Warren Buffett said he was wrong not to press David Sokol about purchases of Lubrizol Corp stock while his former top lieutenant was pitching the chemicals company as a possible takeover target for Berkshire Hathaway Inc.
It was the kind of answer investors had clamored to hear from Buffett at this year’s Berkshire annual meeting, ordinarily a lovefest for tens of thousands of shareholders, and over which the Sokol episode had cast a cloud.
Buffett said Sokol had violated Berkshire’s insider trading rules by failing to disclose his January purchase of Lubrizol shares, less than four weeks after starting talks with Citigroup Inc bankers about the company.
Sokol, who chaired Berkshire’s MidAmerican Energy unit, ran its NetJets plane leasing unit, and was a top Buffett deal maker, was considered a leading contender to succeed 80-year-old Buffett as Berkshire’s chief executive.
Instead, he resigned last month when his Lubrizol stake was revealed. Sokol got a US$3 million profit on that stake when Berkshire agreed to buy Lubrizol for about US$9 billion.
The US Securities and Exchange Commission is probing Sokol, a person familiar with the matter has said. The controversy has called Buffett’s management into question.
“I obviously made a big mistake by not saying: ‘Well when did you buy it?’” Buffett said on Saturday, as he and vice chairman Charlie Munger fielded shareholder -questions for five hours from the stage of the Qwest Center in Omaha, Nebraska.
Calling the Sokol situation “inexplicable and inexcusable,” Buffett used the same language he had used 20 years ago to describe the failure by management at Salomon Brothers Inc, which he chaired, to tell regulators of wrongdoing tied to a Treasury bidding scandal.
Sokol’s departure also raised succession questions. Berkshire is expected to split the chief executive and chief investment officer roles after Buffett leaves. Buffett hired hedge fund manager Todd Combs as a potential successor for the latter.
Prior to Sokol’s departure, Berkshire had said it had four potential internal successors to become chief executive.
Among the possible candidates are insurance executive Ajit Jain, Burlington Northern Santa Fe railroad chief Matthew Rose, Geico auto insurance chief Tony Nicely, MidAmerican Energy chief Greg Abel and reinsurer General Re chief Tad Montross.
“Certainly the candidate that I think is the leading candidate now, I would lay a lot of money on the fact that he is as straight as an arrow,” Buffett said.
He later effusively praised Jain, saying: “I can’t think of any decision Ajit Jain has ever made that I could make better.”
The comments drew loud applause from an audience that perhaps surmised Buffett might be offering a tip about his successor.
That might have been Sokol, but in a scathing report released on Tuesday a committee on Berkshire’s board found that he had deliberately misled Buffett about his Lubrizol investments.
“I think that for reasons that are laid out in the audit committee report, I don’t think there’s any question about the inexcusable part,’ Buffett said.
Barry Levine, a partner at Dickstein Shapiro LLP representing Sokol, faulted Buffett’s comments, and said his client at all times had honored his fiduciary duties.
“David Sokol is deeply saddened that Mr Buffett, whom he considered a friend and mentor, would disparage him as he has done today,” Levine said in an e-mailed statement. “it is alarming that Mr Buffett would be advised to so completely flip-flop and resort to transparent scapegoatism.”
At the outset of the meeting, Buffett said losses from earthquakes in Japan and New Zealand and other catastrophes had driven Berkshire’s first-quarter profit down about 58 percent.
Preliminary results indicate that net earnings fell to US$1.51 billion from US$3.63 billion a year ago.
Operating earnings fell 28 percent to US$1.59 billion from US$2.22 billion, with improvement in “pretty much all” of Berkshire’s roughly 80 other businesses, other than those linked to residential housing, Buffett said.
Losses totaled US$1.07 billion from the Japan earthquake and US$412 million from the New Zealand earthquake.
Buffett said Berkshire would this year likely post its first full-year loss in insurance underwriting in nine years.
The company relies on insurance businesses as a low-cost funding source for investments because it receives premiums well before it pays out money to cover insurance losses. Such losses can effectively raise funding costs.
Buffett rejected calls by some investors for Berkshire to pay a dividend, saying it was better to invest Berkshire’s cash hoard, which totaled US$38.23 billion at year end.