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David Sokol Interview


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Back in 04/05 Buffett bought Posco for his personal investment account (how much it was never revealed). This was (about a year) ahead of Berkshire's purchase. How is this different?

 

How exactly would Buffet profit from the spike in the share price of a company he plans to buy outright? He'll ultimately have to pay that price to buy the company anyways.

They are completely different things.

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Guest ValueCarl

I am sure you boys and girls may have already seen this, but Alice has already taken sides happily endorsing the Ajit news which more than likely, as has been cited here already, was a Buffett decision as soon as he heard about the audacity surrounding Sokol's blatant trades. Whether it's because of her insurance back ground or not, she seems to have garnered a great deal of respect inclusive of calling Ajit the closest candidate to Warren's mindset maintained inside the Berkshire stable. I will take her word on that!      

 

I don't think Ms. Schroeder will end up siding with Mr. Sokol at this time, especially while she has already expressed her disdain over the hatchet jobs he was incorporating over at NetJets!  

 

Go ask Alice if you like, but she has already cast her vote. imo    

 

<Andrew Ross Sorkin chimes in. Now we're all holding our breath to hear Alice Schroeder's take.>  

 

 

In my opinion, this is Buffett's way of begging the shareholders and media to insist by acclamation that Ajit volunteer. UPDATE -- APPARENTLY NOT JUST THAT. GIVEN THE TIMING, IT WAS PAVING THE WAY FOR THE SOKOL RESIGNATION. Buffett, and his family, have always wanted Ajit to become CEO, if it were to be a manager. The problem has been that Ajit doesn't really want the job -- especially its profile. Ajit loves Warren, however, and he's dutiful. My guess is that, if necessary, he'll step up to the plate. At this point he also is possibly the one candidate that the board could choose without doing an outside search, without it causing controversy.

 

http://www.aliceschroeder.com/blog/ajit-ceo

 

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I'm not sure if this is insider trading or not, but based on the information we have so far, I'd have to lean toward 'yes'.

 

For those who disagree (and they may very well turn out to be right, as a matter of fact I hope they are) just out of curiosity, why is this not insider trading?

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I wish CNBC could have asked Sokol whether he owned any shares of Constellation Energy (CEG) prior to Berkshires announcement of their deal a few years ago during the financial crisis that ultimately fell thru.  Also, I wish CNBC could have asked Sokol if he owned any shares in the company MidAmerican Energy bid on prior to the Lubrizol deal, that also ultimately fell thru and paved the way for the LZ deal.  Perhaps the SEC will???

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Guest Bronco

I know I'm in the minority here but why is this situation, where no shareholders were hurt, receiving more attention than something like a FMMH, where shareholders did get hurt.

 

Does Berkshire Hathaway have a legal right, once Sokol bought those shares, to force him to sell? 

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I'm not sure if this is insider trading or not, but based on the information we have so far, I'd have to lean toward 'yes'.

 

I don't see how this could be considered insider trading at all. (Though it does initially look suspicious, and would think it's reasonable for the SEC to at least check into it.)

 

Again, to me it's just the same as if Berkshire bought shares up to 4.9% of the company (knowing they would eventually acquire it) and then announcing a deal. It seems pretty simple to me, without knowing any of the "behind the scenes" information:

 

Sokol found LZ through Citi, he realized it was a good, cheap company. So he put an order in to buy shares (order got only a partial fill, so he sold the small lot for tax purposes). Either at the same time or later he reasoned LZ may be a good acquisition candidate for Berkshire (seems reasonable, as he has brought deals to Buffett before -- both accepted and rejected). In 2011 he put in another order for LZ shares. They were cheap, and likely to go up over time, so he brought up the idea with Buffett. Sokol talks with LZ about the acquisition also. Buffett initially turns the idea down, but eventually changes his mind after Sokol's meeting with the CEO and further insights into the company.

 

It may have been "close to the line" which Buffett doesn't like, but I don't see any trading on inside information anywhere here.

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Guest VAL9000

For those who disagree (and they may very well turn out to be right, as a matter of fact I hope they are) just out of curiosity, why is this not insider trading?

