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”
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. […]
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.
It would be inexcusable for the chief executive officer of Berkshire Hathaway to front-run a potential acquisition this way. Why then, couldn’t the CEO of Berkshire admit it is inexcusable for one of his own senior managers to do so? Instead of condemning Sokol, Buffett gave him a pat on the back on the way out the door. Since when is it enough to merely uphold the letter of the law, especially at Berkshire? Whatever happened to Buffett’s famous saying, “Lose money and I will forgive you, but lose even a shred of reputation and I will be ruthless”?
It’s too bad that Buffett missed an opportunity to show moral courage, stand up for principle, reinforce to his employees what he expects from them, and, not least of all, to live up to his own public reputation.“
Also check out the Bloomberg video, “Atkins Interview on David Sokol’s Resignation”
NYT DealBook March 31, 9:46pm, “Buffett’s Handling of Deputy Baffles Some Experts”
On a personal note, it makes me a bit angry seeing someone taking cheap shots of Alice by writing the following.
“I don’t even disagree with most of her points. The problem I have is that if Alice opens her mouth about Warren something disparaging comes out. […]
Let me help you out Alice. Your book hurt Warren’s feelings. Now he isn’t so friendly towards you. Put yourself in his shoes and imagine someone writing a book about you and having the most embarrassing things you could possible imagine in it.
Now grow up and please get over it. He has helped make you a lot of money. And you are still feeding off of him. The man personally is leaving tens of billions of dollars to charity and is on a mission to convince billionaires around the world to do the same.
Maybe that should be the focus of your next article. I think it is slightly more important than the issues you focus on.”
I want to tell to this person, go read “Morgan Stanley: Stock Is Too Cheap to Sell” by Alice. If he thinks Alice is the type where her reporter’s integrity is up for sale, then he has Alice pegged wrong! My admiration of Alice went up by a thousand times after reading the following in Morgan Stanley (emphasis added),
“(UPDATE: A PR person from Morgan Stanley called Bloomberg and questioned whether they had a policy that would prohibit me from commenting on a former employer. The answer, of course is no, and the relationship was disclosed. I also turned down a package from Morgan Stanley last year that included a considerable amount of money, health care benefits, and some other things, rather than sign a confidentiality agreement that would have prohibited me from ever writing anything about the firm — anything — without their permission and that would have allowed them to sue me if I said or wrote anything they considered criticism of the firm, by their definition, which definition was not spelled out in the agreement.
There are valid reasons why corporations want these agreements, and why people at times sign them. I really don’t have any quarrel with Morgan Stanley wanting its ex-employees to sign NDAs. I respect people who refuse to sign them but don’t condemn those who do. As a journalist who might want to comment on Morgan Stanley in a meaningful way at some future date, I could not sign it myself.)“
Ask yourself, how many people can refuse a package from Morgan Stanley? I say not many!