Did Berkshire Heir Apparent Engage in Insider Trading?

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Did Berkshire Heir Apparent Engage in Insider Trading?
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Did Berkshire Heir Apparent Engage in Insider Trading?

Warren Buffett shocked the business world--and sent his company's shares tumbling--late Wednesday by announcing the resignation of David Sokol--a man many speculated would succeed the renowned investor as head of Berkshire Hathaway. Buffett revealed that Sokol personally purchased stock in a company prior to recommending that Berkshire acquire the enterprise, stoking a debate about whether Sokol violated insider trading laws, which prohibit individuals from trading shares based on non-public information.

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In a statement, Buffett explained that Sokol bought 96,060 shares in Lubrizol--a manufacturer of engine lubricants--in January before suggesting that Buffett purchase the company, which Berkshire eventually did in March in a $9 billion deal awaiting approval from regulators and shareholders. Bloomberg estimates that Sokol may have earned a $3 million profit by buying the Lubrizol stock, which rose in value after the Berkshire deal was announced. The Securities and Exchange Commission says it's reviewing Buffett's statement, and The Financial Times is reporting that an SEC investigation is already underway.

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So, did Sokol engage in insider trading?

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In an interview on CNBC this morning, Sokol insisted he did nothing wrong but added that, if he could go back in time, he would still buy Lubrizol shares but wouldn't inform Buffett about his interest in the company. Buffett also said he believes Sokol's stock purchases were legal, noting that Sokol mentioned in a "passing remark" that he owned stock in Lubrizol during their first discussion about the company.

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One analyst tells Bloomberg that an increase in options trading in the week preceding the Lubrizol takeover suggests investors were speculating with insider information, but a former SEC lawyer adds that Sokol didn't engage in insider trading if he simply purchased the stock prior to his recommendation and Berkshire's decision to pursue an acquisition.

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The pivotal question, lawyers tell The Wall Street Journal, is whether Sokol knew he might pitch a Lubrizol deal to Buffett when he bought Lubrizol shares. "If Mr. Sokol did know at that time," the Journal explains, "that could suggest he had material information at the time he bought the shares ... A question would be whether in buying shares he wrongly used knowledge about what Berkshire was likely to do."

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