
Give the Money to Charity, Sokol!
NEW YORK (
) -- Aside from being the most famous American investor and the world's third richest man, Warren Buffett, CEO of
Berkshire Hathaway
(BRK.B) - Get Report
, is synonymous with two ideals of capitalism that not all of the world's titans can claim as primary pillars of their public image: a level of moral authority that rises above the typical Wall Street ethos, and philanthropy as a majority beneficiary of profit-making.
>>Top 12 Most-Big-Hearted Billionaires
In light of the image that Warren Buffett has created and fostered in the public of a CEO and a company that has the right to chastise Wall Street whenever he and Berkshire feel like it --as well as asserting his right to call on his fellow world's richest to give away their fortunes to charity -- there is really only one proper move for David Sokol to make in regards to his Lubrizol trades, and it's not to give the money to Berkshire Hathaway: give the reportedly $3 million in profits to charity.
The market has been busy reallocating Sokol's Lubrizol trade profits on Thursday, with suggestions being made that the money should be paid to Berkshire Hathaway shareholders because Sokol came upon the investment as part of his due diligence work for Berkshire Hathaway. What's more, Sokol bought the Lubrizol shares at a much better price than the premium at which Buffett would ultimately agree to buy the company -- Sokol had a $104 limit on his Lubrizol order and Berkshire Hathaway agreed to buy the company for $135 per share, booking a tidy profit for Sokol.
Why should anyone or any company profit, whether it is Sokol or Berkshire Hathaway, from a trade if the trade itself is dubious in nature?
Sokol himself is big on philanthropy like his boss Warren Buffett, and said in his resignation letter that a primary reason for leaving Berkshire Hathaway was to pursue his personal investing interests and ultimately fund philanthropic endeavors. Why wait? He close out the Lubrizol trade now and wash his hands of the money by at least putting it to some good use, maybe donating $3 million to a non-profit focused on investor protection.
Sokol took to the airwaves on Thursday to defend himself against the rumblings that grew louder in the aftermath of his resignation and the disclosures by Berkshire Hathaway that Sokol had made significant trades in Lubrizol before recommending that Buffett take a look at the company as a potential acquisition.
>>Berkshire Hathaway's Sokol Resigns
Even if Warren Buffett and David Sokol say that there was nothing unlawful about Sokol's trades in Lubrizol, Sokol admitted on
CNBC
on Thursday that if he had to do it all over again, he would not have recommended that Warren Buffett take a look at Lubrizol. Which is fine, of course, except that he
did
mention it and now has to deal with the consequences.
Sokol also used as part of his defense that rarely in the past had Buffett followed through on an acquisition that he had suggested -- though frankly, that fails the test of any decent high school debate team logic. Just because Buffett had not approved Sokol's takeover ideas in the past doesn't mean Buffett wouldn't in the future, and if Buffett approving a deal would make Sokol's trading activity questionable, then Sokol shouldn't be doing one or the other. Sokol should have erred on the side of caution if there were any chance that Buffett might buy a company he was actively trading in.
Buffett said of the series of Lubrizol trades made by Sokol, "Dave's purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea. In addition, of course, he did not know what Lubrizol's reaction would be if I developed an interest. Furthermore, he knew he would have no voice in Berkshire's decision once he suggested the idea; it would be up to me and Charlie Munger, subject to ratification."
All logical enough, and in the opinion of Buffett and Sokol, without any hint of illegality. However, do any of these logical statements remove the issue of Sokol suggesting an acquisition to Buffett of a company he had recently purchased a significant stake in, and that resulted in a very profitable short-term trade for his private investment portfolio once Berkshire did acquire the company?
Sokol added on
CNBC
that the deal went through so quickly it was unusual as far as Berkshire acquisition process. Maybe so, but even so, how would the speed with which Buffett executed on the transaction change the issue of Sokol's trading in Lubrizol shares and recommendation that Buffett take a look at the company? By Sokol's logic, if Buffett had only waited a few more months to acquire Lubrizol, the public wouldn't even be having this discussion. Really?
The argument could be made that if Sokol were to give the profits from the Lubrizol trade away to charity, it would be an admission of guilt. It wouldn't. It would be a very Buffett thing to do: admitting a mistake, being humble and, in the end, adhering to a higher level of the capitalist ethos than the public, at least these days, affords to the country's most rich and powerful.
The argument can also be made that Warren Buffett has never been shy in the past about standing up for his colleagues and peers when he feels they are being unjustly maligned by the public, and regulators. (Sokol said on
CNBC
he had not been contacted by the Securities and Exchange Commission regarding his trades in Lubrizol.)
