Two former securities attorneys said Friday that the government either concluded that former Omahan David Sokol didn’t engage in illegal insider trading or found it difficult to prove his actions met the legal standard.
When Sokol’s former employer, Berkshire Hathaway Inc., paid $9 billion to buy Lubrizol Inc., Sokol’s shares in that firm netted about a $3 million profit. He defended his trades, saying he could not have known when he bought the stock that Berkshire Chairman and CEO Warren Buffett intended to buy Lubrizol, a chemical manufacturer.
And now, two years after he purchased the stock, Sokol has been informed that the U.S. Securities and Exchange Commission is not pursuing action against him.
Sokol told the Wall Street Journal in an email Friday that he was pleased with the SEC’s decision and felt it was anticlimactic given that he always has maintained he did nothing wrong.
It would have been a very tough case to win, said Peter Henning, a law professor at Wayne State University in Michigan and a former attorney with the SEC. “I’m not surprised by this.”
Even so, Henning said, the SEC’s investigation into the Sokol matter fulfills part of the agency’s role of discouraging financial misconduct, sending the message, “Think twice, because we’re watching.”
The case also makes clear that company ethics policies can be tougher than the law itself.
“The guy can’t go to jail for it, and he shouldn’t,” said Keith Darcy, executive director of the Ethics & Compliance Officer Association in Waltham, Mass. “But the (Berkshire) board decided he had failed to meet their high standards of conduct.”
Sokol resigned from Berkshire in 2011, saying his resignation was voluntary. Soon after, a Berkshire board report said he had violated company policy that requires candor by executives about their stock trading and may have violated his fiduciary duty to Berkshire.
Buffett, chairman and CEO of Berkshire, said when Sokol resigned that he believed Sokol did nothing illegal but later called Sokol’s actions “inexplicable and inexcusable.” Buffett has talked informally with SEC investigators about the matter.
Buffett did not respond to a request for comment Friday from The World-Herald.
Sokol, a former top executive who had served in troubleshooting roles at Berkshire, also declined a World-Herald request for comment. But Sokol’s email to the Journal indicated the rift with Buffett remains:
“I will never understand why Mr. Buffett chose to hurt my family in such a way, but given that he is rapidly approaching his judgement [sic] day I will leave his verdict to a higher power.”
Neither Henning nor David Martin, a Washington, D.C., attorney who also formerly worked for the SEC, has direct knowledge of the Sokol case.
But from the facts that have been made public, they said Friday, it appears that federal attorneys either found Sokol didn’t violate the law or couldn’t prove he intentionally profited by trading in Lubrizol stock based on “material, nonpublic information” — the standard for illegal insider trading.
“This may be a textbook case of the system working, even though the SEC didn’t get a scalp for it,” Martin said. “But the SEC isn’t supposed to get scalps. They’re supposed to investigate claims and make appropriate decisions.”
In separate interviews, Martin and Henning said the facts in the Sokol case were known because his stock trades were “transparent,” with no apparent effort to hide his purchases or to “tip” other people about the possibility of Lubrizol being acquired by Berkshire.
“Sokol never denied it,” Henning said. “He admitted everything that went on. Was he completely above-board? You can argue that. But that’s a matter of corporate governance. That’s not insider trading.”
Martin said the length of the SEC investigation indicates that authorities interviewed people involved in the case and reviewed documents. It’s not clear whether the SEC staff or the commission itself made the decision.
To pursue action, the SEC would have had to prove Sokol’s intent or knowledge of wrongdoing. The SEC might have had to prove that Sokol intended to defraud sellers of the Lubrizol stock, who would be the “victims” in the case because they missed out on the higher-priced Berkshire purchase offer.
“Maybe he was aware that the company might be acquired but he didn’t intend to use that in connection with insider trading or to defraud anybody because he was not aware of whether it would be bought,” Martin said. “If he could show that his trades were not on the basis of material, nonpublic information because he wasn’t aware of that information, that’s a pretty good defense.”
The fact that Buffett alone decides on Berkshire’s acquisitions and keeps his intentions to himself as much as possible would support Sokol’s statement that he couldn’t have known Buffett’s plans, the attorneys said.
Proving trading based on material, nonpublic information also would require knowing what Buffett was thinking about Lubrizol at specific times related to Sokol’s stock purchases and on communications between the two men, the attorneys said.
“You could make the argument that any time Warren Buffett shows even the slightest interest, that that’s material information, but I think that’s a fight that the SEC doesn’t want to make,” Henning said.
The case surely would have ended up in court, with attorneys exploring questions such as how many potential acquisitions Buffett considers, and discards, in a year, Henning said. “A lot would have ridden on Buffett’s testimony” on what he was thinking about Lubrizol on certain days and times.
There has been no indication that Sokol or anyone else tried to cover up the trades or to hide records about the discussions leading up to the Lubrizol purchase, Martin said. Often, a cover-up can bring penalties at least as serious as the original infraction.
Sokol no doubt had passed along other acquisition ideas to Buffett and nothing happened, Henning said. “When the SEC puts it all together, this was all done above-board, and it’s questionable whether this is material information.”
The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.
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