Time to put on the lawyer hat again:

As soon as this story broke, the immediate question was “Why would you be actively trading stocks for your own account when you work for Warren Buffett and recommend acquisitions?

That seems fraught with potential for problems. Does anyone on Berkshire’s legal staff and/or compliance department have an iota of common sense? (Apparently not)

The second piece of silliness from the non-legal analyst community is that Buffett’s lieutenant Sokol was “trapped” by the Berkshire purchase of Lubrizol. That reads more like a defense attorney’s trial balloon than any sort of actual legal analysis.

We will surely learn more details in the future, but the facts we know are as follows:

1. You recommend a company for acquisition (repeatedly) to your employer

2. The company rejects it

3. You make a substantial share purchase for your own account

4. Your company makes the acquisition.

5. You keep your trade profits

That pattern does not suggest black letter insider trading. But it does reveal problematic decision making, and some very poor judgment. Not only is the trading for one’s own account an issue given Sokol’s job, but the fact pattern above, for a public company, is simply foolish.

I am curious: Did some Berkshire lawyer merely opine: “Well, technically, its not really insider trading.

Consider the legal advice that should have been given. Once your employer agrees purchase a company that you recommended and then purchased, you have issues: Beyond the legal concerns, you have conflict of interest concerns, PR problems. (There is certainly the appearance of impropriety, but that is not a standard I believe Sokol is legally held to).

Better advice: Transfer your purchase to Berkshire on announcement of acquisition.  The personal buys should be deemed “on the company’s behalf,” and you agree to transfer the shares to BRK. Perhaps they throw you a nice bonus for your troubles.

It is proactive approach, avoids any conflicts of interest, removes concerns about insider trading. End of problem, end of story.


One of the consistent things that surprise me in these sensational legal cases is how apparently poor legal advice by high priced legal talent can roil a company, and how following bad advice or ignoring good counsel leads to unpleasant surprises.

The flipside of this are situations that do not show up in public view. There are millions of decisions that don’t blow up in players’ faces, that reflect better advice, judgment, outcomes, etc. We do not hear about these because they do not cause a problem, and there is no media coverage.

Too bad we don’t get to quantify the data on legal advice on major corporate events. It would be nice to be able to see the batting records of major law firms and in house legal departments at the major investment banks . . .

Category: Legal, M&A


35 Responses to “Better Legal Advice for Sokol (No, he was not “trapped”)”

  1. budhak0n says:

    Conflict of Interest is a common occurrence nowadays. Frankly the issue is never pressed unless there’s some pot of gold at the end of the rainbow which aint likely.

    I like the guy who says the Durbin amendment represents a 14 billion dollar revenue stream for the banks and that money’s going to be have to be made up somewhere.

    Hilarious. Ok so while the rest of us have to actually earn money, the “banking” industry is entitled to set not only prices but REVENUE and if you don’t like it we’re going to fee you to death.

    Just another chapter in the corporate lives of the eternal “legacy” interest. How’s about you reform your industry to actually add some value and derive your additional revenue from something other than passive activity?

    Just a thought. Ne’er gonna happen.

    Oh and why are we so concerned about giving Sokol legal advice. Let him pay for it at a few hunge an hour like everyone else. For him? Let’s charge him 2 grand per

  2. Lyle says:

    Perhaps the lawyers work on the Bill Clinton style of legal reasoning, like defining what is means. Of course if one had a bit of awareness on how the item looked, but many business types have this blindness. E.H. Harriman had this in spades 110 years ago.

  3. Greg0658 says:

    I get to talk my book .. do you really think this can be policed in TBP sence – survival of a single industry over TBP … I mean lets get a list going: with TBTF; HFT; insider trading; pozies; disaster capitalism plays; etc; etc; etc;

    the super corporations with free (ok a 1/4 of 1 percent) can buy the world up and tell Congress and all us hows IT IS (ok a favored status %’s for the other TBTFights / banks gotta get there 1st u know)

    time to freeze accounts and figure a way to get back to sovereign cash engines only

  4. budhak0n says:

    Better yet charge him the 2k and then give him the wrong answers. God I love this country ! hehe

  5. alpha_bet says:

    Just to clarify, he had purchased shares before he recommended the company to Buffett, and even at that point he was told the deal would not happen.

  6. [...] Barry has some legal advice for David Sokol.  (TBP) [...]

  7. Doug Kass wishes Squawk Box asked the following questions of Sokol:

    What are Berkshire’s internal corporate guidelines for buying and selling stock? Does employee investment activity have to be reported? If so, when? Who within Berkshire signs off on purchases/sales? And does Buffett see the stock activity of employees and Board members?
    Why did he buy and quickly sell his original stake in Lubrizol?
    Why did he repurchase a much more sizeable position in Lubrizol approximately a month later?
    With regards to the second purchase, how did the size of his purchase compare to his average portfolio holding?
    What motivated his decision to repurchase a much large stake in Lubrizol the second time in January? Explain the timing of both purchases.
    Is he an active or inactive investor?
    It has been reported that he intended to resign from Berkshire over the last two years. What was his present status with regard to staying/leaving?
    Was he currently aware of who Buffett would propose as his replacement? Was he in contention?

