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Sokol and ethics question

Had Sokol been a charter holder, would he have been pulled up for Lubrizol?

He did make a “passing remark” to a very sophisticated buyer, before suggesting the investment.

Thanks

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Yeah I don’t think a passing remark is good enough. He should have documented it. Also there is probably some issue with when he bought it. I think he bought / sold and bought relatively recently. By this time he must have known it was a target.

Buffet said it probably wasn’t illegal. I’m guessing that is a euphemism for “unethical.”

Don’t worry though cfa-Bombay, in India front-running your boss and clients is totally ethical so long as it benefits you, and by extension your family :-). So are theft, murder, and bribery.

No Homo

“What people are missing is in plain sight: Sokol bought the stock with a “free option” not available to the public. If WB bit and bid for LZ, Sokol wins big (whether the likelihood was 5% or 50% does not matter), but if WB did not bite and passed, then Sokol would have non-public information that BRK would NOT be interested in LZ. In the latter hypothetical, any sale of LZ shares would then be an insider trade. A win/win situation for Sokol - last I checked, those are not available to the public.”

___________________________________________________
ChickenTikka Wrote:
-------------------------------------------------------
> Being Born Wealthy > Being Jewish or WASPY > Born
> Pretty > Top 5 MBA > CFA > Avg MBA > Born middle
> class > Born lower

As a huge Buffett fanboy (he’s part of the reason I was drawn to investment research and value investing as a career), I’m really, really, really, really disappointed. There’s zero excuse for what Sokol did - the guy’s been paid $24mm over the last three years, and just destroyed his reputation for a measly $3mm bucks. Supposedly he divulged ownership to Buffett before Buffett decided to buy LZ, but my suspicion is that the full details of how much he owned and how fast/recently he had purchased it weren’t disclosed.

Buffett’s response is what disappoints me. He doesn’t have to vilify Sokol - they’ve got 15+ years of working together - but he shouldn’t be afraid to say, “Yeah, you know what - this was wrong. Sokol’s no longer with the firm as a result.”

I’m reminded of how different his spiel was when he temporarily took the helm of Solomon Brothers. “Lose money for the firm - even a lot of money - and I will be generous. Lose a shred of reputation for the firm, and I will be ruthless…Anything near the line should be called ‘out’.”

It’s kinda sad to see how weak his response (not to mention Sokol’s own) has been in response to this when you compare it to some of his writings/sayings on business ethics. Le sigh.

I think this looks worse than it really is.

I don’t understand why Sokol doesn’t just donate the 3 bucks to charity. It’s not like he needs the money, and his legacy is at stake.

ASSet_MANagement Wrote:
——————————————————-
> In the latter hypothetical, any sale of LZ
> shares would then be an insider trade.

Also, this is debatable. While that info is non-public certainly, is it material? I.e. would announcing that BRK was not interested in buying LZ have moved the stock? I don’t think anyone was expecting BRK to buy LZ, so probably not…

I don’t see what is unethical. He bought the shares before he knew that Buffet was going to buy them.

Even if he bought them after he knew that Buffet was going to buy them, is that material? Unless that bid has already been accepted, I don’t see how it would be material info.

justin88 Wrote:
——————————————————-
> ASSet_MANagement Wrote:
> ————————————————–
> —–
> > In the latter hypothetical, any sale of LZ
> > shares would then be an insider trade.
>
> Also, this is debatable. While that info is
> non-public certainly, is it material? I.e. would
> announcing that BRK was not interested in buying
> LZ have moved the stock? I don’t think anyone was
> expecting BRK to buy LZ, so probably not…

The rationale there is that the market would have percieved it to not have the fundamentals that BRK looks for in a stock and probably would’ve pushed it lower.

___________________________________________________
ChickenTikka Wrote:
-------------------------------------------------------
> Being Born Wealthy > Being Jewish or WASPY > Born
> Pretty > Top 5 MBA > CFA > Avg MBA > Born middle
> class > Born lower

Instead of just an off-hand remark that he owns shares, he should have disclosed his purchases to Buffett before the board voted. If he had done that, I think it would be a non-issue. As it is, a bit tricky.

