Berkshire Shares Dip as SEC Weighs Investigation

(Updated from Wednesday, March 30, with comments from David Sokol, analysts, Berkshire Hathaway stock trading impact)

NEW YORK ( TheStreet) -- David Sokol, who resigned Wednesday as one of Warren Buffett's top lieutenants at Berkshire Hathaway ( BRK.B), said he wasn't looking to be the next Warren Buffett.

Yet the market reaction was one of surprise, and questions related to Sokol's trading in shares of Lubrizol ahead of Berkshire's purchase of the chemicals company in mid-March, a transaction in which Sokol played a key role, are reverberating through the markets and public court of opinion.

The Securities and Exchange Commission said on Thursday that it would look into the potential insider trading aspects of the Sokol trades in Lubrizol, though the SEC described the matter as not being "urgent," according to a report on CNBC. The Wall Street Journal had reported on Wednesday night that the SEC was looking into the Sokol Lubrizol trades, citing people "familiar with the matter."

Insider trading lawyers have indicated that major corporate transactions are routinely reviewed by regulators for potential insider trading.
David Sokol

Berkshire Hathaway B shares slid by roughly 2% on Thursday on heavy volume.

The resignation release Wednesday discussed at length trades that Sokol made in Lubrizol ( LZ), a company that Buffett would ultimately agree to acquire in mid-March, and which Sokol first suggested to Buffett as an acquisition candidate.

In an interview Thursday on CNBC, Sokol said the information about his purchases in Lubrizol were included in the news release for full disclosure to be "100% transparent."

Sokol was among the top candidates rumored as a potential replacement for Buffett as CEO of Berkshire Hathaway.

But in the interview Thursday, Sokol said he didn't aspire to be the CEO of Berkshire, but instead wanted to invest his family's money in a "mini-Berkshire."

Sokol ran what has become one of the cornerstones of Berkshire Hathaway's "capital intensive" business segment, MidAmerican Energy, and was credited by Buffett on countless occasions in recent years for also engineering the turnaround in the floundering business jet-leasing company NetJets. Buffett has also commended Sokol for overhauling Berkshire subsidiary Johns Manville, which he again noted in the resignation release.

There is a significant issue for Berkshire Hathaway shareholders in attempting to assign a stock value to the Buffett CEO succession issue.

Uncertainty about succession plans at Berkshire Hathaway have led to short-term declines in its shares in recent history.

Nevertheless, Sokol's role in Buffett's most recent big purchase, the $9 billion acquisition of Lubrizol -- identifying the company as a target and leading early negotiations -- is likely to be a larger focus.

In an ironic twist, Sokol's role in the Lubrizol deal was highlighted in the original press coverage of the $9 billion acquisition as a sign of his prominence within Berkshire Hathaway.

Buffett writes in the letter announcing Sokol's resignation, "In our first talk about Lubrizol, Dave mentioned that he owned stock in the company. It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings."

Buffett noted that on March 19 he learned that Sokol first purchased 2,300 shares of Lubrizol on Dec. 14, which he then sold on Dec. 21. Subsequently, on Jan. 5, 6 and 7, Sokol bought 96,060 shares pursuant to a 100,000-share order he had placed with a $104 per share limit price.

"Dave's purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea," the release said. "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 by the Berkshire Board of which Dave is not a member.

"Neither Dave nor I feel his Lubrizol purchases were in any way unlawful. He has told me that they were not a factor in his decision to resign," Buffett wrote in the resignation release.

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. Sokol added on CNBC that the deal went through so quickly it was unusual as far as Berkshire acquisition process.

Buffett stressed in the letter that "Dave's letter was a total surprise to me.... I had spoken with him the previous day about various operating matters and received no hint of his intention to resign. This time, however, I did not attempt to talk him out of his decision and accepted his resignation."

Sokol is quoted in his resignation letter as writing to Buffett, "As I have mentioned to you in the past, it is my goal to utilize the time remaining in my career to invest my family's resources in such a way as to create enduring equity value and hopefully an enterprise which will provide opportunity for my descendants and funding for my philanthropic interests. I have no more detailed plan than this because my obligations from Berkshire Hathaway have been my first and only business priority."

Buffett stressed that he "had not asked for his resignation, and it came as a surprise to me. Twice before, most recently two or so years ago, Dave had talked to me of resigning. In each case he had given me the same reasons that he laid out in his Monday letter. Both times, I and other Board members persuaded him to stay. Berkshire is far more valuable today because we were successful in those efforts."

Sokol said Thursday on CNBC that in the past Buffett has talked him out of resigning but didn't do so this time, adding he thought it was a mistake to remain at Berkshire the previous time he tried to leave.

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 resignation of Sokol, separate from the issue of Lubrizol stock purchases, is certain to raise concerns about the succession plan at Berkshire Hathaway to the extent that Sokol has been a staple of market chatter about potential replacements for Buffett. Buffett has always praised Sokol for his work at Berkshire, however, Buffett has never been specific about the CEO replacement, only saying that the Berkshire board knows his choice if a change were necessary today, and that succession planning has been a major issue at Berkshire Hathaway board meetings.

Other top candidates on the Warren Buffett CEO replacement watch are Ajit Jain, head of the Berkshire Hathaway national indemnity insurance business, and Matthew Rose, the head of Burlington Northern Sante Fe railroad. On his recent trip to India, Jain's country of origin, Buffett noted that the Berkshire board would support Jain as CEO if Jain decided to pursue the post.

Effective with Sokol's resignation, Greg Abel, presently president and CEO of MidAmerican Holding Co., will become its chairman; Todd Raba, president and CEO of Johns Manville, will become its chairman; and Jordan Hansell, president of NetJets, will become its chairman and CEO.

In a note on Thursday, Jay Gelb, analyst at Barclays Capital, assessed the Warren Buffett succession issue in a way that touched on both Sokol's role specifically, and the larger issue of Berkshire Hathaway after Buffett, writing, "In an unfavorable development for BRK shares, Warren Buffett today announced the surprise resignation of David Sokol, who was one of Mr. Buffett's top lieutenants and presumed successor. This announcement again highlights the key-man risk involved in investing in BRK.A/B shares because Mr. Buffett may be the only one who can manage the company with as much success as in the past."

Paul Howard, a long-time insurance industry analyst who runs boutique firm Solstice Research, and who has covered Berkshire Hathaway for a long time, said on Thursday that he thinks the Sokol resignation puts Berkshire's national indemnity chief, Ajit Jain, at the forefront of most qualified internal candidate. However, Howard added, "I don't think he takes the CEO position if offered. I bet he's comfortable with his current setup."

Solstice Research analyst Howard ultimately concludes that succession at Berkshire Hathaway should not be an issue for Berkshire Hathaway shares. "I do not think succession planning should affect stock. I think Buffett has some good years left in him and the company will have a whole new roster of candidates when the time is upon us," Howard wrote in an email to TheStreet. " I did think Sokol was the top candidate but think there are dark horse picks on short list. Just like Todd Combs was an unknown," Howard added.

-- Written by Eric Rosenbaum from New York.


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