David Sokol Interview

[beerbaron]

Brk is down 4 Billion in market cap today... didn't know Sokol was worth that much.

 

BeerBaron

[seshnath]

For those who disagree (and they may very well turn out to be right, as a matter of fact I hope they are) just out of curiosity, why is this not insider trading?

 

I think for this to be insider trading, Sokol needs to have material non-public information and needs to act with the intent of profiting from that information.  He needs to have been told by Warren that BRK is considering an offer.  It's not enough that he spotted the value before Buffett did, invested, and then told Buffett.  That's an ethical issue, not a legal issue. 

 

I believe an investigation would reveal that Sokol passes dozens of recommendations to Buffett and no action is taken.  Therefore, just because Sokol will be making the recommendation that BRK acquire Lubrizol, doesn't mean that it will happen.  In fact, the probability is quite low based on Sokol's 19/20 rejection rate metric.

 

Where I think it would be insider trading is if Sokol has a history of buying shares in a company, making a recommendation, and then dumping them if Buffett passes on the reco.  In this scenario, Sokol's intent appears to make excess profits through BRK's actions.

 

 

If it is part of a pattern, then LUZ is definitely excusable.  I would be interested to know if Sokol did the same thing with say, BNSF or other acquisitions in the past or other rejected acquisitions.

[seshnath]

My end assessment is I am happy for WEB.  He wouldn't have wanted someone who worked for money than the fun of the job anyway.

 

I just read Petey's earlier comment about CNBC asking questions about constellation and all - my last comment was before I read that.

[Guest Bronco]

I am on the other side of this.

 

Do we want the government to come in and say that no one can recommend a stock that they already own?  I don't see how there is insider trading here.  He never traded on inside information.  He bought the stock before Berkshire did. 

 

Maybe he violated some level of fiduciary duty.  That is different.  But nobody from Berkshire got hurt.  Not Warren.  Not Berkshire shareholders.

 

Are we now saying that executives can't get stock advice from outside consultants?  Give me a break.  You might as well arrest every CEO in the US. 

 

So what if he received the information about LZ from an investment banker?  I get shit in the mail from every penny gold company in the planet.  I read S&P reports all the time. 

 

How about that a company like Berkshire shouldn't have its executives own individual shares?  If you believe this, shame on you.  You all knew that Warren held shares in other companies for years and not a peep.

 

Maybe this is a good thing.  Maybe this guy bought stock in a good company, put some skin in the game.  He recommended something where he put his own money at risk.  He diclosed that to Warren.  Maybe we should all appreciate people that give advice and follow their advice. 

 

If there is anyone to blame, it is Berkshire itself, and its policies.  Warren could have asked Sokol to sell his shares in advance of the purchase - but does he even have a legal right to do that?  Can anyone answer that please?  Berkshire could have a policy that no employees over a certain level can buy stocks.  But again, everyone knew about this beforehand and I didn't hear any complaints. 

 

Time to move on.

 

 

 

 

 

 

[Buffetteer]

Bronko, as a real estate agent, if I violate my fiduciary duty to a client I could lose my license.

 

And I don't think anyone is saying BH employees can't buy shares in public companies. If Sokol had bought shares in Wells Fargo while discussing a possible buyout of LZ then of course there wouldn't be a problem. The issue is the timing of the purchases of a company he was in takeover talks with.

 

A big portion of my portfolio is in BRK so believe me I will always give them the benefit of the doubt, but in this case I think Sokol screwed up. I don't think this affects Warren Buffet's reputation at all, but unfortunately it raises some questions about Sokol.

 

But again, everyone knew about this beforehand and I didn't hear any complaints.

 

We just found out about this 2 days ago.

[Guest Bronco]

Using the logic of others, they would be pissed if you bought a house to live in.  You should have told all your clients first about the good deal you sought.  Did you tell all your clients about the house you live in before you bought it?

 

There is 0% evidence that Sokol was in takeover talks with LZ.  To the contrary, he has no authority to do so.  Has anyone disputed this?  I would take the other side here and said this whole thing happened b/c he had no idea what Warren Buffett would do.  Insider trading doesn't apply here.

 

It may raise some questions about Sokol, but you should all be careful what you wish for.  If you don't want X event to happen, you better consider what some Ahole in Washington will legislate to prevent.  Are CEO's allowed to talk to investment banks?  Are CEO's allowed to buy stock in other companies?  Are any employees allowed to buy stock in other companies? 

[Buffetteer]

Using the logic of others, they would be pissed if you bought a house to live in.  You should have told all your clients first about the good deal you sought.  Did you tell all your clients about the house you live in before you bought it?

 

I'm sorry I fail to see the connection, but I will say this: If I found a house that I felt was very undervalued and approached the seller, I would have to disclose that I am a Realtor and would have to disclose all material facts I have on the house and why I feel it is undervalued. Failure to do so could cost me my license.

