Berkshire Audit Report: David Sokol’s Trading Violated Company Insider Trading Policies and Procedures

Wednesday, 27 April, 2011

Today Berkshire Hathaway‘s Audit Committee released its report, “Trading in Lubrizol Corporation Shares by David Sokol” (PDF file). Have a read. Here is a notable paragraph,

“Mr. Sokol’s answer to Berkshire Hathaway’s CFO, Mr. Hamburg, concerning the investment bankers similarly fell short of the degree of candor required of a corporate fiduciary, and suggests his answer to Mr. Buffett’s earlier inquiry noted above was intended to deceive.

Check out what Alice is saying in “World Learns New Facts Showing Buffett Was Misled” (here is an excerpt),

“However, upon several readings of this release, there do not appear to be *any* new significant facts that were unknown to Berkshire on March 30th when its initial press release was issued. These facts are only *new* to those of us who are reading the audit committee report “

and “Sokol Fights Back Round 1“.

Here are some notable media reports.

Bloomberg (Alice Schroeder), “Buffett Disciples Want ‘Oracle’ to Come Clean” [Apr 28 update] Highly recommended reading. Have a watch of Alice’s Bloomberg video interview. Here is an excerpt from the article (emphasis added),

“The problem isn’t the about-face. It is the missing explanation for why Berkshire went so easy on Sokol in the first place. Whatever the detailed reasons, ultimately it boils down to Berkshire’s reliance on Buffett’s personal judgment about his managers and his ability to delegate to them to the point of abdication. When this one-man infrastructure makes a mistake, it’s hard to admit that Buffett is at fault. Changes in the way the company is managed are personal, not corporate. Under the circumstances, the temptation is high to blame everything on a single rogue employee. That doesn’t excuse Sokol’s behavior, but the failure of oversight needs to be acknowledged and corrected. [...] Read the rest of this entry »


Biggest Canadian National Railway shareholder is …

Monday, 25 April, 2011

Who would have guessed, “Bill Gates now biggest CN shareholder“?

“Microsoft co-founder Bill Gates is the largest shareholder in Montreal-based Canadian National Railway, according to disclosures released ahead of the company’s annual meeting on Wednesday.

The world’s second-richest man owned or control 10.04 per cent of its shares, worth $3.2 billion as of Feb. 25.

That’s based on CN’s closing share price of $70.16 Monday.

Gates has been building a position in Canada’s largest rail company since 2006.

A company proxy circular says he holds the 46.07 million shares through Cascade Investment and as co-trustee of the Bill & Melinda Gates Foundation Trust.”


Cisco shutdowns Flip Video

Tuesday, 12 April, 2011

Cisco kills Flip Video - pix 2

Today, on April 12th, 2011, Cisco shutdowns its consumer video division Flip.

 

Cisco kills Flip Video - pix 1

Barrage of questions for Warren Buffett at this month at Berkshire Hathaway’s annual meeting?

Friday, 8 April, 2011

Have a read of Alice’s “Annual Meeting“,

“> Becky Quick. Has put away the pompoms. Taking a sober, detached and traditionally journalistic stance toward Berkshire/Sokol/Buffett.”

and Andrew’s “Buffett’s Ruthlessness Is Oddly Absent on Sokol” (here are two questions Andrew has, emphasis added).

“¶You have said that Mr. Sokol did not do anything “unlawful.” But Mr. Sokol bought shares of Lubrizol a day after he told Citigroup to indicate Berkshire’s interest in buying the company.

Why don’t you consider that “material” information, a crucial component of insider trading? Do you not believe that a Lubrizol shareholder would have considered such information important to their investment decision? Clearly Lubrizol felt that Mr. Sokol’s inquiry was material enough to hold a board meeting on Jan. 6, one day before Mr. Sokol bought almost $10 million of shares.

If Mr. Sokol was aware of Lubrizol’s board meeting, would you consider that material information? And if a news outlet had reported Mr. Sokol’s inquiry or Lubrizol’s decision to meet, do you not think that the price of Lubrizol’s shares would have risen?