Look at the example of
Goldman Sachs
(GS) - Get Report
, where Buffett not only took to
CNBC
to say that the firm had done nothing wrong with its series of Abacus investments, but used the bully pulpit of the Berkshire Hathaway annual meeting last year to wave around Goldman Abacus deal sheets and say that Goldman hadn't done a thing wrong. He went so far as to say that Goldman Sachs CEO Lloyd Blankfein was the twin brother he never had, but wished he had. For those who didn't vomit at that comment, they might at least note that today Buffett isn't signing any adoption papers for David Sokol.
Yet the Sokol issue hits closer to home. It may not be a breach of Berkshire Hathaway's code of conduct, but it's certainly a gray area when a Berkshire insider is both recommending an acquisition target and investing in shares of the company which Berkshire could soon thereafter acquire in a bid that would raise the value of those shares. Sokol makes the case the since he had no power at Berkshire Hathaway to approve an acquisition (other than acquisitions specific to the subsidiaries he managed, like NetJets), or buy and sell shares in any stocks on behalf of Berkshire, there is nothing wrong with managing money for his family while at the same time executing on his responsibilities as a Berkshire employee, even when they overlap.
Even if it's an innocent case of Sokol seeing a good investment for his family -- and, at the same time, feeling compelled as a Berkshire manager to recommend good acquisition candidates -- Sokol is right in one respect: once he began trading in Lubrizol shares, he shouldn't have ever mentioned it to Warren Buffett as a potential acquisition.
Berkshire Hathaway shouldn't be about the fact that Buffett and Sokol can use gray areas in the law to protect themselves from the appearance of impropriety. If Berkshire Hathaway is to be different from other companies, and have the right -- which Buffett seems to feel it has earned -- to serve as a moral authority in the capitalist world, then it's avoiding any appearance of impropriety, just the appearance, that should be Buffett's and Berkshire's idea of best practice.
Buffett made it clear in the Sokol resignation release that he will not be elaborating on the matter, writing, "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 Oracle of Omaha either protests too much or too little. When it was Goldman Sachs, Buffett couldn't spend enough time defending the company from the SEC investigation. When it's in his own Omaha backyard and involves trading by one of his top lieutenants in a company that the lieutenant had recommended Berkshire acquire, it's one press release and out for the usually loquacious Oracle.
Buffett and Sokol may wish the questions away with their conviction that nothing illegal or unethical was done, but if that's the best of Berkshire Hathaway, its best is just another company that skirts the line with its insider stance in the world of the capitalist elite, as opposed to setting the line for other companies. Every time Bufettt talks with disdain about high-priced investment bankers -- the same bankers, notably, who prepared the list of companies for Sokol that first highlighted Lubrizol as a potential acquisition -- and every time that Buffett right hand man Charlie Munger pens one of his odes to "old school" American capitalism and the halcyon days of better, more moral men -- think back to last year's
Salon.com
piece on the
Sorrowland
world of derivatives trading -- the moral high ground that Buffett has staked out loses a little of its altitude.
If Sokol were to give the $3 million in profits away to charity, it wouldn't be an admission of guilt, and it might be going the extra mile in terms of removing any stain from the Berkshire Lubrizol acquisition and his involvement -- something neither he nor Buffett feels should be there in the first place. However, it would be a very Buffett thing to do, in many more ways than the successfully skirting the line of Wall Street impropriety should be what Buffett and Berkshire are about.
Taking such a Buffett-like action won't do anything to answer the legal questions related to insider trading, but it would at least be a sign from Sokol that he'd like this issue to go away sooner rather than later, which is, after all, why Sokol and Berkshire Hathaway said they disclosed his trades in the first place.
It doesn't look like it's going away, and maybe the public would be more charitable toward Buffett and Sokol, if Sokol was more charitable with his questionable Lubrizol gains. It would at least be part of a more humble stance from Sokol than was evident on
CNBC
, where contrition was lacking. Sokol's main concession -- that if he had to do it all over again he wouldn't have told Buffett about Lubrizol -- was about as pathetic as an admission of mistakes can get, at least on the surface, as it implies that he would prioritize his personal profits over his responsibilities to Berkshire.
So give the $3 million to charity Sokol. Buffett said in the press release about your resignation that he will have no more to say about this matter, but he could probably recommend a few good philanthropic causes where $3 million might come in handy.
-- Written by Eric Rosenbaum from New York.
RELATED STORIES:
>>Berkshire Hathaway's Sokol Resigns
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