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Buffett, Sokol, Caesar’s wife must be above suspicion
I was quoted in FT
about David Sokol, CEO of a Berkshire Hathaway subsidiary, buying
shares in Lubrizol a few months before Buffett’s Berkshire Hathaway
bought Lubrizol at a significant premium, which made Sokol 3 million
dollars on his $10 million purchase.
“Some investors expressed concerns about
Mr Sokol’s actions. ‘Any time you buy stock in a company which your
employer then buys [it] just does not smell right,’ said Vitaliy
Katsenelson, chief investment officer of Investment Management
Associates.”
This quote slightly misstates my view, as the issue here is more
complex. Sokol was the CEO of MidAmerica and NetJets (subsidiaries of
Berkshire); it is not his job to look for companies for Berkshire to buy
– Buffett and Munger are in charge of Berkshire’s capital allocation
decisions. Sokol bought Lubrizol for his own account because he liked
the business and thought it was attractively priced. If he had never
mentioned Lubrizol to Buffett, there would be no controversy today. But
he did, while disclosing that he owned the stock. Buffett expressed
little interest in Lubrizol.
Where this situation gets tricky is when Sokol starts communicating
with Lubrizol’s CEO. Lubrizol’s CEO (and the board) perceive him as the
agent of Berkshire – even though Buffett at the time still had little
interest in the company, because he was spooked, quite deservedly, by
Lubrizol’s very high profit margins. At dinner with Sokol, Lubrizol’s
CEO discussed internal forecasts for 2015, which at the time must have
been material nonpublic information, information that would not be
shared with David Sokol – the private citizen, but was shared with David
Sokol – the left-hand man (Munger being the right-hand man) of Buffett,
who might have wanted to buy Lubrizol. Only after this meeting was
Buffett convinced to buy Lubrizol.
The magnifying glass of the media is now zooming in on Sokol, but the
focus should be directed at Buffett as well. Unfortunately, reputation
is often destroyed by appearances. We know Buffett cares deeply about
his reputation. To remove the appearance of impropriety, he could have
ordered Sokol to sell his shares of Lubrizol in the public market, or to
Berkshire. Sokol would have obliged.
When you act on the behalf of someone else (be it a portfolio manager
running someone else’s money, or an executive of a public firm)
appearances are as important as the legality of one’s actions. You are
like Caesar’s wife;
you must be above suspicion. You never want the true intent of your
actions to be second-guessed, but unfortunately that is exactly what
happened in this case.
Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email, click here or read his articles here. .
Copyright Vitaliy N. Katsenelson 2010. This article may be republished only in its entirety and without modifications.
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It smells like exactly what it is, cow manure. Interesting how quick Sokol turned traitor on buttface "Suck it up" Munger. They should both be fined by the SEC to a degree it hurts more than a slap on the wrist, considered within the context of Sokol's and Munger's net worth. Obviously that means Munger should get the bigger wallop.
The turd never falls far from the Anacle.
Sokol bought and sold abit more than 2k shares, and then followed with 100,000 share purchase. The key question is this: how do these trades/investments compare to the size of Sokol's other investments? Is the "usual, typical, average" size of his trades close to $200K or $10M ??? If he's had no prior multi-million dollar trades , then it clearly shows his "motive" and he needs to be indicted and barred from working in securities industries and hold a post of an officer of any public company.
As far as Buffett - "good ol' Uncle Warren", the "simple man", the mega-philantropist, this investing "icon" of the 1980s, early 1990s, and post-dot-com bubble days... his reputation is FINISHED. I despise him just as I despsie Dick Fuld and Lloyd Blankfein. Buffett is no different from all those Wall St corrupt sharks who effectively bankrupted their institutions but were kept alive by Paulson/Geithner/Brnanke gang, and who are still receiving trillions from the Fed, the TARP, PPIP, etc etc.
Wait, NO! Buffett is WORSE than them: Only Buffett The Hypocrite slammed the derivatives in his annual letters, but kept hundreds of billion of derivatives on his books. Only Buffett (well, and Bill Gross) kept going on TV in the Fall of 2008 and kept arguing/begging/lobbying for the bailouts, and only Buffett kept calling the US Treasury, also in the fall of 2008, and kept "offering his adsvice" on how/what to bailout with the taxpayer's money.
And finally, let's not forget that Buffett benefitted from the bailouts more than any other human being PERIOD. Wells Fargo, US Bank, AmEx, Goldman, GE, the list goes on - Buffett is/was the major shareholder in all of them.