Warren Buffett offered answers Saturday when it came to the David Sokol-Lubrizol affair.
But one question he has no answer for at all, he said, is why? Why would Sokol risk a career and reputation on questionable stock trades that netted him about $3 million?
Buffett said Sokol made some $24 million in compensation as a key Berkshire Hathaway executive last year. And Buffett marveled in recalling how, a decade ago, Sokol turned down $12.5 million in potential bonus money, instead insisting the money go to a fellow executive.
“I thought that was rather extraordinary,'' Buffett told Berkshire shareholders gathered in Omaha Saturday. “What makes it really extraordinary is that $3 million, 10 or so years later, would lead to the kind of trouble it's led to. That's really the fact I find inexplicable.''
“Inexplicable'' and “inexcusable'' are how Buffett described Sokol's dealings in Lubrizol Inc. stock — the Berkshire chairman's first comments in public since the controversy first came to light March 30.
Sokol — like Buffett an Omaha business titan and a man once widely seen as a potential successor to Buffett — declined personal comment when reached Saturday by The World-Herald. But through his attorney, he expressed disappointment at Buffett's remarks.
“David Sokol is deeply saddened that Mr. Buffett, whom he considered a friend and mentor, would disparage him as he has done today,'' said attorney Barry Levine.
Levine accused Buffett of attempting to turn Sokol into a scapegoat. And he repeated that Sokol had never violated any law or Berkshire policy, nor had he ever misled or deceived Buffett.
Media reports have indicated federal regulators are investigating Sokol's Lubrizol trades. Buffett revealed Saturday that Berkshire alerted the enforcement division of the Securities and Exchange Commission on the same day the Sokol resignation was announced.
Buffett said Sokol's trades in the stock of a potential acquisition target clearly violated Berkshire's insider trading rules, code of ethics and the principles he regularly lays out for all Berkshire managers, echoing the blistering report Berkshire's audit committee had issued three days earlier.
Buffett also admitted to some personal mistakes in how Berkshire handled the Sokol matter. He said he probably should have asked more questions when Sokol first mentioned he owned stock in Lubrizol, an Ohio-based chemical company.
And Buffett acknowledged the inadequacy of the press release he personally wrote March 30 that revealed the trades and announced Sokol's resignation. Seen as defending Sokol, the release raised questions of how the famously principled Buffett could be so tone deaf on Sokol's ethics, and even had some observers questioning whether it was time for the 80-year-old Buffett to stand aside.
When a shareholder asked what Buffett and Berkshire Vice Chairman Charlie Munger had learned in the past year, Buffett drew heavy applause when he quipped, “What I've learned is that I'm going to let Charlie write the next press release.”
But Munger, Buffett's trusted sidekick in the boardroom and on the annual meeting stage, said he had approved the release with no objections.
Munger offered some insight on why Berkshire's managers did not more strongly and immediately condemn Sokol's ethics. Important decisions, he said, should not be made in the anger of the moment.
“You can always tell a man to go to hell tomorrow if it's such a good idea,'' he said.
Munger also offered an opinion on why Sokol would have so openly engaged in the questionable trades. “I think hubris contributes to it,'' he said.
Regardless, Buffett and Munger said they thought Berkshire will gain some value out of the experience, reinforcing throughout that at Berkshire, when it comes to questions of ethics and trading in securities, they do mean business.
“We have sent more than one person to jail,'' Buffett said. “There are no gray areas when it comes to ethics.”
Saturday's annual meeting of Berkshire shareholders was like none ever before, coming right in the wake of the Lubrizol controversy that broke exactly one month earlier.
The shareholders who packed the Qwest Center arena and convention center — which Sokol had a major hand in getting built — were well-acquainted with the story. The media throng that followed Buffett around the convention hall before the meeting was somewhat larger than usual and seemed more frantic.
But the release of the detailed audit committee report on Thursday appeared to keep the Sokol issue from dominating the traditional question-and-answer session.
Buffett helped set the tone for the day when the annual movie shown to shareholders to open the session, as usual, included Buffett's 1991 testimony before Congress over securities violations by a Berkshire-owned investment company. The clip includes his oft-quoted remark, “Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.”
Buffett then raised the Sokol issue himself during his opening remarks and fielded a half-dozen questions on the topic from shareholders and a media panel.
The Lubrizol episode began when Sokol, chairman of three Berkshire subsidiaries and seen as one of four possible successors to Buffett as Berkshire's CEO, talked to Citibank investment bankers about compiling a list of companies in the chemical industry.
Sokol in December expressed interest in one of the companies on the list, Lubrizol, and asked the bankers to relay the interest to Lubrizol's CEO.
Sokol then bought $10 million in stock in Lubrizol, just days before he proposed to Buffett that Berkshire purchase the firm.
Buffett recalled Saturday that when he asked Sokol on Jan. 14 or 15 how he had become familiar with Lubrizol, Sokol said he owned some of its stock.
