known is if there were minutes of every meeting, copies of emails and recordings of phone calls between Buffet and Sokol. Yet it is the unions that are detroying this country, not rich, overpaid, overcompensated heads of corporations that take advantage of every loophole to skirt the laws. (no, I'm not now or have ever been a union member)

March 31 2011 at 7:24 PM Report abuse rate up rate down Reply
Carole

Or could it be that Mr. Buffett used this as a mean to get rid of someone he no longer wanted on his team?

March 31 2011 at 4:53 PM Report abuse rate up rate down Reply