Buffett protege explains surprise departure

David Sokol says he did nothing wrong by investing in a company that Warren Buffett's Berkshire Hathaway is buying. Now he wants to start his own company. Berkshire shares are down. Video: Sokol in conflict of interest?

By Charley Blaine Mar 30, 2011 7:54PM
Credit: (©Mark Lennihan/AP)Updated at 9:55 a.m. ET Thursday, March 31

Financial markets hate uncertainty, but Warren Buffett created some late Wednesday, and shares of his company Berkshire Hathaway (BRK.B) were off 3% to $82.93 in after-hours trading. In early trading Thursday, the stock had recovered some but was still down 1.7% at $84.

After Wednesday's close, Buffett announced that David Sokol, one of his closest associates, had resigned. The departure came as Berkshire disclosed Sokol had invested in lubrications maker Lubrizol (LZ), a company Berkshire Hathaway is buying for $9 billion.

That Sokol would leave would cause some unease for Berkshire shares, but the circumstances added to the uncertainty.
Sokol, appearing Thursday morning on CNBC, said he did nothing wrong in buying shares of a company that he later recommended Berkshire purchase. He also said he has been thinking of leaving Berkshire for more than two years, adding that he likes to build companies but never aspired to head Berkshire, The Associated Press reports. Sokol said the time was right to step down because the several Berkshire subsidiaries he oversaw are in good shape. Now he wants to start his own investment partnership similar to Buffett's.

Sokol was widely believed to be the front runner for Buffett's job if the Oracle of Omaha ever retired. Sokol had successfully run Mid-American Energy, a large utility. He turned around NetJets, an operator of corporate planes. The business, Buffett said, "was destined for bankruptcy, absent Berkshire's deep pockets."
 
Sokol told Buffett in a letter that he wanted to devote the rest of his career to investing his money properly to provide for his family and fund his philanthropic activities. Twice before, Buffett said Wednesday in a news release, Sokol tried to resign, but his boss talked him out of it. Fair enough.

Article continues  below.

Where the uncertainty really ramped up came with the disclosure that Sokol had invested in Lubrizol before proposing in January that Berkshire Hathaway acquire the company.

Sokol bought 2,300 shares of Lubrizol in December and sold it a week later. He bought 96,060 shares in early January, when the stock was trading at around $103 a share. The stock is now selling at $134 a share.

The math says Sokol probably did no more than break even on his first transactions. But with the January buys, he's sitting on a 30% gain before taxes. In real numbers, that's a profit of nearly $3 million.

It was only after Sokol bought the shares that he approached Buffett about buying the company. In a news release, Buffett said Sokol mentioned that he owned shares in Lubrizol. But Buffett wasn't very interested. Sokol pitched again after having dinner with Lubrizol's CEO on Jan. 25. This time, Buffett was interested, and the deal was announced on March 14.

Buffett said he didn't realize the size of Sokol's purchases until just as he was leaving on a recent trip to Asia.

Sokol didn't think he'd done anything illegal. He knew Buffett and his board would decide to buy Lubrizol.

Buffett didn't think Sokol had done anything illegal either. He didn't fire Sokol or ask him to leave. The resignation was a surprise, Buffett said. There is, however, a sense that Sokol's departure was with Buffett's blessing and possibly relief.

"Especially in a situation like this, the brand is everything," said William Larkin, a money manager with Cabot Associates in Salem, Mass. "Often, when you violate that brand for any reason whatsoever, your goose is cooked."

Losing Sokol isn't the end of the world for Berkshire Hathaway. Buffett and his longtime partner Charles Munger are still there. Plus, as Jerry Bruni of J.V. Bruni & Co. in Colorado told Reuters: "The bench is pretty deep. There have been three to four candidates mentioned as people who can replace Buffett as a CEO, and all of them are very capable."

