On March 31st, David Sokol appeared on CNBC Squawk Box (to the most distraught Becky Quick we have ever seen) in an attempt to explain why his purchase of of Lubrizol Corp, prior to Berkshire Hathaway's purchase of the Company, was perfectly acceptable. In attempting to provide evidence of this“perfectly acceptable” practice David Sokol said a curious thing (17 minutes 15 seconds in):
I don’t believe I did anything wrong. Charlie Munger owned 3% of BYD before he asked me to go look at it.
Because we all know if everyone is doing it, then it isn't illegal or unethical. Especially if everyone is a member of the Berkshire inner circle. But if the SEC as is now widely reported, is about to make a public spectacle out of David Sokol (if not actually press civil charges because, well, the SEC doesn't actually pursue large scale securities fraud), shouldn't they be looking at ole' Charlie "Suck It In" Munger?
In September of 2008 MidAmerican Energy (a company controlled by Berkshire), bought 225 million shares of BYD (10%) at a cost of $230 million. On February 27, 2010, according to the WSJ, Buffet valued this stake at $1.99B. Since that time the stock has fallen about 60% and we would roughly value MidAmerica’s stake at $852M. A nice 370% gain since the initial purchase. Which means that Munger's 3% is now worth about $280m. This 3% stake in BYD makes up about a little less than 30% of Munger's $1 Billion total net worth . A not inconsequential sum, and significantly more valuable that the $13m stake Sokol had in Lubrizol.
Charlie Munger dispatched then loyal Berkshire lieutenant David Sokol to do the due diligence on BYD. But make no mistake, the purchase of MidAmerica’s stake in BYD was initiated by, and subsequently endorsed by, if not executed by, one Charlie Munger.
Buffett, who is 78, was intrigued by Munger's description of the entrepreneur behind BYD, a man named Wang Chuan-Fu, whom he had met through a mutual friend. "This guy," Munger tells Fortune, "is a combination of Thomas Edison and Jack Welch - something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it."
Coming from Munger, that meant a lot. Munger, the 85-year-old vice chairman of Berkshire Hathaway, is a curmudgeon who frowns on most investment ideas. "When I call Charlie with an idea," Buffett tells me, "and he says, 'That is really a dumb idea,' that means we should put 100% of our net worth into it. If he says, 'That is the dumbest thing I've ever heard,' then you should put 50% of your net worth into it. Only if he says, 'I'm going to have you committed,' does it mean he really doesn't like the idea."
This time Buffett asked another trusted partner, David Sokol, chairman of a Berkshire-owned utility company called MidAmerican Energy, to travel to China and take a closer look at BYD.
Since 2008 there are many instances of Munger and Buffet talking up BYD. But there is no reference, no disclosure, no evidence that Munger has a personal 3% stake in the company that at times was worth close to $1 billion dollars.
Once Again, For The Cheap Qwest Center Seats
Imagine that Gary Cohn (COO of Goldman Sachs) took a 3% stake in a public company without public disclosure. Then imagine that Cohn tells Blankfein that GS Asset Management should take a 10% stake in this Company. Almost 3 years after GS Asset Management takes a stake in this company it has quadrupled in value. Then, through a slip of a tongue, it comes to be known that cuddly Cohn (who may or may not have commited perjury recently, but that is a completely irrelevant topic for another regulator to ignore) has a previously undisclosed stake currently valued at $280m in this Company. What do you think would happen to Gary Cohn?
The Frontrunning Really Tied The Money Pool Together
Perhaps Munger like Sokol makes frontrunning purchases for his family trust. Perhaps, buying for one's family is a defense to frontrunning. Or perhaps the inner circle at Berkshire Hathaway is NOT subject to the same ethical and or judicial standards that the rest of Wall Street and the investing public are subjected to. Who are we to say that the SEC or DOJ should be asking these questions. After all Berkshire Hathaway is living breathing evidence of American ExceptionalismTM. Warren Buffet and Charlie Munger are examples of all that is good in America.
Who are we to doubt the wisdom of perception.
We have yet to hear from Charlie Munger or Warren Buffet on this matter. We won't.