 

I think for this to be insider trading, Sokol needs to have material non-public information and needs to act with the intent of profiting from that information.  He needs to have been told by Warren that BRK is considering an offer.  It's not enough that he spotted the value before Buffett did, invested, and then told Buffett.  That's an ethical issue, not a legal issue. 

 

I believe an investigation would reveal that Sokol passes dozens of recommendations to Buffett and no action is taken.  Therefore, just because Sokol will be making the recommendation that BRK acquire Lubrizol, doesn't mean that it will happen.  In fact, the probability is quite low based on Sokol's 19/20 rejection rate metric.

 

Where I think it would be insider trading is if Sokol has a history of buying shares in a company, making a recommendation, and then dumping them if Buffett passes on the reco.  In this scenario, Sokol's intent appears to make excess profits through BRK's actions.

 

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Again, to me it's just the same as if Berkshire bought shares up to 4.9% of the company (knowing they would eventually acquire it) and then announcing a deal

 

But BRK would not profit from the runup in price in this case because they would eventually have to pay more to buy the company, as a result of the runup. But Sokol did stand to profit because his shares in LZ would be bought by Buffett at a higher price.

 

This is why it seems very close to insider trading to me:

 

1. Sokol asks Citi to give him a list of potential takeover companies for BRK.

2. He gets the list and tells Citi that he likes LZ and would like to meet with the CEO.

3. The next day he buys LZ shares.

4. Then he pitches the company to Mr. Buffett.

 

I don`t see how he is not trading on insider information. The general public was not aware of these discussions.

As I said earlier, if it was a Citi employee that had made those trades after learning that LZ was a potential BRK takeover target, it would be cut & dry...a case of insider trading. How is this any different?

 

 

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http://www.bloomberg.com/news/2011-03-31/buffett-misses-chance-to-show-moral-courage-commentary-by-alice-schroeder.html

 

What were they thinking? How could Warren Buffett excuse David Sokol’s trading in Lubrizol Corp. (LZ) stock while Sokol was pitching the company to Berkshire Hathaway Inc. (BRK/A) as an acquisition candidate?

 

Buffett and Sokol both say that nothing “unlawful” was going on (Sokol even went so far as to tell CNBC he did nothing inappropriate). Their explanation is that, because a deal with Lubrizol hadn’t actually been struck and wasn’t likely when Sokol bought his shares, it was all right for Sokol to profit from his knowledge of a possible deal.

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http://www.bloomberg.com/news/2011-03-31/buffett-misses-chance-to-show-moral-courage-commentary-by-alice-schroeder.html

 

 

Not a fan of Schroeder but I think she is spot on in her assessment.  Personally -- my respect and admiration of Buffett as both an investor and a person has not diminished in any way but I think he demonstrated a rare error in judgement by not making a more forceful EXPLICIT statement about the inappropriateness of Sokol's purchase of LZ for the reasons cited by Schroeder.  With that said, Sokol was clearly fired so Buffett implicitly did make a very forceful statement about his tolerance for unethical behavior -- the presumed heir apparent was shown the door in short order after Buffett learned details of the trades.

 

And from my perspective, Sokol always seemed cocky, aggressive, and arrogant relative to the culture Buffett/Munger tried to create at Berkshire. 

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But BRK would not profit from the runup in price in this case because they would eventually have to pay more to buy the company, as a result of the runup. But Sokol did stand to profit because his shares in LZ would be bought by Buffett at a higher price.

 

Well, Berkshire would ultimately be profiting from buying the first part cheaper -- if they bought 100,000 shares which was 4.9% at $100 then acquired it for $120, they would have made a "profit" (although embedded in the purchase price) of an extra $2 million. Obviously not exactly the same thing, but ethically similar in my view.

 

I don`t see how he is not trading on insider information. The general public was not aware of these discussions. As I said earlier, if it was a Citi employee that had made those trades after learning that LZ was a potential BRK takeover target, it would be cut & dry...a case of insider trading. How is this any different

 

To me, there was no "special" information that was any different from what the public knew. The only difference is that Sokol is one of the handful of people who has Buffett's ear. LZ was on a list that Citi provided with I'm sure many other names -- and really, any company that size could be a "potential" Berkshire takeover target. And as an investment manager, I know that if an analyst of mine bought stock and then recommended the investment to me, assuming they fully disclosed their personal position I would think it was fine even if my subsequent purchase drove up the price. I just don't think its frontrunning if you don't know whether the transaction is going to take place.