  8. Lukey says:

    I can’t agree more! Why is this guy trading his own account? In his position he has ONLY two choices (apparently neither of which he took) – put all his money in Berkshire stock or put it in the hands of an external manager (or managers) and play no role in the choice of investments. He should have resigned before this blew up in his face, not after.

  9. KidDynamite says:

    Barry –
    isn’t the order of your facts incorrect, and essential? Sokol bought LZ stock before talking to Buffett about it (according to BRK’s press release).

    still doesn’t make it look any better aesthetically, but I would think that it makes a big difference legally.


    BR: Sokol apparently bought and sold 2300 shares prior to the rec. It predates the issue, but leads to the question “Why is a Buffett employee in M&A personally trading stocks?”

    BTW, I liked your comments here

  10. Greg0658 says:

    @ RickSantelli on AlanBlinder layouff rant – somebody allowed 40/1 leverage (& beyond in derivatives – a fly heard $560T) and now fall on your swords Americians – the precious system must be saved – yes I guess it does – there is only 1 system

  11. Petey Wheatstraw says:

    Who cares about bad legal advice or unreported (yet obvious) crimes, when neither prosecutors nor MSM “news” is held to any account? Who is to say what the “law” is, when the laws were written with plenty o’ loopholes to be exploited by those who can afford and are positioned to find and avail themselves of them?

    Canada is apparently the last bastion of sanity in the Western hemisphere (linked to from Naked Capitalism):


  12. wally says:

    In my book, it is a conflict, pure and simple. When he recommended to Buffett he should he have disclosed fully and in complete detail so BRK could deal with the situation.

    As an interesting aside, the fact that Buffett supposedly rejected the acquisition (several times) but later bought it makes his subsequent happy talk about the company look pretty phony. If it really was the best thing since sliced bread you’d think he would have bought it the first time around.

  13. mdbuilder says:

    As far as these two go he explained it:

    Q: Why did he buy and quickly sell his original stake in Lubrizol?

    A: His purchase was a limit order for 50K shares @ $104, only 2,300 were acquired due to price movement. Claims 2,300 wasn’t enough to bother with long term so he sold them with a bit of a gain to offset a short term loss.

    Q: Why did he repurchase a much more sizeable position in Lubrizol approximately a month later?

    A: Price came back, he still beleived it was a good investment so he put in another limit order for 100K shares. Managed to get 96K over 3 days.

  14. DeDude says:

    There has to be some rules with regards to personal stock purchases if you also are in a position to influence purchases by market moving large funds. Does anybody know?

  15. eliZ says:

    This is just another example the capture of the financial sector and government by those with wealth and influence.

    Money is the bottom line for Sokol.

    What difference does it really make to him whether he is with BH or not? He will go somewhere else or start his own (albeit less ethical) firm.

    The bottom line – in a financial world where there is little risk for aggregious, unethical and speculative behavior, there are essentially no deterrents for the sociopath(et)ic crowd.

  16. hammerandtong2001 says:

    Just to clarify…

    Individuals like Mr. Sokol typically hire independent 3rd parties to run and manage their investments. In fact, I ‘d bet Berkshire has a realtionship with just such a 3rd party to manage the investments, etc of the top managers there. Hell, I KNOW that JPM has this, and I KNOW that the requirement to use the 3rd party extends down to the MD level.

    There it is.

  17. investorinpa says:

    In response to Wally, we don’t know why exactly Buffett rejected it the first few times. It could have been due to valuation- perhaps at Price X, it was not worth the purchase. But at Price Y, maybe it was.

    I don’t see this as a story that lasts more than a week or so. Sokol is gone, Berkshire will revise their policy on holding shares in companies that are in acquisition talks, they’ll continue to be profitable. Big Picture, people, Big Picture.

  18. b_thunder says:

    How is what Sokol did different from Buffett loading up on GS preferred and then started making phone calls to the Treasury and lobby for the bailout ‘to save the system?” Not to mention almost daily appearances on CNBC?

  19. wally says:

    “How is what Sokol did different from…”

    It’s not different from a lot of things that are done these days. Being in position to make a personal recommendation to Buffett that you know could/would make a big change in the stock price is an insider position. He’s also front-running his own boss here.

  20. Julia Chestnut says:

    In my personal experience, there are clients who are sensitive to “Based on what you have told me, it isn’t technically orange jumpsuit behavior – but it smells bad,” and then there are those who sneer at me and say “I don’t pay you to tell me about good business practices, I just want to know what the law allows.”

    There really isn’t anything you can do with the latter (except make darn sure you CYA). And even with the former, their level of risk comfort tends to be stratospherically higher than that of the average white-shoe lawyer: you can explain the risks, and lots of times they will smile, thank you, and take them.

    But good legal advice costs because it is careful, thorough, and works to see around corners – but most of all, because you trust the judgment of the lawyer in question. When that person tells you – because they have the cajones to do so when others in your organization won’t – that it might be profitable but it is a bad idea, you at least listen. The problem is how little that sort of advice matters to so many clients these days. And how few lawyers understand the job in those terms.