The candidates are presumed to be:
  • Tony Nicely, CEO of Geico, the third-largest automobile insurance company. Nicely has boosted the company's market share from 2% to 8.8% since he became CEO in 1993. Geico's value has grown from $4.6 billion in 1996 when Berkshire bought the 50% share it didn't own to $14 billion-plus.
  • Ajit Jain, head of Berkshire Hathaway Reinsurance Group, which buys risks from other insurance companies. 
  • Matt Rose, CEO of Burlington Northern Santa Fe, which moves about 20% of the nation's railroad freight. In 2010, Berkshire bought the 77%-plus of the railroad that it didn't own for $44 billion. The acquisition has been very successful, Buffett wrote. It has boosted "normal earning power by 40% pre-tax and by well over 30% after-tax."
36Comments
Mar 31, 2011 11:22AM
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After watching Mr. Sokol's interview....glad I don't own stock in Berkshire. If he was the next in line...cheez.... The most telling I think is when he states he doen't THINK he did anything wrong.....HMMM. In my area we had a memorable experience with Berkshire and Mr. Sokol when he "low-balled" Constellation Energy when they had a liquidity crisis a few years back. Upon reading over the offer that was made...it was less than fair. Constellation management thankfully held tough and declined the offer . They found a more equitable solution and have since recovered nicely. Buffett and Berkshire lost some credibility during that ..."encounter".

 Sadly one would think that Mr. Buffet and his Board would be more selective when selecting folks to represent his company and their interest. To be clear, when you are in a powerful position in a Company whose very intent can move the market drastically you have a fiduciary as well as moral responsibility to act fairly and legally. As for Mr. Sokol not THINKING he did anything wrong...Have a feeling that uncertainty will be taken out of his control ... by some pretty smart folks with law degrees and an axe to grind. Mr. Sokol may want to keep in mind  that so many times the punishment for lying or deceiving to conceal a crime is much greater than the original crime. Gonna be interesting to see how this all pans out and what Mr. Sokol's charitable causes will be....

Mar 31, 2011 11:06AM
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@Cyberman63 - WOW! What flawless logic!  The shares have dropped, so that's proof of guilt???

 

Here's how I see it.  First, I am a BRK.B shareholder, so lets get that out of the way. I'm still a working stiff.  It appears Sokol identified a good company for himself, which he is entitled to do.  Why he sold out and repurchased so quickly does get my attention, and Warren should have addressed that better in his statement.

 

Sokol should have made BRK aware of his position, even if he had closed it, when he brought the idea to BRK. IF he did not, it smells bad even if it was not illegal.  If he did not disclose, a resignation or termination was definitely in order.

 

Mar 30, 2011 8:46PM
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More proof that even in a recession/ depression it's hard to find a cold-hearted pr!ck who would claim that after a disaster, now is the time to invest in Japan, just because people are suffering. So Buffet's "heir" bought a bunch of stocks in a company BEFORE Berkshire bought it? I am not a stock person but isn't that "Insider trading".  Hopefully some retard at the SEC knows how to read MSN articles and can quit looking at porn long enough to further investigate.
Mar 30, 2011 9:19PM
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Sorry....this is insider trading ....plain and simple. One can only assume Mr. Sokol had intimate knowledge of Berkshire and access to Mr. Buffett. Then he breaks bread with the head of Lubrizol and gains intimate knowledge of that company. If the SEC doesn't take a close look at this ...boy something is really wrong!!!
Mar 31, 2011 7:41AM
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Mr. Sokol has a fudiciary obligation to the stock holders of Berkshire. How can he possibly be objective when he has recently taken a position in a target company for over $10M of his own money? As the article states he got in ...got out ...and then bought in again. It seems Mr. Sokol may have been playing the possibility that LZ would be acquired. He had intimate knowledge of both the seller and the buyer which was not widely available to the investing public. As for him ONLY making $3M on the deal. IMHO it's all about greed...let us not forget even though Martha Stewart was worth millions she went to jail for making $60K illegally....for her that was pennies!

Mar 31, 2011 11:15AM
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To everybody, or more likely, nobody.  I am disturbed by the number of people I run across on these boards who still seem to be fighting a battle of the subjugated masses against the capitalist pigs.

 

A 2% drop is nothing.  What kind of time frame are you talking about?  BRK has doubled in the short time I've held it (and will keep holding) and you are worried about a two-day fluctuation? And you don't think an exemplary company like BRK, with over 250,000 employees world-wide can overcome the actions of one employee?

 

I see the word "value" bandied about by people who have no idea what the word means.  The real value of a company is not determiend by a panicked sell-off.  Rather the shrot term sell off is a buying opportunity. 

 

If the price of food were cut in half tomorrow, should I panic and throw out everything in my cupboards, or should I run to the store and stock up? That, my freinds, is benefiting from short sighted panic.  Same with the stock of a good company.

