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Please explain to me how this isn't insider trading...

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March 31, 2011 – Comments (21) | RELATED TICKERS: BRK-B

Let me get this straight...David Sokol, who many believe is the #2 man at Berkshire Hathaway goes to a meeting with Citi where they propose that Lubrizol would be a good acquisition target for the company that he is one of the top people at. 

He then has them schedule a meeting with Lubrizol's CEO immediately after which he purchases ten million dollars worth of the company's stock.

Sokol then suggests to Warren Buffett that Berkshire Hathaway should consider buying the company that only a few days before he bought ten million dollars worth of stock in.

Buffett professes not to be interested at first, so clearly this wasn't a stock that was on his radar until after Sokol brought it to his attention.

Berkshire buys Lubrizol and Sokol pockets three million bucks profit in a matter of weeks.

Really?  Is it just me, or does this whole situation certainly look a whole lot worse than what Martha Stewart went to prison for?  What is Sokol's problem.  I'm sure that he makes huge bucks.  He theoretically could have even been Buffett's successor and made even more money and he goes and pulls a stunt like this.  Really?  Some people are just too greedy.  I'm sure that most of my fellow CAPS players would be happy making a tenth of what Sokol pulls in annually.  How did he ever think that he would get away with this?  If the SEC doesn't look really closely at this issue there's something really wrong here.  I watched Sokol's interview on CNBC this morning and I was very shocked at his attitude.  He had absolutely no remorse.  I suppose that could be his defense strategy, but still.  If he honestly doesn't think that he did anything wrong then he has quite a sense of entitlement.  What a mess. 

Ultimately, this probably will have very little impact upon Berkshire Hathaway though.  Yes, they are clearly losing a good manager, but I doubt that they would have trouble finding someone who is very, very talented to take his place.  With the stock down less than two percent this morning, this really can't even be viewed as a buying opportunity.  BRK's stock would have to take a huge knock before I would be really interested in it.  As an individual investor, I'm looking for opportunities that present more upside potential than a behemoth like Berkshire.  Yes, I own some large cap companies in my portfolio, but they all pay dividends and have one or many catalysts that can potentially unlock hidden value at some point in the future.

Deej

21 Comments – Post Your Own

#1) On March 31, 2011 at 10:14 AM, TDRH (99.63) wrote:

Don't hold your breat for a perp walk. 

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#2) On March 31, 2011 at 11:37 AM, vriguy (71.49) wrote:

Unfortunately, the scandal isn't what is illegal, it is what's legal.

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#3) On March 31, 2011 at 11:54 AM, Starfirenv (< 20) wrote:

Deej- always read and appreciate your contributions but let's not be naive.

>" If the SEC doesn't look really closely at this issue there's something really wrong here."

You must not have seen this- big surprise eh?

http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216

 Best

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#4) On March 31, 2011 at 12:49 PM, ESPNcrzy03 (< 20) wrote:

Good post.  I'm gonna go the other way with this one and say +1 to Buffet & co.  Sure he didn't come out and lambaste the guy, but he (charlie, and the board) did tell the guy to hit the road ... and quickly too.  Buffett cares a lot about his reputation and investing morality ... and that's something that we could use more of in finance.

 Sure it's a shame that the SEC will do zilch about it, but nevertheless Sokol isn't getting the reins to BRK and that's thanks to a different kind of regulation: prudence

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#5) On March 31, 2011 at 1:00 PM, GNUBEE (25.07) wrote:

ESPN,

Id agree he cares about his rep, but only because a good rep is good for business. No so much about integrity, Buffet just didnt want it to blow up in his face.

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#6) On March 31, 2011 at 1:13 PM, Jbay76 (< 20) wrote:

Correct me if I am wrong, but is this the guy that Buffet brought on not too long ago?

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#7) On March 31, 2011 at 1:33 PM, ESPNcrzy03 (< 20) wrote:

GNUBEE ... I hear your point but I think your being unfair to Buffett.  At this point in history it's easy to hold a jaded bias to near-term events ... but let's not forget that Buffett has been succeeding/weathering this business for a loooong time now.  That kind of success isn't happenstance, nor do I believe greed alone will get you there (short term? sure ... long term, no).  Buffett prides himself on playing by the rule ... yes, in part because long term it's good for business, but also becuase he believe's it's the right thing to do.  He believes and in my view proves that the two can mutually coexist.  Anyway, I'm sure he's no saint, but I think it's a disservice to just simplify Buffett's motives like that.  His human emotions and virtues are no more simplified than any of ours.

