Shareholder Sues Berkshire, Buffett And Sokol (And Munger) Over Alleged Lubrizol Frontrunning

Tyler Durden's picture

Despite attempts by virtually everyone to bury the Sokol alleged frontrunning scandal due to the ongoing embarrassment it presents to some of the most revered "institutions" within America's crony capitalist system, it just refuses to do so. The latest development comes from Delaware Chancery Court, where we find that Mason Kirby, a shareholder of Berkshire has just sued Berkshire Hathaway and Warren Buffett, David Sokol among other BRK directors, over the purported frontrunning Lubrizol frontrunning by David Sokol. As summarized in the pleading, the complaint is no surprise: "David L Sokol (“Sokol”), a former Berkshire employee and key lieutenant to Warren E. Buffett (“Buffett”), Berkshire CEO, used his position of influence to profit for himself at the expense of Berkshire. As a result of Sokol’s unethical behavior Berkshire suffered significant reputational losses and other damages....Buffett and Sokol, working in concert, breached their duties to Berkshire and its shareholders through these actions and put the Company at risk for a potential adverse SEC action and negative credit rating – events which would be detrimental to the Company. Once the Sokol trades were disclosed, and Sokol resigned from Berkshire, Berkshire’s stock price fell. This immediate stock drop evidences the reputational impairment that Berkshire took as a result of this conduct." As a result of this alleged breach, the plaintiff is suing the Berkshire Board who "violated and breached their fiduciary duties of care, loyalty, reasonable inquiry, oversight, and supervision." Kirby also "seeks restitution from Sokol, and seeks an order of this Court directing disgorgment of all profits, benefits and other compensation obtained by Sokol from Berkshire, including any profit he  made or will make in relation to his Lurizol holdings, based on his wrongful conduct and fiduciary breaches."

While it is admirable for someone to believe that the legal standard in America is equal for both normal people and multi-billionaire, we are confident this lawsuit will be burried shortly (and absolutely nothing will come out of any SEC investigation into BRK). Regardless, Kirby does bring up a valid point, indicating that Sokol most certainly acted in breach of Berkshire's Insiders' Trading Policies and Procedures, which states:

It is important to understand that this restriction applies not only to material nonpublic information relevant to securities issued by Berkshire Hathaway Inc. but also to material nonpublic information relevant to any other publicly-traded securities. This latter category would include securities of other public companies in which Berkshire has invested or may in the future invest. (emphasis added)

***

For purposes of this policy, material information is defined as any information that a reasonable investor would consider important in making a decision to buy, hold or sell securities. In short, it includes any information that could be expected to effect (sic) the price of securities. All actual and anticipated securities transactions of Berkshire and its subsidiaries that have not been publicly disclosed should be considered material.

Other public companies to which this prohibition is applicable include those that may be involved in a significant transaction with Berkshire as well as those for which Berkshire may have access to material nonpublic information through Berkshire’s status as a significant investor or through participation by Berkshire personnel on the board of directors. (Emphasis added.)

***

If a Director or Covered Employee is aware that Berkshire has taken or altered a position in a public company’s securities or that Berkshire is actively considering such action, trading in any securities of such public company by such Director or Covered Employee or any of his or her Family Members is expressly prohibited prior to the public disclosure by Berkshire of its actions with respect to such public company’s securities (or until the Director or Covered Employee becomes aware that Berkshire did not take and is no longer actively considering such action). (Emphasis added.)

The preceding leads the lawsuit to conclude:

Sokol was trading based on material information as defined by Berkshire, as an average investor would consider Sokol meeting with Lubrizol about a transaction with Berkshire, and Lubrizol meeting to consider that transaction, material  information. Sokol knew Berkshire “may be involved in a significant transaction” with Lubrizol and traded based on that information. This is precisely the type of trade that is “expressly prohibited” by the Policy.

Of course it is. But, alas poor Mason, the "prohibition" refers to ordinary people like you, and not to such titans of moral unturpitude as Buffett and his even older henchman.

That said: best of luck. You will need it in attempting to extract justice in this corrupt system.

kirby v sokol