Sokol’s Statements on CNBC Contradict Lubrizol’s Proxy Statement

Published on March 31, 2011

In an article posted earlier today, we provided the video of David Sokol’s CNBC appearance along with commentary regarding his statements.  As part of that article, we raised the issue of Mr. Sokol’s statements on CNBC contradicting the Lubrizol proxy statement account of the development of the transaction with specific reference to Mr. Sokol’s characterization of his discussions with bankers at Citigroup on December 13, 2010.  Specifically, Mr. Sokol suggests that he did not explicitly express interest on behalf of Berkshire when speaking with Citi.  This issue is extremely serious, has received little media attention, and deserves more extended consideration.

We have prepared the following partial transcript of the CNBC interview based on reviewing the video.  The partial transcript contains two key sections of the appearance and we provide the approximate starting time for readers who wish to listen for themselves.  We first present the partial transcript and then compare it to the information in Lubrizol’s proxy.

Sokol’s CNBC Interview – Partial Transcript

[Starting at 7:21]

Joe Kernan: We’re under the impression that on the 13th you told Citigroup to set up a meeting with Lubrizol’s Board that Berkshire might be interested in …

David Sokol: No, no…

Joe Kernan: No, that’s not true?  It’s not that Berkshire might be interested in acquiring Lubrizol?

David Sokol: We had a broad conversation where one of the bankers who was in the meeting said he knew the CEO of Lubrizol and I said gee, if you know him well enough to set up a meeting that would be great, I would love to meet him.

Joe Kernan: But not about Berkshire buying Lubrizol at that point?

David Sokol: Well, we didn’t even … I mean he would certainly have inferred that since I worked for Berkshire, um, you know, that you know that Berkshire would have an interest.

Joe Kernan: Although you didn’t, you said already, you didn’t usually decide what Berkshire was going to buy?

David Sokol: I can’t decide. I have no … but I work for Berkshire so I’m just saying that certainly would … I think he would have assumed that my interest was in some way for Berkshire.

[Starting at 12:55]

Becky Quick: Some people have raised the question on timing around that.  If it was a stake that you had held for, let’s say, six months, a year, two years … we’ve had other people on who’ve said that wouldn’t concern them at all.  The idea that this came in such close  connection with the idea being brought to Berkshire, to Warren’s attention, that’s where they have a conflict.  Do you understand that that could give the appearance of impropriety?

David Sokol: I can understand the appearance issue and that’s why we made it public in the press release is that we want people to know there is nothing there.  The reality is I have no control over a deal ever happening.  So to … the alternative would be for me to only invest my family assets and if I think there’s a good deal for Berkshire not give it to them.  I mean, that to me makes no sense.  It’s ultimately their decision.  Certainly if I was going to be the person that was going to get to make the decision whether or not we should buy this company or not or if I was even going to get to vote on it that’s a completely different scenario.  But I’m trying to invest my family’s capital and if I see a company that I think is interesting and potentially undervalued to not mention it to Warren to me seems inappropriate.

Statements Inconsistent With Lubrizol’s Proxy

Mr. Sokol’s statements to CNBC are clearly intended to present himself as primarily a private investor looking for appropriate investments for his family’s capital.  Only as a secondary consideration does he suggest that candidates might be brought to Warren Buffett’s attention.  Furthermore, Mr. Sokol claims that Citi would have had to infer that his request to meet Lubrizol’s CEO might be related to Berkshire Hathaway implying that he did not directly state his role as an agent for Berkshire.

All of this is in direct contradiction to the clear statement in the Lubrizol proxy regarding the events of December 13:

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.

It is impossible to square Mr. Sokol’s depiction of the events of December 13 with the events described in the Lubrizol proxy where it is clearly stated that Mr. Sokol not only represented his interest to be on behalf of Berkshire but also went as far as to provide reassurances regarding Berkshire not engaging in hostile actions.

Either Mr. Sokol’s account of the events of December 13 described to CNBC this morning were not accurate or Lubrizol’s proxy statement contains inaccurate information.  Both accounts of the events of December 13 cannot be correct simultaneously.

Family Investments Come First, Berkshire’s Interests Take Back Seat

Is this a smoking gun from a legal perspective?  Probably not given the opinions of numerous legal experts who have stated that Mr. Sokol’s actions probably do not rise to the level of insider trading.

Our concern isn’t related to the law but to Mr. Sokol’s attitude toward his role at Berkshire.  It seems like he considered himself a private investor first and an employee of Berkshire second.  He was out to find investments for his family’s capital first and if something worked out for Berkshire as well, that was a nice side benefit.  At numerous points in the video, Mr. Sokol refers to Berkshire as “they” or “that would be their decision”, making it seem as if he did not realize that he was Berkshire’s representative even if he did not have final decision making authority.

It is clear that Mr. Sokol was representing himself to Citi as an agent of Berkshire according to the account provided by the Lubrizol proxy.  At a minimum, even if Mr. Sokol’s account of events is accurate, he was relying on an inference related to his association with Berkshire and Warren Buffett to gain access that he would never enjoy as a private investor.  This fact alone is enough to raise serious ethical concerns even if the matter does not rise to the level of a legal violation.

Disclosure:  Long Berkshire Hathaway.

Sokol’s Statements on CNBC Contradict Lubrizol’s Proxy Statement
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