Warren Buffett heir apparent quits after stock purchases

By Ben Berkowitz

NEW YORK (Reuters) – One of Warren Buffett’s favored lieutenants, who was seen as his leading heir apparent, resigned after buying shares in a company he later recommended that Buffett acquire.

David Sokol’s resignation from his roles as chairman of Berkshire Hathaway units MidAmerican Energy and NetJets raised questions about the transparency of his dealings with Buffett — namely whether he concealed the size of share purchases in Lubrizol Corp.

The resignation could be a reputational blow for Buffett, the 80-year-old “Oracle of Omaha,” who recently sealed a $9 billion deal for Lubrizol Corp at Sokol’s urging.

“Obviously Warren Buffett prides himself on transparency and this would not appear to be transparent,” said Berkshire shareholder Michael Yoshikami of YCMNET Advisors in California. “It’s surprising and always amazes me these types of events occur because it just seems so unnecessary.”

Buffett said on Wednesday that Sokol bought shares of Lubrizol last December, sold them, then bought more shares in early January. He subsequently presented Buffett with the idea of buying the company.

The 96,060 shares Sokol bought on January 5-7 would have generated a profit for him of at least $2.98 million based on Lubrizol’s share price over those three days and the price at which Buffett agreed to buy the company.

It is unclear why news of Sokol’s trading is surfacing now, or whether government investigators have looked into the matter. The U.S. Securities and Exchange Commission and the Department of Justice declined to comment.

LIABILITY

Buffett said he was originally not in favor of the idea of buying Lubrizol but warmed to it after Sokol told him of a conversation with Lubrizol’s chief executive. Berkshire ultimately announced its purchase of Lubrizol for $135 per share, a 28 percent premium, on March 14.

Legal experts were divided on whether Sokol could be held liable in court for his actions.

“He could be. At a minimum he showed extremely bad judgment in not disclosing to Mr. Buffett that he had taken a fairly significant position in the company a week before he pitched the benefits of the company to Mr. Buffett,” said C. Evan Stewart, managing partner at law firm Zuckerman Spaeder LLP in New York who concentrates on securities litigation.

But others said there was the possibility the sequence of events could be explained away.

“The legal issue is, ‘what did Sokol know about Berkshire’s interest in acquiring a position in Lubrizol when he was buying shares in January,'” said Stuart Slotnick, a partner at Buchanan Ingersoll & Rooney in New York.

“Warren Buffett’s job is to purchase stock and companies. If Sokol goes to Buffett and says, ‘I love this stock, I bought some for myself, you should look at it,’ there’s nothing inappropriate in Buffett doing his own analysis and making a purchase, as long as no trading decisions are made on the basis of material, nonpublic information.”

“ENORMOUSLY TALENTED”

In his annual letter to shareholders this year, Buffett praised Sokol for engineering a turnaround at NetJets, a business where he had no prior experience, and for his accomplishments at MidAmerican.

A year earlier, he called Sokol “an enormously talented builder and operator,” and in 2009 he proclaimed that Sokol would run any business with which he was associated “in a first-class manner.”

Most Buffett watchers thought Sokol was the top candidate of the three or four Berkshire executives most frequently mentioned as future CEOs of the company, given the legendary investor’s enthusiasm for him.

The issue of succession is crucial for Berkshire Hathaway because Buffett personifies the company. He built Berkshire up from a small insurance company to one of the largest insurers and conglomerates in the United States over decades.

Buffett said on Wednesday that he did not feel Sokol’s purchases were unlawful.

Berkshire did not release Sokol’s March 28 letter of resignation, though Buffett said that in the letter Sokol had mentioned his desire to pursue philanthropic efforts.

(Additional reporting by Paritosh Bansal, Megan Davies, Jonathan Stempel, Dena Aubin, Dan Wilchins, Maria Aspan, Clare Baldwin, Jonathan Spicer in New York and Sarah Lynch in Washington; Editing by Steve Orlofsky)

Warren Buffett heir apparent quits after stock purchases