On March 30, 2011, Warren Buffett penned an open letter expressing support for his former lieutenant, David Sokol, whose trading activities had been called into question. “Neither Dave nor I feel his Lubrizol purchases were in any way unlawful,” Buffett wrote. Then, a month later, he told shareholders and reporters gathered at the BKR annual meeting in Omaha that, actually, Sokol was a degenerate bum; a piece of garbage that needed to be taken out, lest it stink up the place. (Actual words: “inexcusable,” “inexplicable,” in violation of “the company’s insider-trading rules and code of ethics.” Buffett added that Berkshire “had turned over some very damning evidence” re: Sokol to the Securities and Exchange Commission, to boot.)
Though Sokol did not publicly respond to the comments at the time, they presumably stung quite a bit, since having your unassailable ex-boss basically call you a lowlife does not do wonders for the reputation. Now, a year later, after being informed that the SEC would not be taking action against him, is he in a Zen place about life in general and Buffett’s words specifically? Are the two men cool? Could Sokol see them being friends again one day? At the very least, is he ready to laugh about them? Yes, yes he is. Read more »
The SEC probably came to the right decision in not taking any action against David Sokol but he’s still a delightful insider trading puzzle. Sokol, you’ll recall, is a former Berkshire Hathaway executive and Warren Buffett heir presumptive who was fired because he bought $10mm of Lubrizol stock, then pitched the company to Buffett without telling him that he (Sokol) had just bought a bunch of the stock,1 and then made $3mm when Buffett ended up buying all of Lubrizol at a premium. Here are, to a first not-legal-advice approximation, some things that are probably true:
If Buffett had (1) decided to buy Lubrizol and (2) bought $10mm of Lubrizol stock for Berkshire’s trading account,2 and then (3) Berkshire approached Lubrizol and negotiated a deal: not insider trading!
If Sokol had (1) convinced Buffett to buy Lubrizol and (2) bought $10mm of Lubrizol stock for his personal account, and then (3) Berkshire approached Lubrizol and negotiated a deal: insider trading!
The difference is not the insideriness – Buffett/Berkshire are more insidery, or have more material nonpublic information, than Sokol – but rather the misappropriation of that material nonpublic information. If Berkshire trades on Berkshire’s plans, that’s sort of an epistemological necessity. If Sokol trades on Berkshire’s plans, when he has some duty not to – if, for instance, Berkshire has policies requiring him to keep its plans confidential – then that’s insider trading.
But instead, it appears that the order of operations was (1) Sokol bought the stock, (2) Sokol convinced Buffett to buy Lubrizol, and (3) Berkshire approached Lubrizol and negotiated a deal. Sokol wasn’t trading on Berkshire’s plans: he was trading on his plans to convince Berkshire to buy Lubrizol (and, probably, to convince Lubrizol to be bought).3
And those plans were probably not material, in that they were too hazy and far removed from an actual deal. Here is DealBook: Read more »
It’s fun to get all riled up about insider trading! So let’s.
But first, I see you have some XYZ shares. Would you like to sell them to me? Here are some things you might want to know about it:
1. Warren Buffett is secretly buying loads of it.
2. Congress is going to do something that will make it go up, like kill pending legislation that would restrict its profits.
Let’s say I know those things and you don’t. I buy XYZ from you. Have I committed a crime? Maybe – but it’s not as easy as that.
Let’s start with what insider trading is. Actually let’s start with what it isn’t. Henry Blodget gives a popular simplification, “The definition of insider trading is trading while in possession of material non-public information.” If you think that, then clearly Congresspeople are committing crimes by trading on the knowledge that they’re going to earmark loads of cash to a company or deregulate it or just blow up the financial system or whatever they’re up to.
But that’s not the definition of insider trading, or at least of illegal insider trading. You can tell that by doing this little thought experiment:
1. Buffett knows he’s going to buy ten yards or so of IBM
2. He knows that that will move the market, so it’s material
3. He hasn’t told anyone yet, so it’s non-public
4. So he’s got “material” “non-public” information about IBM
5. He buys it anyway
6. Has he committed a crime? Read more »
As you may have heard, this weekend is Berkshire Hathaway’s annual shareholder meeting. As he has in the past, CEO Warren Buffett will speak at length, and unlike time’s past, this year’s talk will include at least one awkward topic, that being the David Sokol/Lubrizol incident. We previously came up with a bunch of WB-esque words he could offer that would get him back in everyone’s good graces, including but not limited to:
“While nothing illegal went down on Berkshire’s watch, what David did is not the way we expect people to conduct themselves and it certainly left a bad taste in everyone’s mouth. Not unlike what I imagine would be the result of some boyhood experimentation on the farm and a cow with some funky tasting spunk.”
According to Andrew Ross Sorkin, who will be at the meeting, if Buffett wants to make things cool with shareholders, he can’t just say he was disappointed in David Sokol but that he was disappointed in himself. Read more »
Gang, we’re not going to mince words here- this has been the worst month of Warren Buffett’s life. Anything that could have gone wrong did. The Sokol business, the Dilly Bar he dropped on his shirt before going into a big meeting, the Squawk Box redesign, the unwrapped Sees Candy Munger left on his dash in the hot sun. If all that wasn’t enough, now comes word that in one fell swoop, his favorite show, the launchpad for his acting career, and his shot at a date with Susan Lucci are gone. Read more »
When David Sokol, the Berkshire lieutenant thought to be the frontrunner for Warren Buffett’s job resigned two weeks ago, Buffett sent a letter mentioning that Sokol owned a bunch of shares of Lubrizol, which he had bought before pitching WB on the idea for the company. Sokol says he didn’t know much or how Buffett would react or if there was a snowball’s chance in hell BRK would acquire the company, or if anyone would even take this thing seriously. Turns out he may have had some reason to at least have a hunch. Read more »