Wednesday, April 27, 2011

Berkshire Hathaway: "Sokol violated standards"

Wall Street Journal

by Erik Holm

The audit committee of the board of Berkshire Hathaway Inc. said its investigation of stock purchases by David Sokol showed the former executive violated company policies and concluded he misled senior management about the investments.

Mr. Sokol, who bought shares of a chemicals company shortly before recommending that Berkshire acquire the company outright, may face legal action from the Berkshire board, according to a report prepared by the audit committee and released by Berkshire Wednesday.

The report examines in detail the disclosure Sokol made to Berkshire Chairman Warren Buffett about his investment in the company, Lubrizol Corp. Mr. Buffett had said in a statement announcing Mr. Sokol's resignation in March that Mr. Sokol had disclosed that he owned shares in the company, but Mr. Buffett didn't ask for details about the date and time of his purchase.

Mr. Buffett said in March that Mr. Sokol, 54 years old, bought $10 million in shares of Lubrizol about a week before he suggested it to Mr. Buffett. Prior to his purchases, Mr. Sokol met investment bankers representing Lubrizol and asked them to communicate Berkshire's possible interest in a takeover to the company's management. Berkshire's $9 billion deal to acquire Lubrizol in March boosted the value of Mr. Sokol's stake by $3 million.

Mr. Sokol's "purchases of Lubrizol shares while serving as a representative of Berkshire Hathaway in connection with a possible business combination with Lubrizol violated company policies, including Berkshire Hathaway's Code of Business Conduct and Ethics and its Insider Trading Policies and Procedures," the audit committee wrote in its report.

"His misleadingly incomplete disclosures to Berkshire Hathaway senior management concerning those purchases violated the duty of candor he owed the Company," the committee added.
Mr. Sokol's remarks "did not satisfy the duty of full disclosure inherent in the Berkshire Hathaway policies and mandated by state law," the report concluded.

"His remark to Mr. Buffett in January, revealing only that he owned some Lubrizol stock, did not tell Mr. Buffett what he needed to know. … [I]ts effect was to mislead: it implied that Mr. Sokol owned the stock before he began considering Lubrizol as an acquisition candidate, when the truth was the reverse."

Mr. Sokol had long been considered a leading candidate to replace Mr. Buffett as Berkshire's next chief executive.

Mr. Sokol has said the disclosure of the purchases and his resignation were unrelated, that he wasn't a decision maker on the Lubrizol purchase and that he did nothing wrong.
He couldn't immediately be reached on Wednesday.

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