Tags: Buffett | Heir | Apparent | Sokol | Quits | SEC | Reviews

SEC May Check Sokol Deal for Possible Insider Trading

Thursday, 31 Mar 2011 07:05 AM

 

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David Sokol, once a candidate to succeed Warren Buffett as the head of Berkshire Hathaway Inc., resigned as it was disclosed he helped negotiate a takeover while buying stock in the target company.

Sokol, 54, bought about 96,000 Lubrizol Corp. shares in January before recommending the company as a takeover target, Buffett, Berkshire’s chairman and chief executive officer, said yesterday in a statement. Sokol had initiated confidential talks with Lubrizol the month before. Berkshire agreed to buy the firm for $9 billion on March 14.

Buffett, 80, has relied on Sokol as a manager and a dealmaker for more than a decade. The billionaire, who’s been planning his succession, is awaiting approval from regulators and shareholders for the Lubrizol deal. Enforcement lawyers at the U.S. Securities and Exchange Commission were reviewing Buffett’s statement and discussing the matter internally, according to one person with knowledge of the talks.

“The SEC is going look at that deal to check for insider buying and selling, so if there’s an issue the time to clean it up is now,” said Daniel Genter, president of RNC Genter Capital Management in Los Angeles, which oversees about $3.7 billion.

Berkshire Class B shares fell 3 percent to $82.90 in extended trading in New York after the announcement, and have risen about 6.7 percent this year. Sokol was chairman of Berkshire’s MidAmerican Energy Holdings and its roofing unit Johns Manville. He was also CEO of NetJets Inc., Berkshire’s luxury-flight subsidiary.

Share Purchases

Sokol bought 96,060 Lubrizol shares on Jan. 5, 6 and 7, less than two weeks before proposing that Berkshire buy the company, Buffett said. The purchases may have given him a profit of about $3 million, according to Buffett’s disclosure and Bloomberg calculations. Sokol’s compensation from MidAmerican totaled $59.5 million in the last five years, according to the unit’s SEC filings.

“It’s just a classic case of someone not fitting into that Buffett culture,” said Lawrence G. McDonald, president of McDonald Advisory Group in New York and author of “A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers” with Patrick Robinson. “That’s the type of thing you might do at another hedge fund, but you don’t do it at Berkshire.”

Buffett said in the statement that he thought Sokol’s stock purchases were legal. Sokol said he didn’t trade on inside information, according to a statement from Fox Business Network.

Buffett’s Interest

“I didn’t think Warren would be interested in buying Lubrizol anyway,” Fox Business Network cited Sokol as saying in an interview. “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.”

Ann Thelen and Tina Potthoff, spokeswomen for MidAmerican, didn’t return calls and e-mails seeking comment from Sokol. Debbie Bosanek, an assistant to Buffett, confirmed his statement.

A surge in options trading in the week before the takeover suggests that investors may have been speculating with insider information, according to Ophir Gottlieb, head of client services at Livevol Inc., a San Francisco-based provider of options-market analytics. Call trading surged to 2,931 contracts on March 9, and open interest for the April $110 calls jumped to 2,654 from 41.

Sokol joined Omaha, Nebraska-based Berkshire in 2000 when he sold MidAmerican, which he led as CEO, to Buffett for about $9 billion. Under Berkshire, Sokol retained a minority equity stake in MidAmerican and expanded the unit by buying a natural gas pipeline and power producers in California and the U.K.

Scouting Acquisitions

Sokol relinquished the CEO position in 2008 and broadened his duties at Berkshire by scouting deals like an investment in China’s BYD Co. and a rescue package for Constellation Energy Group Inc.

“He was the heir apparent,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business. “The exercise of his recommending Lubrizol to Warren Buffett was like a CEO in training.”

Sokol instructed Citigroup Inc. on Dec. 13 to arrange a meeting with Lubrizol CEO James Hambrick, according to an SEC filing last week. The two men spoke on the telephone on Jan. 14 and met on Jan. 25. Sokol told Buffett he was a shareholder in Lubrizol, the Wickliffe, Ohio-based maker of engine lubricants, when the two men first discussed a possible deal, according to the statement yesterday.

“It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings,” Buffett said. Buffett learned about the size and dates of the purchases “shortly before I left for Asia on March 19,” he said.

Shares Rise

Sokol’s stake as reported by Buffett would have been worth about $9.92 million on Jan. 7, based on the closing price on the New York Stock Exchange. The shares have risen about 30 percent to $134.01 since Buffett’s deal was announced, boosting the stake, if Sokol still owns it, to $12.9 million.

“I don’t attribute this to a failure of character or a scheme, but rather more of an honest oversight that happens in the hustle and the bustle of trying to get jobs done and the enthusiasm that comes about from a good idea,” Thomas Russo, a partner at Berkshire investor Gardner Russo & Gardner, said of Sokol’s trades. “There’s way too much at stake to risk for such small reward.”

Berkshire said in February it has four candidates to succeed Buffett as CEO, without publicly identifying them. Investors including Buffett biographer Andrew Kilpatrick had said Sokol was the most likely successor. On March 23, Buffett said at a news conference in India that Ajit Jain, Berkshire’s reinsurance head, would win the support of directors if he decided to seek the top job.

‘Totally Honorable’

“I really feel about him like I would a brother or a son,” Buffett said of Jain. “He’s not only excelled at every single task he’s taken on in insurance, but he’s behaved in a way that’s been totally honorable.”

Buffett said in the statement that he hadn’t asked for Sokol’s resignation and that it came as a surprise. Twice in years past Sokol had considered resigning and been persuaded to stay, Buffett said. Berkshire is “far more valuable today” because of Sokol’s service, Buffett said. Sokol said he will devote his career to investing his family’s resources and may start an enterprise, according to Buffett’s statement.

“There likely will be an investigation,” said Jacob Frenkel, an attorney at Shulman Rogers Gandal Pordy & Ecker in Potomac, Maryland, and a former SEC lawyer specializing in fraud and stock manipulation cases. “If all we have here are purchases before making a recommendation, and the decision to pursue an acquisition doesn’t commence until after the transactions are completed, that wouldn’t satisfy the definition of insider trading.”

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