Berkshire Hathaway Further Distances Itself From David Sokol (BRK-A, LZ, C)

We have been awaiting a disclosure from Berkshire Hathaway Inc. (NYSE: BRK-A) over its current fiasco over David Sokol’s trading in the Lubrizol Corporation (NYSE: LZ).  Now the data is out, ahead of the Berkshire Hathaway annual meeting and it is obvious as a heart attack that Berkshire Hathaway is distancing itself as far from David Sokol as it can.  We just gave a full preview of what to expect in that annual meeting and this is mostly in-line with what we would have expected.  What is interesting is that Berkshire Hathaway is also bringing Citigroup Inc. (NYSE: C) very much into the mix here.

There is one key issue here… Berkshire Hathaway is further distancing itself from David Sokol and from Citigroup Inc. (NYSE: C).  The conglomerate is trying to show that Sokol’s actions may fall short of what would be considered unlawful violations of insider trading laws but were violations that could have led to his termination.  There is also a change in that “Sokol resignation press release” where Sokol asked for the resignation to not be tied at all to the Lubrizol trading.

That being said, the Audit Committee did admit that violations of internal policies did take place, that David Sokol did not make proper disclosures, and it really looks as if the company is trying to bring Citigroup Inc. (NYSE: C) into the light here as well.  We highlighted the term “Citi” and it appears as though the term “Citi” (for Citigroup) was mentioned literally 35 TIMES…

To further distance the company from Sokol, this press release notes something key:

Mr. Buffett returned from an Asian trip on Saturday, March 26. Late in the day on Monday, March 28, he received Mr. Sokol’s letter of resignation. Mr. Buffett accepted Mr. Sokol’s resignation, and in a call he had with Mr. Sokol, Mr. Sokol reiterated that his resignation was for the reason stated in his letter, namely to build wealth for his family and philanthropic activities.

On March 29, Mr. Buffett provided Mr. Sokol an opportunity to review for accuracy a draft Mr. Buffett had prepared of a press release announcing Mr. Sokol’s resignation and disclosing Mr. Sokol’s Lubrizol trades. At Mr. Sokol’s request, Mr. Buffett deleted from the release the one passage Mr. Sokol said was inaccurate: a passage that implied that Mr. Sokol had resigned because he must have known the Lubrizol trades would likely hurt his chances of being Mr. Buffett’s successor. Mr. Sokol told Mr. Buffett that he had not hoped to be Mr. Buffett’s successor, and was resigning for reasons unrelated to those trades. Except for that deletion, Mr. Sokol concurred in the accuracy of the press release. For example, Mr. Sokol left unchanged the statement that when Mr. Sokol made his purchases, he “did not know what Lubrizol’s reaction would be” if Mr. Buffett developed an interest in a transaction. Mr. Sokol also left unchanged Mr. Buffett’s statement that he had “held back nothing in this press release.”

The audit committee considered the conduct of David Sokol in this matter and has determined that it violated those standards.  It further outlines that Sokol’s trading did violate company policies and it is as we expected would be disclosed:

“We appreciate that at the time Mr. Sokol traded, he did not know whether Mr. Buffett would support, or reject, the idea of an acquisition of Lubrizol. We also recognize that Mr. Sokol did not know how Lubrizol would respond to an acquisition proposal if Berkshire Hathaway were to make one. We recognize the view that those uncertainties might have kept Mr. Sokol’s information below the level of probability required to support a finding of materiality for purposes of finding a violation of federal insider trading law. But the Trading Policy requires a higher standard of conduct than what is required to avoid being charged with a federal securities violation.”

Berkshire is saying that this violated the “Code of Business Conduct and Ethics”… This goes on to say: “By engaging in such questionable conduct, Mr. Sokol threatened Berkshire Hathaway’s reputation–or would have done so had he remained with the Company.”  In short, this is a post-resignation firing.

The company’s line is that “Mr. Sokol Failed To Fulfill His Duty of Full Disclosure to the Company” and the disclosure goes on to say:

“Mr. Sokol’s answer to Berkshire Hathaway’s CFO, Mr. Hamburg, concerning the investment bankers similarly fell short of the degree of candor required of a corporate fiduciary, and suggests his answer to Mr. Buffett’s earlier inquiry noted above was intended to deceive.”

The company notes that “Violations of the Code are punishable by employment-related disciplinary action up to and including removal from office or dismissal.”  The company line is that by resigning, Sokol has “thus suffered a severe consequence from his violations of Company policy” because of his resignation.

Most important is that the Audit Committee says the work is not done.  The line is that the work still ongoing is working with management and legal counsel, cooperating with any government investigations in this matter, and it has even noted legal action against David Sokol to recover any damages sustained from the actions and/or to recover trading profits, and more.

The long and short of the matter is that Berkshire Hathaway is alleging that David Sokol left a major mess for Warren Buffett.  Sokol is now persona non grata at Berkshire Hathaway.

By the mere hint of “government agencies” you should take that to imply that the SEC has either already contacted Warren Buffett and friends or is expected to.  The note about this stopping short of insider trading laws was an opinion, one which the firm could easily change its stance on.

Berkshire Hathaway’s full release is here.

JON C. OGG