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Isn't this front-running.  SEC, where are you?
Mar 31, 2011 1:38PM
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America and its policy of Capital Punishment.  Those with the capital don't get punished.
Mar 31, 2011 10:01AM
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Do you really think that because he works (worked) for Buffett and knew the requirements Buffett wanted for a successful company he should have limited his own purchases to companies Buffett WOULDN'T like?  That sounds a wee bit self destructive.
Mar 31, 2011 9:57AM
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While it could be considered that anyone who owns stock in a particular company is an insider in that company, pitching that company, part of which you already own, to Warren Buffett or anyone else with the bucks to purchase it and drive the price of the stock up is just good business.  It doesn't qualify as insider trading.  Had he known Buffett was going to buy the company and THEN purchased stock before said purchase THAT would have been insider trading.  As I read this article, there was no way for sure that he knew Buffett's decision in advance (other than his assessment of Buffett's desires and requirements).  He took a gamble when he purchased over 96000 shares.  He won!  Hey, that's th way things work. 
Mar 31, 2011 10:10AM
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Everybody crying for blood needs to get a grip.  This dude bought the stock BEFORE negotians to acquire the stock even started.  Yes, he was trying to get Berkshire to buy the company and yes, he would have benefitted nicely if they did.  But it was still a risk on his part as the decision making process on purchasing the company hadn't even started.  There was nothing even close any agreement in principle nor were the companies in talks.  Had Berkshire not bought the company, he might not have made much, if anything.

 

Insider trading is taking priviledged knowledge of a known event and acting upon that knowledge before it becomes public.  In this case, not only was there not even a deal done in principal; but acquistion of the company hadn't even appeared on Buffet's radar yet.

 

So calm down people.  The worst you can say is he benefitted of his influence and associatoin with Buffet but no laws were broken here.  Ethically questionable?  maybe.  Criminal?  nope. 

 

 

Mar 31, 2011 4:20PM
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To Someone (bobbobwhite) who said:  "Berkshire collects hundreds of millions in dividends every year from owned companies but does not pay one cent out of Berkshire in divvies to shareholders. And they are still faithful!"

 

It sounds like you may misunderstand why Berkshire's shareholders are so faithful!  By not paying dividends, there is no double taxation to Berkshire's shareholders as there is to holders of most other stocks and mutual funds.  Your money grows tax-deferred until you finally sell the shares.  If you buy and hold for a long time, as many Berkshire investors do, then the tax advantages are huge and this translates into a significantly higher after-tax return.  Buffet has served his shareholders well, and that is why they continue to be faithful.

Mar 31, 2011 10:29AM
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The 3 million is unrealized, based on the information the article gives us.  He hasn't made money as he hasn't sold it, so don't go on and on about how Sokol screwed the people out of 3 mil.  If he does sell it as Berkshire buys up the remaining shares, the money comes from Berkshire.  If any wrong doing, Sokol was in the wrong from "stealing" from Berkshire.  I say stealing in parenthesis because it looks shady, but Berkshire has it's responsibility to know what it is buying and the price it is paying on the market Willing to pay is the key. 

Mar 31, 2011 11:55AM
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And life goes on in the world of money.
Mar 31, 2011 4:45PM
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Now that Mr. Sokol is dedicating himself to philanthropic endeavors maybe  he can give some of his illicit gains to the ex employees at Netjets that he threw onto the street and are still trying to find jobs.
Mar 31, 2011 3:30PM
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no honor among thieves and with government at there back they cant fail
Mar 31, 2011 2:32PM
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Like we said yesterday, scumbags had one more run in them and shaved about 30 points right before the bell...We see it happen constantly....Manipulators never give up....Today we have been basically flat all day...But be careful, they will no doubt make their move anytime now...We will see.
Mar 31, 2011 1:24PM
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What's your defnition of wrong?  Nothing.
Mar 31, 2011 1:09AM
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This David Sokol is a scumbag.  He invests a ton into the Lube, talks Buffet into buying the company, and then resigns.  If Buffet was aware of all this, they should both be in jail.  Just goes to show you, that investing isn't for the small investor, because we'll never have that information.  If this was such a successful deal and on the up and up, why are the brk.b shares dropping?
Mar 31, 2011 4:20PM
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Send da bumb to jail; he's dirty.  And while you're at it, send all da bumbs that created these opportunities (better known as loop-holes) to jail too.  I'm tired of them getting richer on the backs of those who put in an honest days living.
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