Getting Sokol Right From Day One

January 4, 2013

David Sokol of MidAmerican Energy at Berkshire...

David Sokol of MidAmerican Energy at Berkshire Hathaway Meeting 2009 (Photo credit: mikebaudio)

According to press reports, the Securities And Exchange Commission has decided to not take action against David Sokol. That's the same fellow who many thought was Berkshire HathawayWarren Buffet's heir apparent; however,  in 2011, Buffet said that Sokol had violated the company's insider trading policies when he was purportedly touting Buffet on Lubrizol at the same time he was personally loading up on shares of the chemicals maker.

In 2011, when everyone was guaranteeing that Sokol would be prosecuted for insider trading, I stepped back from all of that piling on and gave the allegations in the press a lawyer's more considered once-over.  It's nice to know that at the time I had the courage of my convictions and spelled out my reservations in The Supreme Court's Smell Test: Buffett, Sokol, Becker and Zicam? ("Street Sweeper" April 1, 2011):

[F]or starters, anyone who is asserting for a fact that David Sokol violated the federal securities anti-fraud laws is, well, okay, you come up with a euphemism for "idiot."  These anti-fraud cases are fact-specific and frequently require a detailed inquiry as to who, what, when, where, and why.

Based upon the sparse facts presently before us, there is no way for anyone to make an assertion, pro or con, as to whether the purchases of Lubrizol by Sokol were material events. Similarly, whether a reasonable investor would deem that Sokol acted with the scienter to defraud is also beyond any present credible legal analysis because we know  too few facts concerning the transaction.  As of today, we're only scratching the threshold surface of an anti-fraud analysis.

While I agree with the proposition many experts have voiced that the cited conduct would likely be a violation if the parties were stockbrokers or if Berkshire Hathaway was an SEC-registered brokerage firm, the fact is that this transaction did not occur between a stockbroker and his/her client.  Which reminds me of that wonderful line: If my aunt were a man, she'd be my uncle.

For me, Sokol's conduct (and, frankly, that of Berkshire Hathaway) doesn't pass the stink test. It looks wrong. It feels wrong.  It's something that Berkshire's internal policies should have required be disclosed, in writing, and retained in the records attendant to making the decision to buy or not to buy a given pitched investment by a Berkshire insider.

However, as most veteran lawyers will tell you, there is ethics and there is illegal; and those two considerations are very different. Moreover, within the context of business where folks and companies are always trying to get an edge on the competition, the game isn't always played fairly. In the scrum, a lot of nasty stuff goes on.

Alex Rodriguez may run across the opposing pitcher's mound in the middle of a game. It ain't nice according to some unwritten code. However, it ain't illegal.  Whether David Sokol merely ran across the mound remains to be seen.  I'll leave it to plaintiffs' lawyers and regulators to figure that one out. . .