 

As for if it was a Citi employee, Investment Advisers and Broker-Dealers have a completely different set of much more strict rules of what they can or can't do -- and even then I don't think it's clear cut insider trading because it was at a point where it was no where near a certainty (though it would likely be a violation of Citi rules, and a fireable offense).

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I just don't think its frontrunning if you don't know whether the transaction is going to take place.

 

As someone else said earlier, I think it's about probabilities. If it was public knowledge that LZ was on a short-list of companies that fit certain criteria by Buffett AND that Sokol was going to recommend it personally to Buffett, interest in that company would probably soar even before any deal was announced. The probability of a deal is just much higher than with any random big quality company, even if "higher" doesn't mean close to 100%.

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Well, Berkshire would ultimately be profiting from buying the first part cheaper -- if they bought 100,000 shares which was 4.9% at $100 then acquired it for $120, they would have made a "profit" (although embedded in the purchase price) of an extra $2 million.

 

If I buy half a company for $1,000,000, and as a result the remaining half of shares double, that would mean that I would have to pay an additional $2,000,000 to purchase the rest of the company...for a total cost of $3,000,000. Whereas if I had bought the whole company right away it would only have cost me $2,000,000. I lose from the runup in price, not gain.

 

I do see your point on the legality issue though, I don't agree with it, but I understand your argument. I guess we'll have to agree to disagree.  :)

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Question -- did Buffett not criticize Sokol's actions because he would potentially open a can of worms re Charlie Munger's stake in BYD?

 

While I don't for a minute think the Munger/BYD is comparable to Sokol/LZ, could Buffett want to avoid any possibility of an aggressive regulator or media trying to tarnish Munger by extrapolating a Buffett condemnation of Sokol/LZ?

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Another perspective:

 

 

 

"What people are missing is in plain sight:  Sokol bought the stock with a "free option" not available to the public.  If WB bit and bid for LZ, Sokol wins big (whether the likelihood was 5% or 50% does not matter), but if WB did not bite and passed, then Sokol would have non-public information that BRK would NOT be interested in LZ.  In the latter hypothetical, any sale of LZ shares would then be an insider trade.  A win/win situation for Sokol - last I checked, those are not available to the public." from reader Zero Hedge

 

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Guest ValueCarl

Did Zero Hedge examine the quick in quick out December, 2010, trades yet?

 

To take their "latter" theory further; however, the ability to really win and not break even or lose, was almost entirely predicated upon the Berkshire premium Sokol was pondering Berkshire might pay. Who was going to pay more for his shares if Berkshire balked?

 

The losers, mind us, are the people he took the shares from. Without competing offers coming to light, the latter argument also loses merit or weight.       

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Guest ValueCarl

Where are all the buyers willing to pay Sokol more than Buffett's Berkshire? In the meantime, The SEC puts Sokol on the BACK BURNER or in the non urgent file at least for the time being. 

 

Lubrizol Expect To Complete Merger In 3Q11 >LZ      03/31 12:48 PM

 

 

 

 

  (MORE TO FOLLOW) Dow Jones Newswires (212-416-2400)

  03-31-111548ET

  Copyright © 2011 Dow Jones & Company, Inc.

 

 

Lubrizol: Continuing To Work With Berkshire Hathaway To Complete Merger      03/31 12:48 PM

 

 

 

 

  (MORE TO FOLLOW) Dow Jones Newswires (212-416-2400)

  03-31-111548ET

  Copyright © 2011 Dow Jones & Company, Inc.

 

WSJ:SEC Weighs Launching Sokol Insider Trade Probe -Sources      03/31 11:29 AM

 

 

 

New York (Dow Jones)--The Securities and Exchange Commission was Thursday weighing whether to launch an insider trading investigation into Berkshire Hathaway Inc. (BRK/A:$125,426.00,00$-2,677.00,00-2.09%) (BRKA, BRKB) executive David Sokol, according to people familiar with the matter.

