Wednesday, March 30, 2011

David Sokol resigns to Berkshire Hathaway

Wall Street Journal

By Serena NG and Erik Holm

David Sokol, widely seen as the leading contender to succeed billionaire Warren Buffett at the helm of Berkshire Hathaway Inc., resigned unexpectedly amid surprising revelations about his personal stock trading.

In an unusual and personal announcement, Mr. Buffett said the resignation followed revelations that Mr. Sokol had purchased shares of a company that Berkshire recently bought, Lubrizol Corp., at the initial suggestion of Mr. Sokol.

Mr. Buffett said Mr. Sokol, 54 years old, had bought roughly $10 million in shares of the chemicals maker in January, before Berkshire reached a $9 billion deal to acquire the company. Berkshire's purchase price of $135 per share meant that Mr. Sokol's stake rose $3 million in value.

Mr. Buffett said he and Mr. Sokol didn't feel the Lubrizol purchases were "in any way unlawful." The Securities and Exchange Commission declined to comment.

The Berkshire chairman and chief executive said the purchases weren't a factor in Mr. Sokol's decision to leave. He said Mr. Sokol, in a March 28 resignation letter, cited his desire to spend more time on his family's investments.

The revelations throw into question Mr. Buffett's carefully crafted succession plan, one of America's most widely watched boardroom dramas. Berkshire has said it has identified four executives at the company who could replace him. Mr. Sokol has long been considered high on that short list.

The incident is also a potential black eye for Mr. Buffett, 80, who emphasizes character and integrity in his manager choices and who himself is known for his ethics. Shares of the conglomerate, one of the nation's biggest companies, declined in after-hours trading. The development comes amid questions about trading by senior members of corporate America.

This month, regulators alleged that Rajat Gupta, one of the nation's most widely respected corporate directors, shared inside information with hedge-fund king Raj Rajaratnam, an allegation both men deny.

Mr. Buffett said he had been aware Mr. Sokol owned stock in Lubrizol, but only found out about the timing and size of the trades on March 19—a few days after Berkshire agreed to buy Lubrizol at a 28% premium to its share price before the deal. In an interview Wednesday evening, Mr. Sokol said his resignation "had absolutely nothing to do" with Lubrizol, and said the company elected to disclose his trades before they appeared in a proxy statement in the coming weeks.

"This was 100% my decision," Mr. Sokol said. He said he had contemplated leaving Berkshire for the past three years and had told Mr. Buffett that he wanted to hand over management of the companies he ran "when the timing was right."

Mr. Sokol was chairman of Berkshire utility subsidiary MidAmerican Energy Holding Co. and chief executive of its fractional jet business NetJets Inc. He had identified Lubrizol as a potential acquisition for Berkshire late last year and took the early lead on the deal, which Mr. Buffett eventually closed, according to a recent company filing on the deal.

In his initial conversation with Mr. Buffett about the company, Mr. Sokol mentioned he owned stock in Lubrizol, Mr. Buffett said Wednesday. "It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings," he wrote.

Mr. Sokol brought the idea for buying Lubrizol to Mr. Buffett in mid-January. Just days earlier, on Jan. 5, 6 and 7, he bought 96,060 shares in the company. This followed trades of 2,300 Lubrizol shares Mr. Sokol had bought and sold in December, according to Mr. Buffett's announcement. Mr. Buffett said he learned of the extent of the stock purchases shortly before beginning a trip to Asia on March 19.

On Lubrizol, Mr. Sokol said he "had no inside information and no knowledge if Warren would be interested or not in the company" at the time he bought the shares and when he brought the company to Mr. Buffett's attention.

"There's nothing in there that's embarrassing," Mr. Sokol said, though he acknowledged "it would look bad 60 days later" if his stake in Lubrizol was disclosed in public filings and Berkshire hadn't said anything about it. "We wanted it all out." He said the analysis he did on Lubrizol was "done off public information."

Mr. Buffett, he said, didn't ask him about the stake he held and found out about its details only when Mr. Sokol submitted the information to Berkshire's general counsel, who was helping to prepare regulatory filings for the deal.

"I have been a CEO for 27 years in two companies, and my interest is in growing companies," he said, adding his goal is to build an entity of his own that's similar to Berkshire.

Securities lawyers debated whether Mr. Sokol's dealings could fall into a gray legal area. In broad terms, insider trading laws prohibit individuals from trading on shares based on material non-public information in violation of some duty of trust.

One key question, lawyers say, is whether Mr. Sokol knew that he would pitch a Lubrizol deal to Mr. Buffett, or even that he might do so, at the time he bought Lubrizol shares. If Mr. Sokol did know at that time, that could suggest he had material information at the time he bought the shares, because Mr. Sokol is a trusted Buffett lieutenant, lawyers said.

However, it could be harder to show that Mr. Sokol violated any duty to Berkshire Hathaway, because he told Mr. Buffett that he owned Lubrizol shares, the lawyers said. Scrutiny could more likely focus on whether Mr. Buffett made a mistake by not learning more about Mr. Sokol's Lubrizol stake when weighing a decision to pursue a deal.

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