A few days ago, we disclosed that based on David Sokol's testimony to CNBC, Buffett's right hand man, Charlie Munger, may be just as guilty of a comparable attempt at frontrunning a Berkshire purchase through his previously undisclosed holdings of a 3% stake in BYD. And despite the Octogenarian's wishes that this story remain dead and buried, Bloomberg has decided to once again bring it up to popular attention. "Berkshire Hathaway Inc. Vice Chairman Charles Munger said his family was invested in BYD Co. “for years” before his company took a stake in the Chinese automaker and that he disclosed the financial interest to his business partner Warren Buffett. “I certainly suggested that Berkshire look at investing in something that the Mungers were already invested in, but we’d been in it for years,” he said today in a telephone interview." Of course, since there is no way to check,the general public will be happy to just take Munger's word. After all, he is just as old and cuddly as that other guy, who following the recent spate of negative publicity, and especially Mike Steinhardt's scathing review today, will very soon need his own reality show to preserve his "reputation." Either way, here is the validation fro Munger why the SEC should not be currently deposing him: "I had Dave look at it, because I knew I couldn’t talk Warren into buying into the damn thing by myself. It’s a new technology-type investment. But David went over there, and he made the deal for Berkshire. I recused myself. But there’s no question about it, that I caused Dave’s original interest." Of course, we would love to take Munger's word for it: after all he represents just the same level of "integrity" as Buffett. But in the meantime, we would love to know at what price Munger made his purchase, and, well, when, because at last check in the "years" preceding 2008, the stock was trading pretty much in line with any price achieved in 2008, not to mention the surge once the Buffett investment was announced. And we are convinced that while his self-proclaimed recusal will placate everyone that Munger may have committed a crime, perhaps the SEC should ask a question or two. If nothing else, than at least to clear the Vice-Chairman's now thoroughly besmirched reputation.
The Munger investment in BYD is different from Sokol’s in Lubrizol because of the longer amount of time that elapsed before Berkshire announced its intention to acquire shares, said James Cox, a professor of corporate and securities law at Duke University Law School in Durham, North Carolina.
“What really matters is the close time sequence that we all now know that Sokol made the investment,” he said.
We would respectfully, and completely, disagree. And while we will assume initially that Munger did not lie about how long he held BYD for (although we would not be all that shocked if our well-meaning naivete is proven wrong) a far greater issue is the cost basis which is the benchmark against which capital gains are calculated. But we certainly wouldn't expect a corporate and securities law professor at Duke to know this. And what someone like Munger no doubt realizes is that once it becomes public that Berkshire is looking at a stock, regardless of whether Sokol, Munger, Buffett or the janitor is signing the actual wire transfer, the price would surge, making the cost basis that much more attractive... regardless if the holding period was 1 milliseconds or 10 years.
The Securities and Exchange Commission is probing whether Sokol, 54, bought shares in Lubrizol on inside information that Berkshire was considering buying the company, according to a person who declined to be identified because the investigation is secret. The SEC is seeking records from Sokol’s brokerage and examining trading data from the Financial Industry Regulatory Authority, the person said last week. Buffett said March 30 that he doesn’t think Sokol’s purchases were unlawful.
Munger’s account of the BYD investments doesn’t raise “any taint or question mark” for Berkshire, said John Coffee, a securities law professor at Columbia University.
“There’s always going to be some possibility that a director will have some interest in a company that your firm is looking at for a transaction and you disclose that and you recuse yourself,” Coffee said.
That's great. But how about we get the SEC's opinion on the matter. After all, it is not like US capital markets are suffering from an overabundance of investor faith these days.
It would truly be a public service to clear up any possible confusion vis-a-vis just how criminal, if at all, the Munger purchase may have been. And, alas, for that we would fall back to the opinion of one Mary Schapiro, as much as we enjoy John Coffee's non-porn surfing opinion. And lastly, the biggest issue here is what Buffett knew, and what he disclosed publicly: considering the general public had to learn of Munger's massive purchase, and potential conflict of interest, only by parsing the transcript of a former member of the tainted and conflicted Berkshire family, one wonders: just who is hiding what here?