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#8) On March 31, 2011 at 1:43 PM, buffalonate (94.15) wrote:

Sokol told Buffett he owned shares so their is no ethical problem in my book.  He found a company he liked bought shares and then told his boss he should buy stocks in that company too.  He had no idea whether or not Buffett would be interested in the company or if the company would be interested in selling. 

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#9) On March 31, 2011 at 2:03 PM, JakilaTheHun (99.93) wrote:

I'd argue it's a grey area.  If he disclosed his ownership to Buffett and Berkshire, it sounds as if it's OK.  Also, he didn't actually know Buffett was going to buy the company.  Sokol has made a lot of other investments that Berkshire has shown no interest in (e.g. MBFG).  

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#10) On March 31, 2011 at 2:21 PM, eldemonio (98.63) wrote:

ESPN,

He resigned on his own accord.  You make it sound like Buffet demanded his resignation - that's not accurate.

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#11) On March 31, 2011 at 2:56 PM, TMFDeej (99.33) wrote:

Hi everyone.  Thanks for reading and commenting. 

It's not exactly as if Sokol found a company all on his own that he was interested in and innocently bought it.  It is my understang that he only became aware of Lubrizol and purchased its stock after it was presented to him by a group from Citi that was looking at potential BRK acquisition targets.

Once he took the idea from them and used it for a personal investment, which is likely unethical in itself, he then arranged for a meeting with Lubrizol's CEO without stating that it was for his personal investment.  Sokol even admitted that Lubrizol's CEO likely thought that he was meeting with him as a representative of BRK.

Sokol did not present the idea to purchase Lubrizol to Buffett until after he had bought ten million dollars worth of the stock for himself.  Not only that, but at least according to BRK while he did reveal that he was a shareholder of Lubrizol, Sokol never told Buffett that he had just bought his stake in the company only a week or two earlier.

This whole thing reeks if you ask me.  As the #2 man at a company that has an itchy trigger finger for an acquisition you shouldn't be abllowed to do things like this.  Heck, many financial journalists and politicians aren't allowed to own stakes in individual companies.  Even The Motley Fool has trading restrictions for lowly strollers like myself.

Deej

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#12) On March 31, 2011 at 3:56 PM, Valyooo (99.37) wrote:

Eh, its not exactly like Buffett is some idiot whos gonna throw $9B on something that he doesn't see as a good investment.  If I buy a crapload of a company, and then went to buffett and suggested that he buys a company that I think is good, then he does some DD and decides he likes it too, why wouldn't he buy it?  Why would I buy 20 million of stock in a company I dont like?  Why would Buffett buy $9B of a company to help out a friend?

Also, its not like he knew somebody would acquire it.  if Berkshire bought $10m of the stock, and then acquired it, it wouldn't be a big deal, so I don;t know why this is such a huge deal.

Also, if you are a top 3 wealthy man in the world, and you are making an investment, you probably have done the research to see that your buddy owns some of it.

What was Sokol to do?  "Oh, well I think this company is a great investment.  Unfortunately, I think Buffett will also like it, so I will stay away from it and not make any money off of it"

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#13) On March 31, 2011 at 4:12 PM, stan8331 (97.10) wrote:

"What was Sokol to do?  "Oh, well I think this company is a great investment.  Unfortunately, I think Buffett will also like it, so I will stay away from it and not make any money off of it""

By that logic, there's really no such thing as insider trading because anyone who ever bought shares in any company can claim they just thought it was a really great investment.  There was no certainty that Berkshire would buy the company, but there was a pretty darn decent chance with Sokol strongly hawking it.  Sokol was not exactly a mail-room employee at Berkshire.  

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#14) On March 31, 2011 at 4:23 PM, Valyooo (99.37) wrote:

Well, I think of insider trading being bad when somebody gets access to earnings or transcations that have already been discussed, before the general public gets that information.