Here is another way to think about it: If a Citigroup banker had bought shares of Lubrizol at the same time as Mr. Sokol, would you have considered that insider trading? Isn’t that the definition of insider trading? What did Mr. Sokol do that was different?

¶Berkshire has always been a very decentralized institution with only 21 of its 257,000 employees working at headquarters and each subsidiary left to its own devices. “Most of these managers are happiest when they are left alone to run their businesses, and that is customarily just how we leave them,” you recently wrote in the annual letter.

This structure might seem like a bastion of efficiency. But given Mr. Sokol’s possible transgressions, do you now think Berkshire needs more compliance programs and people to manage them?

P.S. I have never thought I would be tagging a post about Warren with “ethics” where I question if it is sadly missing.

Update: “Bloomberg Columnist Schroeder on Berkshire Holdings” (with video)


Whatever happened to Warren Buffett’s famous saying, “Lose a shred of reputation for the firm, and I will be ruthless”? – 96,400 free lottery tickets ($3 million winnings)

Thursday, 31 March, 2011

April 13th, 2011 Update: MarketWatch, “David Sokol knew of progress toward a possible Berkshire Hathaway Inc. bid for Lubrizol Corp. before he bought almost $10 million worth of stock in the lubricant company, according to a new regulatory filing.

April 1st, 2011 Update: “Sokol affair “credit negative” for Berkshire: Moody’s

Alice’s “Moody’s Weighs In on Sokol, Cites Succession Risk

***

As a fan of Warren Buffett, it saddens me to see David Sokol‘s surprise resignation, Warren’s press release about the resignation, and Sokol‘s CNBC appearance this morning. Seeing these and the many news reports today lead me to question if Warren has forgotten his saying as told in the 1996 book Buffett: The Making of An American Capitalist,

Lose money for my firm and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.

Alice Schroeder has become my “go-to” expert on all things Warren and Berkshire since she published Warren’s biography “Snowball” in 2008 and what I’ve learned of her as a reporter and as a person. I highly recommend you read Alice’s Bloomberg opinion piece, “Buffett Misses Chance to Show Moral Courage: Alice Schroeder” and her blog entry.

I think it is very important for someone like Alice to speak up and hold Warren accountable while his mind is still very sharp. I think Warren has set up some bad precedence for the next CEO. (Or may be this mess will paradoxically serve as what NOT to do?)

Here are excerpts from Alice’s opinion (emphasis added),

What were they thinking? How could Warren Buffett excuse David Sokol’s trading in Lubrizol Corp. (LZ) stock while Sokol was pitching the company to Berkshire Hathaway Inc. (BRK/A) as an acquisition candidate?

Buffett and Sokol both say that nothing “unlawful” was going on (Sokol even went so far as to tell CNBC he did nothing inappropriate). Their explanation is that, because a deal with Lubrizol hadn’t actually been struck and wasn’t likely when Sokol bought his shares, it was all right for Sokol to profit from his knowledge of a possible deal.

On Wall Street, we call this kind of trading front-running, and everybody knows that it is wrong. People get fired for doing it. [...]

Lottery Tickets

In substance, when Sokol pitched the deal to Buffett, he was holding stock in Lubrizol that had the equivalent of free lottery tickets attached. These 96,400 lottery tickets gave Sokol unfair odds — odds far better than in the kind of lottery the general public gets to play. Read the rest of this entry »


Warren Buffett’s (PR) nightmare – David Sokol’s surprise resignation and Buffett’s “unusual” statement

Thursday, 31 March, 2011

Update 1:07am MST, Apr 1, 2011: “CNBC TRANSCRIPT: David Sokol Defends His Controversial Lubrizol Stock Purchases

Update 8:57pm MST, March 31: Bloomberg, “Buffett Misses Chance to Show Moral Courage: Alice Schroeder

Update 9:17am MST: CNBC, “Sokol to CNBC: I Shouldn’t Have Told Buffett I Liked Lubrizol” (with extensive video interview of Sokol)

NYT DealBook entry after Sokol CNBC appearance, “The Perception of the Sokol Situation

Watch the CNBC Sokol interview first, Bloomberg TV interview, “Jeffrey Matthews Interview on Sokol, Buffett”

CNBC, “LIVE BLOG – David Sokol’s Live Interview on CNBC’s Squawk Box”

***

Today is not a good day for Warren Buffett or Berkshire Hathaway shareholders.

