Thursday, March 31, 2011

An Upset In Omaha

News crossed the wires yesterday after the market close that one of Berkshire Hathaway's senior executives suddenly resigned. David Sokol, a highly regarded manager, was CEO and Chairman of several Berkshire subsidiaries. Sokol was thought to be one of four managers that would succeed Buffett to oversee all the operating businesses of Berkshire. In a stunning revelation, it appears Sokol purchased close to 100,000 of Lubrizol (LZ), a specialty chemicial maker, shortly before he recommend to Buffett that LZ would be a good candidate for BRK to purchase. His investment was worth nearly $10 million. In fairness to Sokol, he did not know if Buffett would decide to buy LZ. However, Sokol's opinion is highly valued by Buffett as evidenced by the duties Sokol has performed across BRK businesses. Then, on March 14th, BRK announced it would buy LZ in an all cash deal worth $9.7 Billion or $135 per share. The buy-out netted Sokol close to a $3 million profit - in 3 months. While Sokol maintains that no laws were broken, this transaction does raise the eyebrows of the "street" and BRK shareholders. This event raises the concern as to whether Sokol's fiduciary responsibility to BRK shareholders was maintained. One could argue that Sokol had inside material information about the pending transaction ( he met with Citi bankers about LZ ). Buffett has always played well inside the confines of the law. He tells his managers to imagine that their actions were published on the front page of the local paper. How would your mom react if she read that headline? I don't think this event passes the front page test. Buffett also likes to say, that your reputation takes a lifetime to build and can be lost in a second. At the end of the day, this situation has made a small dent in the otherwise sterling reputation of BRK. I don't believe this event will detract materially from the long-term intrinsic value of BRK. The management pool is fairly deep at the senior level at BRK. The stock is trading down 1.5% today. If the sell-off continues, which I DON'T expect, then BRK is a buy under $80-$82.

If you are interested in reading the news release from BRK, written by Buffett himself, click here:


  1. This is a big no-no in Canadian corporate law (

    Not sure about the US corporate or securities law implications, but given the high profile nature of this case, you can bet a class action and/or an SEC investigation is coming.

  2. Thanks Franco, I was wondering about that. The optics of this event are very poor. I feel for Buffett as he didn't really create the situation but is left holding the "reputation" bag. In his press release, he mentions that Sokol did nothing unlawful - but it sure looks funny. I have read, that this kind of transaction happens on wallstreet fairly often. Except, many who buy before a buy-out haven't met with the bankers. They are buying on spec. I guess it is a very fine line between a fair and fully disclosed transaction and front running. I'll read your link over the weekend.

    Thanks again

  3. here's the audit committee's report: