The Sokol Resignation: Is Warren Buffett Losing It?

Last Updated Apr 1, 2011 9:46 AM EDT

How much Kool-Aid does the sainted Warren Buffett expect his disciples to drink? You could easily choke on yesterday's dose. He wants you to think that all is ethically fine and dandy at Berkshire Hathaway, after a top executive's questionable stock trades and sudden resignation. Buffett's press release on the departure basically said, "Trust me, shut up, and forget about it."

Sorry, Warren. You send morality memos to your managers, warning them to avoid even the appearance of impropriety. But this counts as your own third breach in a mere 12 months. You don't seem to notice that you've become the Offender in Chief.

The story so far:

Top Buffett lieutenant David Sokol proposed, in mid-January, that Berkshire Hathaway buy Lubrizol, a Wickliffe, Ohio, company that makes specialty chemicals. Sokol had contacted Lubrizol in December to explore a deal, according to a filing with the Securities and Exchange Commission. Before the first meeting, he bought some shares and sold them a week later. He bought shares again in early January -- roughly $10 million worth, at around $104 a share or less. Then, with the ground prepared, he brought Lubrizol to Buffett.

Buffett says that he wasn't interested at first, but Sokol persevered. Two months later, Berkshire bought Lubrizol for $135 a share, a fast gain for Sokol in the range of 30 percent ($3 million). He quit his job when the the public learned about the trade, from Berkshire's filing with the SEC.

In his press release, an avuncular Buffett tells us not to think for a minute that the stock transactions "were in any way unlawful." We're also ordered to believe that Sokol's sudden departure had nothing whatsoever to do with the Lubrizol deal. It was a normal, everyday, hasty, overnight resignation by a man who was thought, until then, to be a contender for Berkshire CEO. More Kool-Aid. Glug, glug, glug.

Unfortunately for Buffett, Sokol's purchases smell like illegal insider trades. He bought the shares after he had entered into nonpublic talks with Lubrizol and -- according to the SEC filing -- in Berkshire Hathaway's name. He couldn't be sure that Buffett would buy, but even rumors of a deal would have sent the share price up.

Bloomberg News reports that the SEC is investigating the transaction, to see if it thinks there is actually a case. Sokol said, in an interview with CNBC, that he hadn't done anything wrong. The Wall Street Journal's Deal blog is polling readers on whether they think his stock purchase was illegal. Fifty seven percent are saying "yes."

What did Buffett know and when did he know it? He says that when Sokol first broached the deal, Sokol said in "a passing remark" that he owned some Lubrizol stock. But Buffett never asked for details until after the purchase was approved. Is Buffett losing it? Or did he shrug off the disclosure because it's common for Berkshire's top execs to buy stock in companies they bring to Buffett to buy? The SEC should ask that question, too.

This is Buffett's third, recent public involvement in matters that appear ethically gray. He owned $5 billion in Goldman Sachs' preferred when the SEC charged it, last April, with lying to customers about a subprime mortgage product. His defense of the company boiled down to "everybody does it, so no big deal." (Goldman settled, paying a $550 million fine.) Then came the credit rater, Moody's -- another of your investments -- that raked in big fees by giving top safety-and-soundness ratings to crappy products. He called it an "incredibly wonderful business" with "pricing power."

Buffett once said, "It takes 20 years to build a reputation and five minutes to lose it." He may be at four minutes and counting. When he finally leaves Berkshire Hathaway, what will come glug-glug-glugging out out from under the doors? As for the greedy Sokol - $3 million is pocket change. He should return the money to Berkshire's shareholders.

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