I don’t think its illegal per se, but I do think he had an ethical obligation to disclose what he did (even if it didn’t influence Buffett’s decision, which I believe). If Buffett didn’t need to care about legal problems, he would do the calculus of what is the benefit of keeping Sokol around vs. bad press and perhaps a diminished opinion of how capable Sokol is. I think even if Buffett reduced his opinion of Sokol, Sokol is still a talented enough executive that he would have created far more value for Berkshire by staying around (compared to a replacement) than the bad press would have generated.

However, it could be that Buffett was thinking of having Sokol be the next CEO before and now due to the reduced opinion of him, he would not. Then, Sokol might want to leave even if Buffett had wanted him to stay.

Palantir Wrote:
——————————————————-
> Even if he bought them after he knew that Buffet
> was going to buy them, is that material? Unless
> that bid has already been accepted, I don’t see
> how it would be material info.

Lol, of course that’s material. The stock jumped 25% when it was announced…

ASSet_MANagement Wrote:
——————————————————-
> The rationale there is that the market would have
> percieved it to not have the fundamentals that BRK
> looks for in a stock and probably would’ve pushed
> it lower.

I don’t think it would sell off on news like that; it’s not like they were already in talks or someone else had put in a bid.

jmh530 Wrote:
——————————————————-
> Instead of just an off-hand remark that he owns
> shares, he should have disclosed his purchases to
> Buffett before the board voted. If he had done
> that, I think it would be a non-issue. As it is, a
> bit tricky.

One would think that BRK has the same trading restrictions / required disclosures that every other bank/fund compliance department enforces. If they didn’t before, they will soon…

Buffett/Munger had to have known. Perhaps they just misjudged how the public would perceive it.

jmh530 Wrote:
——————————————————-
> Instead of just an off-hand remark that he owns
> shares, he should have disclosed his purchases to
> Buffett before the board voted. If he had done
> that, I think it would be a non-issue. As it is, a
> bit tricky.

One would think that BRK has the same trading restrictions / required disclosures that every other bank/fund compliance department enforces. If they didn’t before, they will soon…

Buffett/Munger had to have known. Perhaps they just misjudged how the public would perceive it.

.

i dont get why this is so debatable …………its definitely unethical no matter how u slice it………..

he identified a stock with upside potential that may or may not be interesting to buffet …………as a employee of berkshire his loyalty lies to present the investment idea to the firm and give the shareholders an opportunity to pass/take the offer.
instead he kept the idea to himself and bought on two separate occasions the stock before presenting to Buffet after which he sold to make a profit ( irrelevant here but why did he sell)…………..at the very least he engaged in front running

this plus the points the Ass_Man brings up is a huge disappointment. Buffets model of management only works when you have highly ethcal managers of which sokol is not one ( based on his interview on CNBc the following morning defending his actions)………………..also methinks Buffet was too beholden to Sokol in his letter explanation……

Hope this helps

justin88 Wrote:
——————————————————-
> ASSet_MANagement Wrote:
> ————————————————–
> —–
> > The rationale there is that the market would
> have
> > percieved it to not have the fundamentals that
> BRK
> > looks for in a stock and probably would’ve
> pushed
> > it lower.
>
> I don’t think it would sell off on news like that;
> it’s not like they were already in talks or
> someone else had put in a bid.

But the WB but riders would take it as the company not having ANY redeeming value attributes. I wouldn’t underestimate how stupid people can be.

___________________________________________________
ChickenTikka Wrote:
-------------------------------------------------------
> Being Born Wealthy > Being Jewish or WASPY > Born
> Pretty > Top 5 MBA > CFA > Avg MBA > Born middle
> class > Born lower

I am a lawyer and, in my opinion, if you buy shares in a company knowing that you are going to recommend to your boss, Warren Buffet, who you also so know will take seriously and consider acting on your recommendation, that he buy all of that company, that is clearly insider trading. The relevant law enforcement authorities may decide not to prosecute Sokol, but it won’t be because he isn’t guilty of insider trading based on the facts as I’ve seen them presented.