 

I think a more appropriate analogy would be this:

I am employed by a builder who tells me they are interested in buying some property to develop. I approach a homeowner and tell him I want to buy his house, but don't tell him that a developer is interested in buying the property and that I could then sell it for much more. I am not sure that the developer is going to be interested in the property, but after I buy it I will approach the builder and recommend that he buys it. The builder says he is not interested, but I am persistent and a month later I bring it up again and he agrees. I have just made millions by withholding information from the homeowner. Is that fair?

 

There is 0% evidence that Sokol was in takeover talks with LZ

Actually I think there is 100% evidence that he was. It wasn't until after LZ's board agreed to be purchased by BH that Warren took over the negotiations. Until that point it was all David.

[Guest Bronco]

I don't want this to drag out.  You can provide me 100 examples of how you would lose your license, and you would be right each time.

 

Here is what I would ask:

 

1) What law did Sokol violate?

2) What law would you change, and be specific to terms, to avoid this practice that is offensive to you?

3) Please provide evidence or link (which I am unaware of but you have access to) that states 1) Sokol can legally negotiate a merger on behalf of Berkshire Hathaway, 2) that he acted as an agent to negotiate such a merger or takeover 3) that LZ's management team believed that Sokol had the authority to negoiate such transaction. 

 

I believe you are stating that Sokol negotiated the deal, the board of LZ approved, and Warren Buffett than took over (I would assume to negotiate the price). 

 

That isn't the version I heard in Sokol's interview but that is the last I heard of this matter.  I would be interested in learning the truth.

[Guest Bronco]

And I'm just curious - in your example, why is the builder buying a home?  Are they going to tear it down.  That is a shame.

[Buffetteer]

Actually I never implied that Sokol was negotiating the deal, just that he was talking to LZ about a potential takeover. More info can be found here: (Lubrizol's letter to shareholders regarding the deal. Scroll down to "background on the merger").

 

http://www.sec.gov/Archives/edgar/data/60751/000119312511078281/dprem14a.htm#toc166121_52

 

Mr. Sokol indicated that, as is typical in other Berkshire Hathaway acquisitions, if Berkshire Hathaway were to acquire Lubrizol, it would want Mr. Hambrick to continue to run the business. This is from a Jan. 25th meeting Sokol had with CEO of LZ, obviously discussing a potential acquisition. The letter does a great job of explaining the series of events.

 

Weather Sokol has the authority to make a deal is irrelevant, the point is he was trading on info that was not yet available to the public. Don't you think it would have been wrong for the board of LZ to start accumulating shares in their company after being approached by BH for a possible acquisition. We may disagree on this, but I think it would have...I feel they would have been taking advantage of the shareholders they were purchasing the shares from as the shareholders did not have all the facts.

 

And I'm just curious - in your example, why is the builder buying a home?  Are they going to tear it down.  That is a shame.

 

You don't know the half of it. They're going to tear down that house and build four new ones in it's place...It really is a shame.  :)

[Guest Bronco]

Ok, I'll summarize my thoughts and be done. 

 

Sokol isn't on the board of directors for BRK.  I don't believe he is an executive for BRK.  He is chairman of a subsidiary and CEO of another subsidiary.

 

So I guess that no employee of a company should be allowed to buy stock in "X" after such employee investigates a possible transaction with company "X".  I wouldn't venture a guess as to the timeframe that this would apply to - could an employee buy a stock 2 months after investigating, 3 years, or never.  But that is what I am hearing.

 

Perhaps there will be new insider trading laws to capture this scenario - I'll leave it to smarter peole than me to figure that out.

 

 

[beerbaron]

For grey area like this one I would suggest Klarman's rule.

 

"If think what you are doing would get you on the front page of the jornal and you would not be happy about it, then you should not do it"

 

The fact that there is a debate about this one means that it's way to close to the line then what BRK will accept.

 

I'm very happy about Buffett's action and it shows a huge courrage to get rid of your number 2 who would have earned you billions in the future for moral issues. On the moral compass BRK is in a class of it's own.

 

BeerBaron

[Buffetteer]

We all have our opinions on this subject, and there are valid points on both sides.

I'll not drag this on any longer either, but I keep asking myself this question: "If, before buying the shares, Sokol made it public that he was talking to LZ about potentionally being acquired by BH, would he still have been able to buy them for $104/share?"

 

So I guess that no employee of a company should be allowed to buy stock in "X" after such employee investigates a possible transaction with company "X".

 

Yes, I would agree with that. If my company is in talks with Bombardier to buy 100 planes, I probably shouldn't buy Bombardier shares until the news is made public.

