NEW YORK (By Ben Berkowitz) - The man widely seen as the leading successor to Warren Buffett at Berkshire Hathaway has resigned after buying shares in chemical company Lubrizol Corp before pushing Buffett to acquire it.
David Sokol's resignation is a reputational blow for Buffett, the 80-year-old "Oracle of Omaha," who prides himself on his folksy fair-dealing image and handpicks managers who can run businesses in a similarly transparent manner.
"Obviously Warren Buffett prides himself on transparency and this would not appear to be transparent," said Berkshire shareholder Michael Yoshikami of YCMNET Advisors in California. "It's surprising and always amazes me these types of events occur because it just seems so unnecessary."
While Buffett said he did not think Sokol broke the law, the sequence of events raised questions about conflicts of interest and the strength of Berkshire's internal controls.
Berkshire's actively traded Class B shares fell 3 percent after-hours.
Buffett said on Wednesday that Sokol bought shares of Lubrizol last December, sold them, then bought more shares in early January. He subsequently presented Buffett with the idea of buying the company, with a "passing remark" he owned some Lubrizol stock that Buffett did not probe further.
The 96,060 shares Sokol bought on January 5-7 would have generated a profit for him of at least $2.98 million based on Lubrizol's share price over those three days and the price at which Buffett agreed to buy the company.
It is unclear why news of Sokol's trading is surfacing now, or whether government investigators have looked into the matter. The U.S. Securities and Exchange Commission and the Department of Justice declined to comment.
Sokol defended himself in an interview with Fox Business that ran late Wednesday.
"There was no inside information. The only reason Warren Buffett mentioned it in the release is because it would have to be brought up anyway when Berkshire put the purchase up for a vote. It's a disclosure issue," he said.
Buffett took pains in his statement Wednesday to make clear that he did not fire Sokol, and that Sokol offered his resignation after having asked twice before in recent years to retire. Buffett said he discovered the extent of Sokol's Lubrizol holdings on March 19, but insisted the March 28 resignation came as a surprise.
Nonetheless, a recent regulatory filing by Lubrizol makes clear Sokol had the idea of buying Lubrizol well before taking it to Buffett.
Lubrizol said Sokol had a meeting with bankers at Citigroup on December 13, 2010, at which they discussed a list of 18 companies Citi had compiled for Sokol as potential acquisition targets. According to Lubrizol, Sokol told the Citi bankers that Lubrizol was the only name on the list he liked.
The next day, according to Buffett's statement, Sokol began buying stock. Sokol eventually presented the idea of buying Lubrizol to Buffett on January 14 or 15.
Buffett said he was originally not in favor of the idea of buying Lubrizol but warmed to it after Sokol told him of a January 25 conversation with Lubrizol's chief executive. Berkshire ultimately announced its purchase of Lubrizol for $135 per share, a 28 percent premium, on March 14.
John Coffee, a Columbia University law professor, called the disclosure "embarrassing" for Berkshire.
"It's the kind of behavior that, as a matter of corporate governance, sophisticated companies try to avoid," he added.
Legal experts were divided on whether Sokol could be held liable in court for his actions.
"He could be. At a minimum he showed extremely bad judgment in not disclosing to Mr. Buffett that he had taken a fairly significant position in the company a week before he pitched the benefits of the company to Mr. Buffett," said C. Evan Stewart, managing partner at law firm Zuckerman Spaeder LLP in New York who concentrates on securities litigation.
But others said there was the possibility the sequence of events could be explained away.
"The legal issue is, 'what did Sokol know about Berkshire's interest in acquiring a position in Lubrizol when he was buying shares in January,'" said Stuart Slotnick, a partner at Buchanan Ingersoll & Rooney in New York.
"Warren Buffett's job is to purchase stock and companies. If Sokol goes to Buffett and says, 'I love this stock, I bought some for myself, you should look at it,' there's nothing inappropriate in Buffett doing his own analysis and making a purchase, as long as no trading decisions are made on the basis of material, nonpublic information."
One securities lawyer, who spoke on condition of anonymity because his firm does not permit staff to speak to the media publicly, said he could "see reasons for Buffett to be annoyed" but did not see a crime in what happened.
Most Buffett watchers thought Sokol was the top candidate of the three or four Berkshire executives most frequently mentioned as future CEOs of the company, given the legendary investor's enthusiasm for him.
In his annual letter to shareholders this year, Buffett praised Sokol for engineering a turnaround at NetJets, a business where he had no prior experience, and for his accomplishments at MidAmerican.
A year earlier, he called Sokol "an enormously talented builder and operator," and in 2009 he proclaimed that Sokol would run any business with which he was associated "in a first-class manner."
The issue of succession is crucial for Berkshire Hathaway because Buffett personifies the company. He built Berkshire up from a small insurance company to one of the largest insurers and conglomerates in the United States over decades.
Berkshire did not release Sokol's March 28 letter of resignation, though Buffett said that in the letter Sokol had mentioned his desire to pursue philanthropic efforts.
(Additional reporting by Paritosh Bansal, Megan Davies, Jonathan Stempel, Dena Aubin, Dan Wilchins, Maria Aspan, Clare Baldwin, Jonathan Spicer in New York and Sarah Lynch in Washington; Editing by Steve Orlofsky, Phil Berlowitz, Gary Hill)
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