Sokol Joins Brandon Winning Buffett’s Praise in Berkshire ‘Head Scratcher’

Berkshire Hathaway Inc Chairman David Sokol. Photographer: Jonathan Fickies/Bloomberg

 

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April 6 (Bloomberg) -- Alice Schroeder, a Bloomberg News columnist and author of "The Snowball: Warren Buffett and the Business of Life," talks about Berkshire Hathaway Inc. Vice Chairman Charles Munger's investment in Chinese automaker BYD Co. before Berkshire took a stake in the company and former Berkshire manager David Sokol's purchase of Lubrizol Corp. shares before recommending the company as a takeover target to Buffett. Munger said his family was invested in BYD “for years” before his company took a stake in the automaker and that he disclosed the financial interest to Buffett. Schroeder speaks with Betty Liu, Dominic Chu and Jon Erlichman on Bloomberg Television's "In the Loop." (Source: Bloomberg)

 

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April 6 (Bloomberg) -- Jeffrey Matthews, founder of hedge fund Ram Partners LP and author of "Pilgrimage to Warren Buffett's Omaha," talks about Warren Buffett's management of Berkshire Hathaway Inc. in light of recent disclosures involving two company executives. Former Manager David Sokol bought 96,060 shares of Lubrizol Corp. in early January before recommending that Berkshire acquire the company, and Vice Chairman Charles Munger said his family was invested in BYD Co. before Berkshire took a stake in the Chinese automaker and that he disclosed the financial interest to Buffett. Matthews speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

David Sokol, who left Berkshire Hathaway Inc. (BRK/A) after investing in a buyout target, joins departed manager Joseph Brandon in winning praise from Warren Buffett after actions that brought scrutiny to a firm where executives stress the importance of reputation.

Sokol’s contributions to Berkshire were “extraordinary,” Buffett said when he announced his resignation March 30. Buffett said in 2009 that Brandon helped in “righting the ship” at General Re. Brandon left in 2008 after prosecutors named him an unindicted co-conspirator at a trial where four former General Re officers were convicted of helping American International Group Inc. (AIG) deceive investors through a sham transaction. Brandon wasn’t charged with a crime.

Buffett’s praise of the subordinates doesn’t match his comments about guarding the firm’s image, said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha.” Buffett told Congress in 1991 that he had given employees of Salomon Inc. a message after a bond scandal: “Lose money for the firm and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.”

Buffett’s annual meeting and letters to shareholders are “all about reinforcing the message on upholding Berkshire’s good reputation,” Matthews said in an e-mail. “This letter about the Sokol affair does not reinforce the message.” The contrast is “the biggest head-scratcher,” he said.

Sokol, 54, bought 96,060 Lubrizol Corp. (LZ) shares in January, less than two weeks before recommending the firm as a target, Buffett said in a March 30 letter announcing the departure. Buffett, 80, said doesn’t believe Sokol’s trades were unlawful. Sokol and Brandon had previously been considered possible successors to Buffett as CEO of Omaha, Nebraska-based Berkshire.

‘Graceful Exit’

“There’s nothing wrong with a graceful exit,” Charles Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance, said in an interview. “The fact that they are leaving says it all.” Buffett didn’t return a request for comment left with an assistant.

Berkshire announced March 14 it would buy Lubrizol for about $9 billion, or $135 a share, compared with the closing price of $105.44 on the New York Stock Exchange in the last trading day before the announcement. Sokol’s investment may have given him a profit of about $3 million, according to data compiled by Bloomberg. Sokol told CNBC last week that he did nothing wrong related to Lubrizol.

‘Passing Remark’

Sokol had initially made a “passing remark” about owning stock in the company, and Buffett didn’t then ask about the extent of his holdings, according to the letter. Buffett found out specifics of Sokol’s trades “shortly before” leaving for an Asia trip on March 19, he said in the March 30 document.

Criticizing Sokol, who was also chairman of Berkshire’s energy business, would have been “a self-indictment” for Buffett because he was aware of the personal stake before making the deal with Lubrizol, said Elizabeth Nowicki, a professor at Tulane University Law School.

Buffett’s policy prohibits covered employees from making trades based on insider information that “Berkshire has taken or altered a position in a public company’s securities or that Berkshire is actively considering such action,” according to a document on the firm’s website. The Wall Street Journal reported yesterday on Berkshire’s policies.

The U.S. Securities and Exchange Commission is probing whether Sokol bought shares in Lubrizol on inside information that Berkshire was considering buying the company, according to a person who declined to be identified because the investigation is secret.

‘Lawyer-Drafted Boilerplate’

Buffett’s reputation for candor, based partly on his annual letters to shareholders, denied him the option of sidestepping the specifics that he revealed, said Nowicki, a former attorney with the SEC.

He “couldn’t just put out your typical lawyer-drafted boilerplate, cryptic, nonsensical non-statement,” Nowicki said. “It would have raised more questions than it answered.”

Last year Buffett wrote that Richard Santulli, who was replaced by Sokol as leader of NetJets after posting losses at the luxury air-travel business, was the father of the industry who established “top-of-the-line standards for safety and service.”

Buffett said in a letter published in 2009 that General Re, a reinsurance business purchased by Berkshire in 1998, had suffered from poor underwriting and reserving and that “these problems were decisively and successfully addressed,” by Brandon and Tad Montross, who replaced him as CEO of the unit.

Brandon stepped down after a trial centered on contracts that prosecutors said helped AIG inflate reserves by $500 million in 2000 and 2001. Buffett was unaware that a written deal had secret side agreements that let AIG book fraudulent reserves, prosecutors said. The SEC has sent Brandon a letter stating that the regulator isn’t pursuing any civil claims in the case, according to two people familiar with the document.

Clarity

The departures of Brandon, 52, and Sokol told investors more than remarks from Buffett, who showed “grace” in handling the exits, said Nell Minow, a board member at GovernanceMetrics International, a corporate governance research company.

“I don’t think there’s any lack of clarity” in the Sokol remarks, Minow said. Buffett said in his letter that he accepted the resignation after twice talking Sokol out of leaving before the Lubrizol talks. “I don’t think anyone needs any more information,” she said.

Berkshire said in February it has four candidates to succeed Buffett as CEO, without identifying them. During a trip to India last month, Buffett said the firm’s directors would support Ajit Jain, 59, as the company’s next head if the reinsurance executive decided to seek the post.

“He’s not only excelled at every single task he’s taken on in insurance, but he’s behaved in a way that’s been totally honorable,” Buffett said at a news conference in Bangalore on March 22. “He could have made a lot more money working for somebody else than working for Berkshire.”

To contact the reporters on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net