Lately, both the Department of Justice and the Securities & Exchange Commission have been busy dealing with greedy people who have mistaken illegal activities for permissible ones. During my second semester at community college, one of my Business Law assignments was to examine one of these cases in the newspapers and decide whether the person was guilty of insider trading or not. What follows is my analysis of the case I chose.
Online in the New York Times’ business website, http://dealbook.nytimes.com/2011/03/31/s-e-c-said-to-weigh-inquiry-of-sokols-lubrizol-trades/, I discovered the curious case of David L. Sokol and his sudden resignation from
his position at Berkshire Hathaway. In addition to his position as Chairman of the Board at two BH subsidiaries, he served as an acquisitions advisor to Warren Buffett. At a meeting with Citigroup bankers, Mr. Sokol surveyed a list of vulnerable companies open to takeovers and expressed an interest in Lubrizol. Mr. Sokol asked Citigroup to convey his interest to Lubrizol chairman, president and CEO James L Hambrick.
At this point in time, the SEC is not conducting a formal investigation of Mr. Sokol’s activities; they are merely “looking into things”. In my opinion, Mr. Sokol is guilty of two violations of the Securities Exchange Act of 1934: insider trading, since he clearly intended
to make a profit from the deal at his employer’s expense, and fraud.
Although the article in the NY Times indicated that the laws regarding insider trading are murky, I believe that this is a clear case of insider trading. Mr. Sokol knew about the impending acquisition of Lubrizol by Berkshire Hathaway because he was the person pursuing the deal. After having served as acquisitions officer in several previous deals, he was fairly certain that he could sell the deal to his boss. Having tested the water with a small acquisition, he invested heavily in Lubrizol while making every effort to facilitate the deal. The information regarding the future purchase of Lubrizol was not known publicly, and other Berkshire Hathaway insiders were not aware of the impending deal until after it was approved by the board.
David Sokol acted as an authorized agent of Berkshire Hathaway and led Lubrizol’s board of directors to believe that BH was genuinely interested in acquiring them when he had not yet informed Mr. Buffett of his activities. Although he may have informed Mr. Buffett of his purchase of Lubrizol stock, he did not inform anyone at Lubrizol of said purchase, nor did he remove himself from negotiating the takeover.
Apparently, I wasn’t the only one who felt that way. The day the homework assignment was due, I discovered that a stockholder had filed a shareholder derivative suit asking for all of Sokol’s profits to be returned to Berkshire Hathaway, alleging that he violated his duties in profiting from the takeover.