Sokol: My Mistake Was Suggesting Lubrizol to Buffett

Published on March 31, 2011

David Sokol appeared on CNBC earlier today to discuss his resignation from Berkshire Hathaway which was announced by Warren Buffett in a very unusual press release on Wednesday afternoon.  In an article posted last night, we reconstructed a timeline of the relevant events and argued that regardless of the legal status of his transactions in Lubrizol stock, Mr. Sokol used very poor judgment in the events leading up to Berkshire’s offer to acquire Lubrizol.  Nothing in the CNBC video has changed this opinion, for the reasons we will explain below.

Mr. Sokol’s interview lasts approximately thirty minutes and readers are encouraged to view the video in its entirety below (RSS feed readers can access the video on CNBC’s website.)

Private Investor or Agent for Berkshire?

It is worth examining several of Mr. Sokol’s statements because they appear to demonstrate, at a minimum, significant confusion regarding his role as a private investor and his role as an agent for Berkshire.

At several points during the interview, Mr. Sokol insists that there was no conflict of interest and that his initial interest in Lubrizol was based on his own research based on publicly available information along with the analysis provided by Citigroup bankers.  However, Mr. Sokol was apparently dealing with Citi as an agent for Berkshire based on the information clearly provided in Lubrizol’s proxy statement:

On December 13, 2010, Mr. Sokol and Citi met to discuss the list of companies. During the course of the meeting, Mr. Sokol said that the only company on Citi’s list that he found interesting was Lubrizol. When Mr. Sokol learned from Citi’s representatives that Citi had an investment banking relationship with Lubrizol and its Chairman, President and Chief Executive Officer, Mr. James L. Hambrick, he asked one of the Citi representatives to inform Mr. Hambrick that he was interested in speaking with him and discussing Berkshire Hathaway and Lubrizol [emphasis added], if Mr. Hambrick were available. Mr. Sokol also advised Citi that Berkshire Hathaway does not engage in hostile transactions [emphasis added], and that Mr. Hambrick should understand that if they met and nothing came of the meeting, their meeting would remain confidential.

On the following day, Mr. Sokol made his first purchase of Lubrizol stock which he proceeded to sell on December 21 for “tax planning reasons” according to the interview.  His larger purchase was made in early January as described in our previously published timeline.

Mr. Sokol repeatedly characterizes his actions as one of a private investor seeking to invest his family’s wealth.  We can sympathize with Mr. Sokol’s desire to invest his assets in companies with prospects for excellent future returns.  However, it is clear and obvious from the Lubrizol proxy that Mr. Sokol was working on Berkshire’s behalf, not on his own behalf as a private investor.

Mr. Sokol states during the interview that Lubrizol may have “inferred” that he was acting on Berkshire’s behalf.  This is disingenuous at best given the fact that he directed his contacts at Citi to specifically mention Berkshire Hathaway as described in the Lubrizol proxy and quoted above.  Is Mr. Sokol claiming that the Lubrizol proxy is incorrect regarding the characterization of his meeting with Citi’s bankers on December 13?  If so, he did not make that claim during the CNBC interview.

“I’m Not a Decision Maker”

Mr. Sokol claims that he was not a decision maker and had no authority when it comes to committing a single dollar of Berkshire’s capital toward investments in securities.  However, it is obvious that he had some role in the process or he would not have been engaged with Citi in an explicit attempt to open discussions with a company that was a prospective acquisition target for Berkshire.

It is also obvious that Mr. Sokol had a role in presenting this information to Warren Buffett and making a recommendation for Berkshire to proceed.  Although obviously Warren Buffett will make his decision based on his own evaluation of the acquisition target, for Mr. Sokol to suggest that he has no role in the matter is clearly inaccurate.  He was the point man on the acquisition up to the point where price was discussed, at which point Mr. Buffett took the lead. 

“I Shouldn’t Have Mentioned Lubrizol”

Perhaps the most revealing and most disturbing part of the interview involved Mr. Sokol’s only expression of regret — the fact that in retrospect he would have made his personal investment in Lubrizol but would not have told Warren Buffett about the company.  How does this square with the timeline of events that clearly show that Mr. Sokol was acting on Berkshire’s behalf on December 13 prior to any of his personal transactions?  Is Mr. Sokol suggesting that it is ethical to spend time and resources on a search for acquisition targets for Berkshire only to put his own personal interests above Berkshire’s when an attractive prospect appeared?

The news of Mr. Sokol’s resignation and the circumstances surrounding the Lubrizol situation were disappointing when first reported last night.  If the goal of Mr. Sokol’s appearance on CNBC was to explain why his actions were appropriate, he clearly failed because his explanation does not reconcile with the version of events described in Lubrizol’s proxy statement.

Clearly, David Sokol’s primary goal is to invest his personal assets and to build his own business.  That is a perfectly legitimate goal and one that he can now pursue without conflicts of interest with Berkshire.  It was not legitimate, ethical, or fair to Berkshire for Mr. Sokol to attempt to act as an agent for Berkshire and to simultaneously take positions in an acquisition target.  The question of legality is not one we are qualified to comment on but should become clear in due course as the SEC will no doubt investigate the matter thoroughly.

Disclosure:  Long Berkshire Hathaway.

Sokol: My Mistake Was Suggesting Lubrizol to Buffett
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