[Guest ValueCarl]

Sometimes I take my pistol out a tad bit early as I did in the case of Ms. Schroeder earlier. She or her moderator must have been behind in reviewing the posts to be released at her site. There have been many comments over there surrounding this Sokol matter. 

 

Here's another interesting post on Moody's by "Go Ask Alice."  ;D 

 

http://www.aliceschroeder.com/blog/moodys-weighs-sokol-cites-succession-risk

[Rabbitisrich]

 

 

So I guess that no employee of a company should be allowed to buy stock in "X" after such employee investigates a possible transaction with company "X".  I wouldn't venture a guess as to the timeframe that this would apply to - could an employee buy a stock 2 months after investigating, 3 years, or never.  But that is what I am hearing.

 

 

Appearance is reputation is money in this case. It's like an absentee father driving to recover a relationship with his child, only to find out along the way that the child has just won the lottery. One thing may or may not have anything to do with the other, but there is no reasonable test to distinguish an honest motivation from a self-serving one.

[DCG]

Citi is not helping Spkol's case. They are saying that they were under the impression that they were providing Sokol research for Berkshire, and not him personally.

 

http://online.wsj.com/article/SB10001424052748704530204576237170960624878.html?mod=WSJ_hp_LEFTWhatsNewsCollection

 

I also think I agree with James Stewart's column in today's Journal that (for berkshire's sake) Sokol probably should have been fired before he resigned.

[Guest ValueCarl]

Notwithstanding the SEC's more casual remarks about this blatant front running trade, I think David Sokol will be needing a Proctologist before this is over!

 

<If an inquiry had not been made of him about the Lubrizol stock in connection with the SEC filing, he (apparently) would never have reported it.>

[netnet]

Notwithstanding the SEC's more casual remarks about this blatant front running trade, I think David Sokol will be needing a Proctologist before this is over!

 

It would appear that the examination is already proceeding!!  :D

[pilaniman]

I am re-pasting my comments from a different thread since this is more relevant place for it.

 

From what I have read so far, Mr. Sokol looks culpable because he met Citi investment bankers and not the wealth management guys. As an ex-M&A banker, I can tell you that if I am meeting a guy like Mr. Sokol, I am talking to Berkshire unless he expressively states that he is there in a personal capacity in which case I would have talked to him about a lot smaller companies (than LZ) given the relative size of his checkbook vs Berky’s . In Dec meeting, Citi must have shown him 10-15 “elephant-size” ideas in general which would meet Buffett criteria of what Berky would want to buy.  These initial meetings are to gauge client’s interest for a deep-dive on a potential M&A idea and/or to get CEOs talking. Even if in the first meeting, citi bankers did not discuss non-public information I would think that in the subsequent meetings they did. If the Citi bankers are doing their job competently, they would have shared  non-public information because as a banker you are telling the client (i.e., Berky) something which is not well known or misunderstood about a business and potentially non-public information such as target CEO's willingness to do a deal, etc. The whole idea of such meetings is to highlight the business in the most favorable light for a potential M&A deal. There is an underlying assumption that the discussions are absolutely confidential. I don't know whether the non-public information was discussed or not. But for Mr. Sokol to say that he was meeting Citi bankers in personal capacity is completely naive IMHO. Even if you give him the benefit of the doubt, the timing of the purchase is so close that it does not pass the smell test.

 

If I were him, I would have called general counsel or outside counsel as soon as Mr. Buffett showed interest in pursuing the discussions to flag this issue and seek proper legal guidance.

 

For him to say Mr. Munger bought BYD before bringing it to Berky is a complete misdirection. One has to understand the timing of Charlie's purchase and the beginning of Berky's involvement. One has to know how many quarters had gone by between Mr.  Munger's purchase and serious investment discussion between BDY and Berky. What kind of material non-public information Mr. Munger had before he made his purchases. So that is a different situation in my opinion.

 

Let's think the other way around - would citi compliance allow bankers to buy the stake around the time Mr. Sokol bought it for the second time? The answer is definitely no! As soon as a deal starts to heat-up, it is logged with compliance in the banks to avoid such situations. All the team members esp. on the M&A side (industry bankers are generally prohibited from investing in their clients) would be stopped from doing any trades in LZ. I am not suggesting that the banks have the best compliance procedures. All I am saying is that Mr. Sokol was either grossly ignorant or did cross the line willingly. I hope it is the former for us Berky shareholders.

 

Cheers,

 

[seshnath]

I am re-pasting my comments from a different thread since this is more relevant place for it.

