Comment On the Oracle of Omaha

Posted by Jeff Carter
on April 6th, 2011

I am on vacation, sort of, and I have some guest bloggers lined up. My friend Scott Hoekman from Maroon Analytics sent this blogpost in.
Warren Buffett is an honorable man, and I am not accusing Mr. Buffett of anything illegal. He is not the one who did the insider trading. However, he is parsing his words and not keeping true to his image: Buffett is the most successful common sense investor in the world; and, this other part I especially love, a guzzler of Cherry Cokes and devourer of steaks and chocolate at the age of 80. ($BRK.A)

So what happened? Buffett’s ex-potential replacement – David Sokol – asked an investment banker – Citigroup – for M&A leads for Berkshire Hathaway. Sokol picked one on the list – Lubrizol($LZ). While he set up meetings on BRK buying LZ, and while LZ considered a BRK buyout, Sokol bought LZ’s stock, sold the stock and bought some more. Buffett agreed, after initially turning LZ down, to consummate an acquisition of LZ. Sokol made a $3 million profit on his LZ purchase in two months which is a nice chunk of change. This is also of course insider trading but only by Sokol. After all, Buffett is an honorable man.

Buffett did not think what Sokol did is illegal but it sure seems like this is a classic example of how not to buy a stock. Buffett did not do anything wrong in this situation but come off as a willing participant in this process. Instead of calling Sokol out for imitating Gordon Gekko, he wrote a letter which a bunch of fancy lawyers probably reviewed. It might not be “illegal” but it is sure unethical and definitely insider trading.

Let’s take look at this scenario in a couple other of ways. If a Citigroup banker called up his broker and purchased LZ stock, then he would have been fired and in a heap of trouble. If a LZ executive did the same, then he too would be deep-sixed and facing tremendous scorn. But Sokol leaves and gets Buffett’s written blessing that nothing bad happened. Buffett is trying to shield him from blame when Sokol deserves the blame. And we should believe Buffett because he is an honorable man.

So what is the end result? If the SEC had any guts (and it does not), then Sokol would already be under investigation. Sokol should donate all the $3 million profit to charity and he should take a two-year leave of absence from any trading or managing/directing a publicly traded company. Sokol wants to focus on philanthropic opportunities and this punishment would give him a chance to start.

But Buffett should not be exempt from scrutiny. I would enjoy seeing Buffett dragged in front of Congress and have silly Representatives like Maxine Waters (who is in the middle of a financial scandal of her own) lambast the best investor ever. Buffett does not need any more lessons on donating his wealth – that is taken care of; however, he should consider some better disclosure rules and limitations of BRK employees with stock trading. It would be important and proper to have him admit this publicly at BRK’s big annual meeting in a few weeks. This would also give him a great opportunity to revise his ridiculous and limited explanation of the Sokol-LZ affair. After all, Buffett is an honorable man.

BRK.A Stock Chart by YCharts

My own disclosures: my family owns BRK stock. Jordan Hansell is a family friend (he is Sokol’s former lieutenant; after Sokol’s departure, Hansell is now the CEO of NetJets). Scott Hoekman is a principal of Maroon Analytics.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.