  21. fully diluted says:

    Legal or not, there’s no denying that this whole thing just looks bad for Berkshire, guess Sokol forgot to follow WB’s advice: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” and “Lose money and I will forgive you, but lose even a shred of reputation and I will be ruthless.”.

  22. darth beta says:

    Just one person’s opinion – I don’t think he did anything wrong. Maybe a bad analogy but should the 2nd in command at KO be banned from drinking Pepsi? Maybe morally or ethically but there is a question of violating worker freedoms to consider.

  23. rip says:

    Seems to me this is just more proof Buffet is not quite a saint.

  24. I agree with Lukey on this. Wasn’t the BRK employee stock purchase plan enough for the guy? I have to think he was making millions there. What is it with people who never have to worry about money again wanting to take stupid risks like that? Is it a conscience thing, pride or what?

    @Petey Wheatstraw March 31st, 2011 at 8:44 am

    Canada is apparently the last bastion of sanity in the Western hemisphere

    Not quite. We just act more like sociopaths as opposed to psychopaths

    Now there is a thought. How does a psychopath perceive the actions of a sociopath?

  25. socaljoe says:

    Can’t help wondering about Buffett’s judge of character. He has selected a successor who is front running his employer’s acquisitions.

    Can’t help wondering since when has Buffett / Berkshire been aware of this? Did they find the impropriety and act on it or where they forced into it by the threat of an outside force going public?

    Can’t help wondering why a man who must be very wealthy would risk his reputation and future career for a few dollars more… seems awefully dumb for a man who is supposed to be smart.

    Can’t help wondering about Bershire’s thoroughness in performing due diligence prior to their acquisition. You would think their investigation would have revealed that their own management has personally invested in the acquisition target.

    Can’t help wondering whether this is a one-off or common practice… with Sokol… at Bershire… everywhere?

  26. HEHEHE says:


    According to this line if Buffet’s letter it would appear that he and Sokol didn’t even seek any legal advice:


    It makes one wonder how many other transactions occured like this one. It doesn’t even sound like there’s a pattern of even consulting a legal department or they’d even care what they’d say. It’s like an invitation to the class action bar and SEC to come in and poke around and see our shoddy compliance/legal oversight.

  27. phb says:

    Not sure how transferring the shares to BRK is any better than the front-running he committed (in my humble opinion). Very slippery ethical slope.

  28. JerseyCynic says:

    CommonMan asks what is it with people……..

    They are all part of this ‘failed state’ now called the united corporations of America


    -mark faber

  29. There’s never just one cockroach. I wonder about other stock trades that have been done by Sokol and other senior executives.

  30. Bill Wilson says:

    I tend to think he was given good legal advice, but chose to ignore it.

    I was at the grocery store tonight. The man who was bagging my groceries asked me if I wanted a bag for a six-pack of beer that I had bought. When I declined, he pointed to the beer and said, “Behave yourself.”

    I responded, “That’s not the idea.”

    We don’t always do what’s best for us, even when we’re old enough to know better.

  31. druce says:

    Sokol broke Buffett’s trust.

    Either Sokol was a Buffett mergers lieutenant or he was not. Their statements so far are weaselly on that score.

    If he was a go-to guy for mergers, he’s not supposed to get a merger candidate list as part of his merger-vetting role and then trade on it.

    If he was not a go-to guy for mergers, he’s not supposed to go to Citi and get a merger candidate list on BRK’s behalf when he knows Buffett is not interested in his opinion, and then trade on it .

    It’s not insider trading in the sense of ripping off the prior shareholders or eventual acquirer, but it’s not doing a first class business, and either way it’s a breach of trust with Buffett.

  32. druce says:

    not that anyone asked LOL – but here’s my speculation:

    Sokol was Buffett’s Mr. Fixit, and said to himself, I could be making the big bucks starting my own HF/PE shop . He tells Buffett, hey, if I’m not the successor, let me know so I can go off and build some real wealth. Buffett says, I like you and think you would be well advised to stick around. Sokol’s trading his PA without too much discretion (see above), at some point, either on his own or based on some input, he realizes he has a Warren problem and offers to quit again, and this time Buffett, having lost trust, does not object.

  33. Greg0658 says:

    A fellow FaceBook’r mentioned a case of railroad yard J6P workers that traded on a yard full of suits.

    Sorta helps my case (or my book).

  34. A says:

    I always find it amusing when comments are made regarding America’s loss of its moral compass.
    In the quest for power and profit, morality has been been off course for decades. Pretty difficult to right the ship when the elected captain himself is corrupt. Nothing new.

  35. [...] stock when BRK made the decision to buy the company. I had already read Barry Ritholz’s comments (http://www.ritholtz.com/blog/2011/03/better-lubrizol-legal-advice-for-sokol-no-he-was-not-trapped/) a day earlier – a normally sober commentator who again made good sense – and had forgotten the [...]