 

From what I have read so far, Mr. Sokol looks culpable because he met Citi investment bankers and not the wealth management guys. As an ex-M&A banker, I can tell you that if I am meeting a guy like Mr. Sokol, I am talking to Berkshire unless he expressively states that he is there in a personal capacity in which case I would have talked to him about a lot smaller companies (than LZ) given the relative size of his checkbook vs Berky’s . In Dec meeting, Citi must have shown him 10-15 “elephant-size” ideas in general which would Buffett criteria of what Berky could buy.  These initial meetings are to gauge client’s interest for a deep-dive on a potential M&A idea and/or to get CEOs talking. Even if in the first meeting, citi bankers did not discuss non-public information I would think that in the subsequent meetings they did. If the Citi bankers are doing their job competently, they would have shared  non-public information because as a banker you are telling the client (i.e., Berky) something which is not well known or misunderstood about a business and potentially non-public information such as target CEO's willingness to do a deal, etc. The whole idea of such meetings is to highlight the business in the most favorable light for a potential M&A deal. There is an underlying assumption that the discussion is absolutely confidential. I don't know whether the non-public information was discussed or not. But for Mr. Sokol to say that he was meeting Citi bankers in personal capacity is completely naive IMHO. Even if you give him the benefit of the doubt, the timing of the purchase is so close that it does not pass the smell test.

 

If I were him, I would have called general counsel or outside counsel as soon as Mr. Buffett showed interest in pursuing the discussions.

For him to say Mr. Munger bought BYD before bringing it to Berky is a complete misdirection. One has to understand the timing of Charlie's purchase and the beginning of Berky's involvement. One has to know how many quarters had gone by between Mr.  Munger's purchase and serious investment discussion between BDY and Berky. What kind of material non-public information Mr. Munger had before he made his purchases. So that is a different situation in my opinion.

 

Let's think the other way around - would citi compliance allow bankers to buy the stake around the time Mr. Sokol bought it for the second time? The answer is definitely no! As soon as a deal starts to heat-up, it is logged with compliance in the banks to avoid such situations. All the team members esp. on the M&A side (industry bankers are generally prohibited from investing in their clients) would be stopped from doing any trades in LZ. I am not suggesting that the banks have the best compliance procedures. All I am saying is that Mr. Sokol was either grossly ignorant or did cross the line willingly. I hope it is the former for us Berky shareholders.

Cheers,

 

 

Let us set aside the scope of inside information for a moment.

 

The services of Citi were/will be paid for by Berkshire or subsidiaries.  Sokol used the services to gain personal benefit.  Obviously we are not talking about taking a pencil from the office supply room to write a personal letter.  Contrast this against the behavior of the exemplars like WEB who reimburses BRK for personal travel on company jet and personal phone calls. 

 

CTM's situation, put in this context, becomes very different.  CTM didn't first hire an investment banker on behalf of BRK to short-list BYD.  He did his due diligence either by himself or as speculated, through his associate, Li Liu.  Then he took the idea to WEB/BRK.  It passes all standards of conduct.

 

To put in context, here are some of CTM's quotes about Sokol's type of rationalisation

""I'm used to people with very high IQs knowing how to recognize reality, but there's a huge human tendency where it may be instructive to think that whatever you're doing to succeed is all right. These people say to themselves: I need it and I want it, therefore I must have it....."

 

"My favorite human misjudgment is self-serving bias: how the brain subconsciously will decide that what’s good for the holder of the brain is good for everyone else. If the little me wants it, why shouldn’t the little me have it? People go through life like this. I’ve underestimated this phenomenon all my life. People go bonkers taking care of their own self-interest."

- both quotes taken from http://mungerisms.blogspot.com/ (lines in bold for emphasis)

 

Secondly, when Sokol approaches Citi or any other IB and ask for a short list for acquisitions, he is holding himself out as an agent for BRK and subsidiaries.  According to the English law, he is an agent by "holding out".  I don't know if this particular English law is taken cognizance in the US jurisdiction or not.  Applying it as a minimum standard of conduct, Sokol has "a duty to avoid conflict of interest between the interests of the principal and his own (that is, the agent cannot engage in conduct where stands to gain a benefit for himself to the detriment of the principal)." (http://en.wikipedia.org/wiki/Law_of_agency).

 

Since the service is paid for by BRK/subsidiaries, arguably there is detriment to the principal (BRK/subsidiaries).

 

Sokol should be out, no question about it.  Whether WEB should have given a pat on the back on the way out or should have thrown him under the bus is really a question of culture.  I could see a lot of other managements doing that; but not WEB.  The press release makes adequate disclosure for informed shareholders to come to their own conclusions. (as we are in the course of doing here)  That is all the fiduciary duty WEB owes.  Whether there is insider trading or not, is not a matter that he need decide (I guess, this issue goes to the "too tough" pile).  He has disclosed the holdings which he can reasonably expect to set off a process in motion to investigate a case for insider trading. 

 

Like I commented earlier, happy for WEB that Sokol is out.