“He said, ‘I've owned it and it's a good company,''' Buffett said. “I obviously made a big mistake by not saying, ‘When did you buy it?' But when someone says they bought the stock, you don't think they bought it in the prior week.''
Sokol also did not mention his talks with the investment bankers who put Lubrizol on his radar, Buffett said.
It wasn't until March 14, when Buffett announced Berkshire's plans to buy Lubrizol at a premium price, that he learned of Citibank's role in the acquisition in a call from a Citibank official from Chicago.
“This was all news to me,'' Buffett said. “So that set off some yellow lights, at least.''
At Buffett's request, Berkshire's treasurer the next day asked Sokol about Citibank's involvement and the dates of Sokol's Lubrizol purchases.
Sokol gave the dates of the stock buys. When asked about Citibank's involvement, Sokol said he thought he had called someone there for a Lubrizol phone number, which Buffett said “turned out to be somewhat of an understatement.''
In the days that followed, Buffett and Berkshire officials were anxiously awaiting the draft proxy statement from Lubrizol, a legal requirement that would detail the background of the transaction. Buffett was preparing for a weeklong Asia trip and wanted to see it before he left.
Berkshire received the draft on March 18, the day before Buffett left. After reviewing it, Berskshire officials decided they needed to get the legal department involved, Buffett said.
Buffett said attorneys from Berkshire's law firm interviewed Sokol at least three times. Berkshire's legal counsel, Ronald Olson, was on the trip and was briefed on the results of those interviews. Buffett said it was decided then there would need to be a “prompt” meeting of Berkshire's board when they got back to Omaha.
They returned March 26, but before the board could meet, Sokol's assistant late on March 28 delivered Sokol's letter of resignation. The letter cited personal reasons, and Buffett said Sokol told him he was “retiring on a high point.”
“I don't know whether the questions of the previous week affected his attitude,'' Buffett said. “He would not say. At any event, we had that resignation.''
Buffett then told of how he came to write the press release, which was twice run by Sokol himself. Sokol objected “very much'' to one part Buffett had written that suggested Sokol was leaving because his chances of succeeding Buffett had been damaged.
Buffett said Sokol told him he “should not be trying to second-guess what was in his mind.'' That part was struck, and on March 30 it was released. That was also the same day Berkshire officials alerted federal regulators.
The press release caused a firestorm, including criticism of Buffett.
The release had praised Sokol and also appeared to defend him. It said Buffett didn't think the transactions were unlawful and noted that when Sokol bought the stock, Sokol had no way of knowing whether Buffett would agree to buy Lubrizol.
Buffett biographer Roger Lowenstein called Buffett's failure to signal even the slightest disapproval “the most glaring example of ethical obtuseness of his career.'' A Bloomberg business columnist said Buffett's silence caused him to wonder “whether Buffett had lost his mind.''
In his own defense Saturday, Buffett said he had been satisfied with the outcome. Sokol was gone from Berkshire with no severance costs or a potential legal fight over money due him — a possible result if he had been fired. And, he said, “some very damning” evidence had been released to both the public and the SEC.
“What I think bothers people is there was not some big sense of outrage in the release,'' Buffett said. “I plead guilty to that. This fellow had done a lot of good things for us over the years. If I'm laying out a whole bunch of facts that are going to create a lot of problems for him for years to come, (I thought) I would lay out what he had done for Berkshire.''
Sokol's attorney seized on the March 30 press release. Levine said there was no new information since the press release that should have caused Buffett to become so critical.
“It is alarming that Mr. Buffett would be advised to so completely flip-flop and resort to transparent scapegoatism,'' Levine said. Given his 11 years of service to Berkshire, Levine said, Sokol deserved to be treated more fairly.
Some Buffettologists and Berkies have said the Lubrizol episode raises questions about Sokol's lofty place in Berkshire and Buffett's ability to choose his successor — always a hot topic with shareholders.
Buffett on Saturday downplayed suggestions Sokol was first in line to succeed him, saying “I'm not sure (the assumption) was warranted.'' And he said the odds of him making a mistake in choosing an ethical successor “are very, very low.''
“I think the candidate who is the leading candidate now, I would lay a lot of money, is straighter than an arrow,'' he said. He then added to laughter: “The Bible says the meek shall inherit the Earth, but the question is: Will they stay meek?''
Most Berkshire shareholders interviewed Saturday seemed generally satisfied with Buffett's explanations — probably not surprising in a gathering where he is treated like a rock star.
Robin Silvers, a jewelry dealer from Playa del Rey, Calif., said she thinks Buffett handled the Sokol matter properly. There was no more he could have done, she said, and he provided a “decent enough explanation.''
“I know this is a challenging time for him to go through,'' she said. “It's a little blip that I think Berkshire Hathaway and all of us will get through.”
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