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Buffett heir apparent quits after stock purchases
Reuters


NEW YORK (Reuters) - The man widely seen as the leading successor to
Warren Buffett at Berkshire Hathaway (BRKa.N) has resigned after
buying shares in chemical company Lubrizol Corp (LZ.N) before pushing
Buffett to acquire it.


David Sokol's resignation is a reputational blow for Buffett, the 80-
year-old "Oracle of Omaha," who prides himself on his folksy fair-
dealing image and handpicks managers who can run businesses in a
similarly transparent manner.

"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 he did not think Sokol broke the law and that Sokol
resigned because he wanted to create a family business of his own and
devote more resources to philanthropy.

Nonetheless, the sequence of events raises questions about conflicts
of interest and the strength of Berkshire's internal controls.

Berkshire's actively traded Class B shares fell 3 percent after-hours.

Buffett said on Wednesday that Sokol bought shares of Lubrizol last
December, sold them, then bought more shares in early January.

Sokol subsequently presented Buffett with the idea of buying the
company, and made what Buffett called a "passing remark" that he owned
some Lubrizol stock. Buffett said he did not probe Sokol's stock
ownership further.

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.

Sokol defended himself in an interview with Fox Business that ran late
Wednesday.

"There was no inside information. The only reason Warren Buffett
mentioned it in the release is because it would have to be brought up
anyway when Berkshire put the purchase up for a vote. It's a
disclosure issue," he said.

SURPRISE MOVE

Buffett took pains in his statement Wednesday to make clear that he
did not fire Sokol, and that Sokol offered his resignation after
having asked twice before in recent years to retire. Buffett said he
discovered the extent of Sokol's Lubrizol holdings on March 19, but
insisted the March 28 resignation came as a surprise.

Nonetheless, a recent regulatory filing by Lubrizol makes clear Sokol
had the idea of buying Lubrizol well before taking it to Buffett.

Lubrizol said Sokol had a meeting with bankers at Citigroup on
December 13, 2010, at which they discussed a list of 18 companies Citi
had compiled for Sokol as potential acquisition targets. According to
Lubrizol, Sokol told the Citi bankers that Lubrizol was the only name
on the list he liked.

The next day, according to Buffett's statement, Sokol began buying
stock. Sokol eventually presented the idea of buying Lubrizol to
Buffett on January 14 or 15.

Buffett said he was originally not in favor of the idea of buying
Lubrizol but warmed to it after Sokol told him of a January 25
conversation with Lubrizol's chief executive. Berkshire ultimately
announced its purchase of Lubrizol for $135 per share, a 28 percent
premium, on March 14.

LIABILITY

John Coffee, a Columbia University law professor, called the
disclosure "embarrassing" for Berkshire.

"It's the kind of behavior that, as a matter of corporate governance,
sophisticated companies try to avoid," he added.

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."

One securities lawyer, who spoke on condition of anonymity because his
firm does not permit staff to speak to the media publicly, said he
could "see reasons for Buffett to be annoyed" but did not see a crime
in what happened.

"ENORMOUSLY TALENTED"

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.

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."

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.

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, Phil Berlowitz, Gary Hill)