If I buy shares in a company because I like it, why wouldn't I also buy it for a company I run?  If you like the company enough, why wouldnt you want both yourself and your company to own it?

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#15) On March 31, 2011 at 6:18 PM, SolarisKing (31.46) wrote:

The point is, and i can barely believe that some of you don't see it...

is that he would not have even thought about it (presumably) if he had not been in an insider.

It is almost certain that at the confrence with the CEO there was info released to a potential buyer of the company (an insider) that was not available to the public. At a minimum, i would guess that he was given more current and accurate assessment and forecast than joe schmoe gets. And none of that lookin' 'round for info the way J. Q. Public has to do. Just plain ole "ask the CEO".

Don't you wish you had an hour of Steve Jobs time? and that he took you seriously? and that he said "buy now and it will be worth millions"?

  He then used that specific info to decide to make 3 million in a less than a month (if he had bought before the meeting with the CEO than he would have been closer to honest).

The point being, be didn't like the company. He doesn't even claim it was on his watch list. 

He began to like the company after  he received an advantage.

And that is definitely insider trading.

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#16) On March 31, 2011 at 6:50 PM, BlackSwanCapital (78.46) wrote:

Sokol is fine in my book.

Li Liu bought a large stake in BYD, then recommended this to Buffett.  there' really no difference.  Everyone is just in "witch hunting" mode.  This is just media sensationalism.

 

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#17) On March 31, 2011 at 6:52 PM, alexpaz (28.98) wrote:

BURN THIS SCUM BAG!

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#18) On March 31, 2011 at 6:54 PM, BlackSwanCapital (78.46) wrote:

Solaris king, I'm sure most Ray Dalio could get a meeting with most CEO's if he wished, what you mentioned in #15 isn't insider trading.

Think of Buffett meeting with the Geico VP on a saturday, back in his younger years (right before he started buying Geico shares), that's basically what Sokol did with Lubrizol. 

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#19) On March 31, 2011 at 10:12 PM, rexlove (99.45) wrote:

This was not insider trading - and unfortunately he wont get prosecuted for it. What he did was front-running. He bought into a company he later pushed on his boss..

While what Sokol did can not be considered illegal - most fund companies don't allow it. In fact most hedge fund companies don't allow you to trade personal accounts while working there. I'm surprised Buffet doesn't have this same policy.

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#20) On April 01, 2011 at 12:09 AM, walt373 (99.80) wrote:

There's a clear conflict of interest going on here. Imagine if it was just a free for all at Berkshire Hathaway with a bunch of employees frontrunning BRK's (near) future acquisitions. Imagine if Buffett himself did this - he saw a stock he liked and bought a ton before he had Berkshire acquire it to net himself a large personal profit, at the expense of the shareholders. It would totally destroy his reputation. Sokol was in line to eventually take Buffett's place so it should be obvious why this was 100% unacceptable. He's a high ranking executive whose actions represent the entire company, and this display of willingness to toe the line undermines the trust and reputation that is at the foundation of the business.

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#21) On April 01, 2011 at 12:41 AM, SolarisKing (31.46) wrote:

Imagine if it was just a free for all at Berkshire Hathaway with a bunch of employees frontrunning BRK's (near) future acquisitions. Imagine if Buffett himself did this - he saw a stock he liked and bought a ton before he had Berkshire acquire it to net himself a large personal profit, at the expense of the shareholders. It would totally destroy (etc)

Think of Buffet making phone calls on his own time, and arranging a meeting on his own phone, and buying shares of Geico with his own money, then becoming a succesful company who representents shareholders and hiring a man with scrupulous intent. Then firing him for stealing profit from your shareholders. That's what it's like.

 It's not the same as  BlackSwanCapital says in post 18. Sokol was inside.   Plain and simple.

During the course of his JOB, while representing shareholders, he gained an advantage from being inside, and then traded with an advantage, to the expense of the shareholders and the public, and all the butterflys in quantum physics. That's why it's illegal.
   The reason folks get away with it is it's 'hard to prove'. The reason Buffet has clients is because 'he can be trusted'. The reason Sokol is gone is because 'he can't be trusted'.

Just because it's frontrunning doesn't mean it's not insider trading.

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