M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, April 28, 2011

Berkshire report on Sokol trades

These are not good facts for Sokol.  From the Berkshire board's report on Sokol's trading:

Mr. Buffett was initially unimpressed with Lubrizol as apotential acquisition, but told Mr. Sokol to let him know what he learned at the meeting. He also told Mr. Sokol that he was unfamiliar with the lubricants and additives part of the chemicals industry. During the conversation, Mr. Buffett asked Mr. Sokol how he had become familiar with Lubrizol. Mr. Sokol mentioned that he owned the stock. He did not disclose:

     the amounts and timing of his purchases;

     the fact that he bought the shares after discussing Lubrizol with Citi and after Mr. Sokol had narrowed the bankers’ initial list of 18 chemicals companies to one, namely Lubrizol;

     the fact that Mr. Sokol had bought shares after Mr. Sokol (acting as a senior representative of Berkshire Hathaway scouting acquisition candidates) hadasked for Citi’s help arranging a meeting with Lubrizol’s CEO to discuss Lubrizol and Berkshire; and

     the fact that Mr. Sokol bought shares after learning that Citi had discussed his request for a meeting with Lubrizol’s CEO, who told Citi that he would discuss Berkshire Hathaway’s possible interest in a transaction with the Lubrizol board.

It did not cross Mr. Buffett’s mind at that time that Mr. Sokol might have bought Lubrizol shares after seeking through investment bankers to initiate discussions with Lubrizol concerning a possible Berkshire Hathaway acquisition of Lubrizol. Because Mr. Sokol’s comment about owning the shares was inresponse to Mr. Buffett’s question how Mr. Sokol had come to know the company, it implied that Mr. Sokol had been following Lubrizol as an owner of itsshares, and in that way came to think of Lubrizol as a possible Berkshire Hathaway acquisition.

As I have noted before this looks more like a loyalty claim than a federal insider trading case.  And it doesn't look good for Sokol on that level.  The report concludes that even if Sokol was not in the possession of material information required to make a federal case, he was in possession of confidential information, Berkshire's confidential information.  And by trading on Berkshire's confidential information, he was usurping a corporate opportunity.

It's worth noting that there is a derivative suit already pending - no surprise ( Download Kirby v Sokol complaint).  In that complaint, the directors are named as defendants in addition to Sokol.  Prof Bainbridge notes that there is no case against the directors.  And he's right.  I suspect that what going on here is that the plaintiffs are just looking for a way to argue that demand would be futile - based on the argument that directors would be personally liable in the event plaintiffs were to win.  I don't think this is really going to be a winning argument - mostly because the plaintiffs allege no actual facts to back that up.

Anyway, this new report from the directors of Berkshire provides more evidence to use against Sokol in a Kirby's case against him.  Though, if I were counsel to Berkshire, my next step would be to try to take over the case from the shareholder plaintiffs and have the board pursue it on behalf of the company themselves.  


Update: Yikes!  This is starting to get ugly!  Sokol's attorney responds with a statement:

am profoundly disappointed that the Audit Committee of Berkshire Hathaway would authorize the issuance of its report to the public without the care and decency to ask even a single question of Mr. Sokol. Mr. Sokol had been associated with the Berkshire Hathaway companies for 11 years. During this time, his indefatigable efforts helped create enormous value for the Berkshire shareholders. He deserved better. While I take issue with much of the Committee's report, I briefly make the following points. If the Audit Committee had asked, it would have learned that:

Mr. Sokol had been studying Lubrizol for personal investment since the summer of 2010; such investments are specifically allowed by his employment agreement.

Mr. Buffett was told twice, not once, about Mr. Sokol's ownership of Lubrizol stock before Mr. Buffett engaged in any discussions with Lubrizol.

Contrary to the Audit Committee's statement, Mr. Sokol's Lubrizol shares were not acquired pursuant to a "100,000 limit order." Rather, they were purchased as a result of several limit orders, over a period of days, at specified prices, for the day only, in order to acquire the stock at low prices. At that time, Mr. Sokol had no reason to anticipate that Mr. Buffett would have any interest whatsoever in Lubrizol.

I have known Mr. Sokol and have represented his companies in business litigation since the mid 1980s. I know him to be a man of uncommon rectitude and probity. He would not, and did not, trade improperly, nor did he violate any fair reading of the Berkshire Hathaway policies.




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