Legal News

Did Berkshire?s Sokol Violate Insider Trading Law?

By Nathan Koppel

We begin today with a deeper dive into the controversy surrounding David Sokol, the Berkshire Hathaway executive who announced his resignation Wednesday.

Sokol, to recap, bought about 100,000 shares of chemicals concern Lubrizol shortly before he suggested to Warren Buffett that Berkshire consider acquiring the company.

Berkshire eventually offered $9 billion for Lubrizol, which led to a run-up in Lubrizol’s stock price and a tidy gain for Sokol.

Did Sokol trade on material, nonpublic information?  That would be the prime question to answer in a regulatory inquiry of  Sokol. The SEC is likely to investigate, WSJ reports.

Sokol and Buffett have both denied wrongdoing, and securities experts say it will be difficult to prove that Sokol violated securities laws.

Weeks before his stock purchase, Sokol asked Citigroup bankers to reach out to Lubrizol about a possible acquisition by Berkshire, the New York Times reports. Regulators could view the fact that bankers had reached out to Lubrizol about a possible deal to be nonpublic information, according to the Times.

But if that information is deemed confidential would it be viewed as “material,” or of relevance to the average investor? News of possible acquisitions by Warren Buffett, the Times notes, do carry considerable weight with investors.

Still, Sokol didn’t approach Buffett about Lubrizol until after Sokol had already purchased shares, so Sokol can reasonably contend he had no idea whether Buffett would be interested.

“On the surface, it would be hard to say that he illegally traded on inside information," Paul Atkins, a former SEC commissioner, told Bloomberg in this piece.

Another issue, of course, is whether Sokol violated more general rules of business ethics, and particularly whether he faced conflicts by recommending a business venture in which he stood to personally gain.

Robert Heim, a former assistant regional director of the SEC's New York office, told Bloomberg that Sokol exercised poor judgment by purchasing a stock that he later brought to Buffett’s attention. “An executive like Mr. Sokol is not permitted to use information that he gained during the course of his employment for personal financial gain," Heim said.

Full post as published by Law Blog - WSJ.com on April 01, 2011 (boomark / email).