This isn’t the best-written piece but the substance of it is pretty spot on:

http://www.nytimes.com/2011/04/02/opinion/02nocera.html

This particular episode unfortunately makes Buffet look like an old crank and his deputy Sokol like a somewhat younger crank.

Palantir Wrote:
——————————————————-
> I don’t see what is unethical. He bought the
> shares before he knew that Buffet was going to buy
> them.
>
> Even if he bought them after he knew that Buffet
> was going to buy them, is that material? Unless
> that bid has already been accepted, I don’t see
> how it would be material info.

are u serious?

Hope this helps

Sorry, I’m not good at ethics. I thought Rajaratnam and Gupta were ok too.

^ right on Palantir, in South Asia it’s unethical not to make as much money as possible.

No Homo

What about his remark that if he had to do it over again, he would have still bought the shares but not suggested it to Buffett?

That’s terrible. Buffett thought he could trust this guy.

Just goes to show when you make a mistake it’s best to own up to it. Sokol should have just said, “It was a lack a judgement on my part and I should have known better. I’m sorry if my actions let anyone down.” But no he has too much vanity to do that.

Just look at Andy Petitte and Giambi vs Clemons and Bonds.

The more I think of it, the more it seems that Sokol was wrong - legally & ethically. More anecdotal evidence to suggest that the comment was left to be a passing comment only. Pretty stupid on the part of Sokol, because he has lost more.

But, greater damage has been done to WB, by actually saying what he said. It’s probably still not too late for him to take further steps.

I spoke to friends and clearly most places have a compliance system around staff trading. The regulator here also has clear rules around this.

Surprising and sad that such a large player in capital markets (BRK) does not have a formal staff holdings/ trading declaration system. It seems it does not fall into definition of an AMC, yet it’s main activity is equity investment in businesses. Does BRK fall under any of the SEC rules?

It’s main activity isn’t equity investment, it’s insurance. Not an investment company.

Palantir Wrote:
——————————————————-
> It’s main activity isn’t equity investment, it’s
> insurance. Not an investment company.

Ok. So is it regulated by an insurance regulator?

I know IRDA has clear clause on staff trades.

Palantir Wrote:
——————————————————-
> It’s main activity isn’t equity investment, it’s
> insurance. Not an investment company.

I can only assume you’re now trolling us. Stop it.

ChickenTikka Wrote:
——————————————————-
>
> Don’t worry though cfa-Bombay, in India
> front-running your boss and clients is totally
> ethical so long as it benefits you, and by
> extension your family :-). So are theft, murder,
> and bribery.

>^ right on Palantir, in South Asia it’s unethical not to make as much money as possible.

Ha Ha !

Your confidence in the above statement makes my right brain go “Aha ! that’s the reason why he is here .. in India” and then my left brain adds “Ainvayi !”

You got it!

No Homo

http://dealbook.nytimes.com/2011/04/05/the-private-equity-parallels-with...

“… private equity deal-makers argue that if the same fact pattern involving Mr. Sokol was perpetrated by an executive at one their firms, the story would end very badly.”

“When DealBook asked several lawyers about these facts — replacing Berkshire with Blackstone — they all said this would likely form the basis of an insider trading charge. (They also say that under the insider trading laws, it would not matter whether Blackstone ultimately acquired the industrial company.)”

“What also perplexes private equity deal-makers about the Sokol situation is that Berkshire did not seem to have the proper procedures in the place to protect against this. Buyout firms like Blackstone, Kohlberg Kravis Roberts and the Carlyle Group have strict compliance rules regarding personal trading by company executives.”

Bump.

To whoever is in doubt (I expect a limited few anyway) about Sokol, see example 9 on page 129-130 of book 1. (level 3)

................................................................................................................We either make ourselves miserable or we make ourselves strong, the amount of work is the same.