Did Sokol violate Berkshire policies?

By Felix Salmon
April 6, 2011
the WSJ has now posted online? The key bit is this:

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Did David Sokol and/or Charlie Munger violate the Berkshire Hathaway ethics policies which the WSJ has now posted online? The key bit is this:

If a Director or Covered Employee is aware that Berkshire has taken or altered a position in a public company’s securities or that Berkshire is actively considering such action, trading in any securities of such public company by such Director or Covered Employee or any of his or her Family Members is expressly prohibited prior to the public disclosure by Berkshire of its actions with respect to such public company’s securities (or until the Director or Covered Employee becomes aware that Berkshire did not take and is no longer actively considering such action.)

I think the present tense here is the Sokol loophole: the language says “is actively considering” rather than “will actively consider”. If Sokol knew that Buffett was going to actively consider an investment in Lubrizol in the future, but wasn’t doing so yet because Sokol hadn’t brought him the idea yet, then he might just have stayed on the right side of the memo, which was clearly written by a lawyer.

On the other hand, it’s pretty clear that Sokol violated the spirit of the memo. If it’s wrong to trade in a stock while Buffett’s considering it, then it’s wrong to trade in that same stock in advance of Buffett’s consideration.

Munger, on the other hand, seems relatively safe. His investment in BYD was a very long-term one; it long predated any discussions at Berkshire; and it took place at arm’s length, via an investment fund — the investment was actually made by Li Lu, rather than by Munger himself.

Insofar as Sokol’s defense is “even Charlie Munger did it”, then, I don’t think it flies. Sokol was clearly trading rather than investing, and he was switching back and forth between his roles as private investor and Berkshire representative so quickly that even Citi’s bankers got confused. I’m not a securities lawyer; I have no idea whether what he did was illegal. But it certainly wasn’t behavior becoming a future CEO of Berkshire Hathaway.

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Comments
7 comments so far

The WSJ also posted BRK’s insider trading policy. http://s.wsj.net/public/resources/docume nts/BerkApr6_2011.pdf

You can’t buy if you have material non-public information in a company in which BRK “may in the future invest.”

Knowledge that BRK’s bankers were pushing LZ and that you plan to discuss with Buffett certainly sounds like material non-public information.

No “will actively consider” language here.

Posted by 3oosion | Report as abusive

> If it’s wrong to trade in a stock while Buffett’s considering it, then it’s wrong to trade in that same stock in advance of Buffett’s consideration.

No.

I can see that this creates bad appearances, but in a world in which we were allowed to be naive, I can’t imagine that these would be remotely the same thing. The worst thing he did was to create an appearance of conflict; there was no actual conflict at any point, and a policy that your suggesting — that he decline to bring ideas to Buffett that Buffett might like — would hurt Berkshire shareholders and acquisition target shareholders while benefiting nobody.

Posted by dWj | Report as abusive

dWj- Yes.

Your argument is illogical- It’s blatantly unethical and a conflict of interest- Sokol was trading on the nonpublic information that Hathaway would soon be considering the company as an investment. In fact, one could easily argue that Hathaway was already considering the company as an investment- it is Sokol’s job after all to find good companies to invest in.

Posted by AdamJ23 | Report as abusive

What AdamJ123 Said.

BH != Warren Buffett. If a senior member of BH plans to suggest acquisition, BH is actively considering the acquisition.

Posted by klhoughton | Report as abusive

Sokol’s analysis was paid for by Berkshire, so they had first dibs on his report and recommendations. He may not have violated any laws, but he certainly didn’t act ethically wrt Berkshire.

Posted by Eric_H | Report as abusive

Those in business will happily say f’morality, this is business. But business ethics and lack thereof are also a part of business and in this case ensconced in their business code as well.

So, YES>

Posted by hsvkitty | Report as abusive

During the last Free Money and Loan Guarantee Gala The Federal Government threw for Wall Street, Buffett jumped into the Party by going partners with GS throwing $5B liquidity into the everyone gets a cut of the action table. Buffett knew full well GS had unlimited access to the discount window no matter the quality of the paper being passed and Buffett knew all GS’s cheese positions AIG were going to be covered by the bailout. Tell me where is there not inside information bouncing all around Berkshire. Buffett made a ton of money on this sure bet based on inside information! Just what Berkshire policies is who being accused of violating here?

Posted by Woltmann | Report as abusive
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