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11:48 AM
Ivy Schmerken
Ivy Schmerken
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Don't Mess With Warren Buffett!

Berkshire Hathaway releases an audit report accusing David Sokol of misleading Buffett about his personal trades.

Warren Buffett was slow to react but this morning Berkshire Hathaway released an audit report that slammed David Sokol, a former chief lieutenant, for misleading his boss on personal trades he made in a chemicals manufacturer that Berkshire had agreed to acquire.

The report, released by the audit committee of Berkshire Hathaway's board, says Sokol "deceived" his boss about trades in Lubrizol stock. According to today's New York Times, Sokol, who resigned on March 30, "never told Mr. Buffett that he had bought his stake in Lubrizol after Citigroup bankers had pitched the company as a potential takeover target."

Now Sokol's trading is reportedly under investigation by the Securities and Exchange Commission, the New York Times report said, citing anonymous sources.

Why the stir? When Sokol was pitching an acquisition of Lubrizol to Buffett earlier this year, he had already purchased $10 million of its stock. Once word leaked out that Berkshire was in negotiations to acquire Lubrizol, the stock shot up and Sokol's position increased in value by $3 million. It was a sweet deal for Sokol but it had begun to tarnish the reputation of Buffett who is admired for his folksy demeanor and investing acumen.

Previously Buffett seemed reluctant to criticize Sokol, who was regarded as a star manager and a possible successor to the investment sage.

For months, the media has been trying to make sense of why Buffett - America's folsky billionaire investor - would tolerate such a lapse in business ethics that violates his company's compliance and insider trading policies. When the controversy first arose in March, Buffett appeared to defend Sokol's trades in Lubrizol stocks. When Buffett announced Sokol's resignation on March 30, he said, "Neither Dave nor I feel Lubrizol purchases were in any way unlawful."

But given the recent surge in insider trading cases brought by the SEC and the current spotlight on Galleon Group's Raj Rajarnatam who is awaiting a jury's verdict, you would expect Buffett to be more critical of one of his own top executives. Buffett must have smelled a rat, but legally the board was taking cover by waiting for the audit committee's report.

Coincidentally, Berkshire released the audit report's findings a few days before the company's annual meeting this Saturday in Omaha, known as the "Woodstock of Capitalism," where the issue of Sokol's trading is bound to come up.

What caused the dramatic reversal in Buffett's opinion? According to the audit report, Buffett was not aware of the full story when he made his remarks in March.

In a complete reversal of Berkshire's earlier stance, the report alleges Sokol's conversations with Buffettt and others at Berkshire were "intended to deceive" and its "effect was to mislead."

For starters, Sokol failed to disclose the role that Citicorp played in pitching the acquisition to him. Buffett apparently asked Sokol how he came to be interested in Lubrizol and Sokol said he owned the stock.

According to the sequence of events outlined in the New York Times, Citigroup bankers began calling the Lubrizol CEO about Berkshire's interest on Dec. 17, 2011, but it was not until Jan. 5, 6, and 7 that Sokol accumulated nearly 100,000 shares in the company.

In the New York Times story, Sokol's attorney, Barry W. Levine of Dickstein Shapiro, defended his client's actions, saying that Sokol was considering a personal investment in Lubrizol since the summer of 2010 before Citigroup bankers proposed the idea. The attorney also said that Sokol told Buffettt "twice, not once" about his ownership of Lubrizol shares," before Buffett began discussions with the company.

So either Buffett is getting hard of hearing or Sokol lied about the timing and origins of his investment. Probably, Buffett placed too much trust in Sokol, who had turned a small Omaha energy company into a multi-billion dollar business, and this blinded Buffett to other things going on - like Sokol's abrasive management style.

Details of Sokol's harsh leadership have emerged with journalists investigating his tenure at the company. Yesterday, the New York Times ran a story exposing how Sokol's "brass knuckle tactics" began to alienate employees at two of Berkshire subsidiaries, Johns Mansville and Net Jets. Sokol told managers that employees dealing with personal problems such as illness and divorce were a danger to the company. He also abruptly dismissed the CEO of Johns Mansville one morning and locked him out of the building. While these actions are not illegal, they are not in sync with the kind of reputation for fairness and integrity that Warren Buffett portrays.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
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