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Top 15 Business News Stories of 2011

Buffett Embarrassed
Warren Buffett

It wasn't until the second page, sixth paragraph of the Warren Buffett letter released to the press late on the afternoon of March 30 that the circumstances surrounding the surprise resignation of Berkshire Hathaway (BRK.B) CEO heir apparent David Sokol became clear.

"That brings us to our second set of facts," the sixth paragraph of the Buffett letter began. "In our first talk about Lubrizol, Dave mentioned that he owned stock in the company."

David Sokol

On March 14, Berkshire Hathaway had announced its $9.7 billion acquisition of chemicals company Lubrizol. It was an idea that Sokol, head of Buffett's utility business MidAmerican Energy, had first suggested to Buffett in January. It was also a stock in which Sokol had traded. On Jan. 5, 6 and 7, Sokol purchased 96,060 shares of Lubrizol, one week before he pitched it as an acquisition to Buffett.

If Buffett was hoping that insider trading allegations wouldn't stick if he buried the actual circumstances leading to the Sokol resignation in the second page of the release, he was sorely mistaken. Sokol's Lubrizol trades was the lead, and it was the Berkshire Hathaway story that spiraled out of spin master Buffett's control in 2011.

In closing the letter of March 30, Buffett made a claim that would later come back to show how badly he misjudged the public reaction to the Sokol resignation: "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."

The questions didn't go away, and Buffett was forced to say plenty more about the Sokol resignation before the headlines dissipated. In fact, the usual lovefest of Buffett investing faithful otherwise known as the Berkshire Hathaway annual meeting became high noon in Buffett's defense of his handling of the Sokol situation in early May.

Buffett and his right-hand man Charlie Munger made the case that they didn't want to throw Sokol under the bus when issuing the original release. "What I think bothers some people is that there wasn't some big sense of outrage in the release. I plead guilty to that. This fellow had done a lot of good," Buffett told shareholders. Munger added, "You can always tell a man to go to hell tomorrow." Which they proceeded to do at the annual meeting, when Buffett referred to Sokol's actions as "inexplicable and inexcusable," and a violation of Buffett and Berkshire principles.

As a matter of insider trading, the Sokol Lubrizol purchases remain a gray area. No charges have been brought against the former Berkshire Hathaway executive. As a matter of Berkshire internal controls, or lack thereof, and CEO succession planning, the press and public lost interest in pursuing the story. As for Buffett's mastery of Berkshire Hathaway's public image, the would-be standard bearer of capital markets integrity, his handling of the Sokol situation is a more complicated matter, even if the press called off the dogs after Buffett and Munger's annual meeting "mistakes were made" mea culpa.

Buffett famously said in testimony he was forced to give before Congress after being embroiled in the Salomon Brothers Treasury securities scandal of 1991, "After they first obey all rules, I then want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper, to be read by their spouses, children, and friends, with the reporting done by an informed and critical reporter. If they follow this test, they need not fear my other message to them: Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless."

He was ultimately ruthless with Sokol, but 2011 ended without an exact measurement of how the shreds of reputation lost were split between Buffett and Sokol. -- Eric Rosenbaum

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