They said the agency does not view the situation as requiring urgent action.

The likely first step in a probe would be to request relevant information, such as trading records, from Berkshire Hathaway (BRK/A:$125,426.00,00$-2,677.00,00-2.09%) and Mr. Sokol, according to people familiar with the matter.

On Wednesday, Berkshire Chairman and CEO Warren Buffett disclosed that Sokol, 54, was resigning from Berkshire, where he had been considered a leading contender to succeed Buffett, who is 80.

Sokol resigned after purchasing $10 million of the stock of Lubrizol Corp. (LZ:$134.00,00$-0.01,00-0.01%) ( LZ), a company Sokol suggested that Buffett buy. Sokol bought the shares, and recommended the company's purchase, in January. In March, Berkshire said it agreed to buy Lubrizol (LZ:$134.00,00$-0.01,00-0.01%) , leading to a $3 million profit on Sokol's stake in less than three months.

Sokol said his resignation "had absolutely nothing to do" with Lubrizol (LZ:$134.00,00$-0.01,00-0.01%) , and both he and Mr. Buffett said they don't think Sokol violated any laws.

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http:// www.djnewsplus.com/nae/al?rnd=wdT56CDzcM2lcNcg0h5jlg%3D%3D. You can use this link on the day this article is published and the following day.

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What people are missing is in plain sight:  Sokol bought the stock with a "free option" not available to the public.  If WB bit and bid for LZ, Sokol wins big (whether the likelihood was 5% or 50% does not matter), but if WB did not bite and passed, then Sokol would have non-public information that BRK would NOT be interested in LZ.  In the latter hypothetical, any sale of LZ shares would then be an insider trade.  A win/win situation for Sokol - last I checked, those are not available to the public.

 

Although this reasoning makes sense, it contradicts itself saying that the likelihood of the deal going through doesn't matter. The likelihood matters a lot -- for ANY company, there is a "free option" that Buffett buys it.

 

I might buy stock in Fairfax, then send a letter to Buffett trying to convince him to buy it. I wouldn't count on Buffett listening to me or trusting me, so maybe I'd figure there's a 1% chance he'll agree and buy Fairfax. Does that mean I have a free option not available to the public? So David Sokol would clearly know there were higher odds of Buffett buying LZ than the average investor. But wouldn't that be true for any company? (Assuming the company broadly fit Buffett's acquisition criteria, which Sokol isn't the only one privy to.)

 

So maybe it is a matter of Berkshire policies -- that Sokol shouldn't have been allowed to purchase ANY company in his personal account without explicit permission from Buffett/Marc Hamburg. I don't think that's a good solution but maybe thats what the SEC would require.

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Guest ValueCarl

Go ask Alice, anyone?  ;) I don't see any affection for Sokol, as was implied for Jain even before yesterday's bombshell. She certainly clears up the quick in and out December trades, however. If I'm reading Alice correctly, she's calling this as it is, a FRONT RUNNING TRADE! imo 

 

http://www.aliceschroeder.com/blog/sokol-resignation 

 

http://www.bloomberg.com/news/2011-03-31/buffett-misses-chance-to-show-moral-courage-commentary-by-alice-schroeder.html

 

 

Buffett gave out a few facts in his press release yesterday, but the Schedule 14A filed with the Securities and Exchange Commission by Lubrizol fills in the damning pieces. After deciding to pursue Lubrizol as an acquisition candidate for Berkshire in the fall of 2010, Sokol tried to buy 50,000 shares on Dec. 13, the day he presented Berkshire’s possible interest to Citigroup Inc. and asked it to set up a meeting with Lubrizol’s management. He was able to acquire only 2,300 shares, and sold them a week later.

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Guest ValueCarl

Anyway, I thought Alice's footnote was most interesting.

 

<Editor’s note: Alice Schroeder has been subpoenaed by Berkshire subsidiary NetJets seeking confidential information related to her news sources for other publications. The matter is being heard in Connecticut state court.>

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