* Here is the unusual statement/official news release “Warren E. Buffett, CEO of Berkshire Hathaway – Announces the Resignation of David L. Sokol” (PDF file)

Paradoxically, the most damaging bit may be the second last paragraph, “I have held back nothing in this statement. Therefore, if questioned about this matter in the future, I will simply refer the questioner back to this release.” To me, this is in full prep mode to fight with lawyers (SEC lawyers, et al). A totally silence after issuing such an “unusual” statement is asking for serious headline news trouble! (see more excerpt at the end) I hope I am wrong here.

* NYT DealBook, “Abrupt Exit for a Top Deputy to Warren Buffett

* CNBC Warren Buffett Watch, “Surprise Resignation of Leading Buffett Successor Raises Unanswered Questions” (with video)

* More excerpt from the official news release,

“Finally, Dave brought the idea for purchasing Lubrizol to me on either January 14 or 15. Initially, I was unimpressed, but after his report of a January 25 talk with its CEO, James Hambrick, I quickly warmed to the idea. Though the offer to purchase was entirely my decision, supported by Berkshire’s Board on March 13, it would not have occurred without Dave’s early efforts. Read the rest of this entry »


Warren Buffett’s NetJets Orders Up To 120 Bombardier Global Business Jets

Wednesday, 2 March, 2011

From Reuters,

Bombardier Inc (BBDb.TO) has agreed to sell as many as 120 aircraft to Warren Buffett’s NetJets Inc in a deal that could earn it more than $6.7 billion.

The deal, consisting of a firm order of 50 jets and options to purchase a further 70, is the largest business aircraft sale for Bombardier, the world’s No. 3 civil aircraft maker after Airbus (EAD.PA) and Boeing (BA.N).

While airlines still account for the majority of corporate travel, many businesses are gradually returning to private planes. They are eager to avoid airport hassles, flight delays and other potential logistical snags associated with commercial flying.”

In the current economic climate, I think it is nice for Bombardier to have this deal. At the same time, I bet NetJets is getting a pretty good deal for the jets too. Alice Schroeder, Buffett’s biographer, wrote about NetJets earlier this week here and here before this deal. It will be interesting to hear what she has to say on this deal.

Now, here is a video clip of what Warren talking about the deal on CNBC (with transcript).

P.S. Warren has previous experience in airlines related investments. Since we are talking about a lot more money here, I hope it works out better (much better) this time around.

***

March 6th, 2011 Update: Financial Post, “Worldwide Private Aviation Leader NetJets Inc. Announces Purchase Agreement for Bombardier Business Aircraft” Here is an excerpt with emphasis and comment added. And yes, I was a bit of an idiot to miss it.

“The agreement includes a firm order from NetJets for 50 Global business jets valued at a retail price of $2.8 billion, with options for an additional 70 Global aircraft. The firm order comprises 30 Global 5000 Vision and Global Express XRS Vision aircraft, with deliveries scheduled to begin in the fourth quarter of 2012, as well as 20 firm orders for Bombardier’s newly-launched Global 7000 and Global 8000 jets, with deliveries of these aircraft to begin in 2017. At a total retail price exceeding $6.7B, this is the largest aircraft purchase agreement in the history of private aviation. Additional terms of the deal were not disclosed.”

[Kempton: First of all, how could I missed "retail price"?! You must be kidding me that Warren Buffett or CEO of NetJets David Sokol would pay retail price during a recession for jets! Therefore someheavy discounting is probably happening here. And the option for additional 70 jets, probably cost nothing or just a token amount.]


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