The man widely seen as the leading successor to Warren Buffett at Berkshire Hathaway has resigned after buying shares in a 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,” Berkshire shareholder Michael Yoshikami of YCMNET Advisors in California said. “It’s surprising and always amazes me these types of events occur because it just seems so unnecessary.”
Buffett said he did not think Sokol broke the law and that Sokol resigned because he wanted to create a family business of his own and devote more resources to philanthropy.
Nonetheless, the sequence of events raises 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 in December, sold them, then bought more shares in early January.
Sokol subsequently presented Buffett with the idea of buying the company and made what Buffett called a “passing remark” that he owned some Lubrizol stock. Buffett said he did not probe Sokol’s stock ownership further.
The 96,060 shares Sokol bought on Jan. 5 to Jan. 7 would have generated a profit for him of at least US$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 US Securities and Exchange Commission and the Department of Justice declined to comment.
Sokol defended himself in an interview with Fox Business that ran late on 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 on 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 Dec. 13, 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 Jan. 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 Jan. 25 conversation with Lubrizol’s chief executive. Berkshire ultimately announced its purchase of Lubrizol for US$135 per share, a 28 percent premium, on March 14.