Warren Buffett has said he made a big mistake in not quizzing the man once regarded as his potential heir about the controversial share deal that has cast a pall over his annual meeting.

Talking to a crowd of 40,000 gathered for the meeting in Omaha, Buffett was grilled about the resignation of David Sokol, a former director of Buffett’s investment firm Berkshire Hathaway. Sokol resigned earlier this month after it was disclosed he had bought a $10m stake in chemicals firm Lubrizol shortly before recommending that Berkshire buy the company. The purchase netted him a $3m profit.

I obviously made a big mistake by not saying, ‘Well, when did you buy it?’ said Buffett, adding that he found Sokol’s actions inexplicable and inexcusable.

He said he had paid Sokol $24m last year; Sokol is believed to be worth more than $100m.

Buffett pointed out that Sokol had once volunteered to give up $12.5m of bonus compensation to Greg Abel, his colleague in Berkshire-owned energy firm MidAmerican, because he thought the money should be shared. But he said he would never understand what lay behind Sokol’s Lubrizol dealings. Buffett’s business partner, Charlie Munger, said: I think hubris contributed to it.

A shareholder asked Buffett: Why did you handle this matter in the inadequate way you did? Berkshire’s original statement on Sokol’s resignation claimed his decision to leave the company had nothing to do with the Lubrizol affair and that Sokol had done nothing illegal.

Last week, Berkshire issued an internal report that slammed Sokol. It concluded he had violated company policy and could be sued for damages. Sokol has denied any wrongdoing.

The Lubrizol deal is now being investigated by the US financial authorities and is the subject of legal action by Berkshire shareholders.

Buffett said he did not have the full facts before the initial press release was released. From what I knew then it did not seem unlawful, he said.

Munger said: The press release was not the cleverest press release in the history of the world. He added that Berkshire director Tom Murphy often said that, if you are angry, you can always tell a man to go to hell tomorrow.

The Lubrizol row has cast a pall over Berkshire’s annual meeting. Before the meeting began, shareholders said they had already been worried about who would take over from the 80-year-old Buffett, a legend in the investment world, but were now increasingly concerned. Ann Rutley, a shareholder from Florida, said: It would have been a lot worse if this guy had taken over the company, but it’s worrying that he could have come so close.

Before the meeting began, Buffett played a clip of his testimony before Congress in 1991 when politicians were investigating a bond trading scandal at Salomon Brothers; Buffett was called in to sort out Salomon after the scandal broke.

Buffett said: After they first obey all rules, I then want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper, to be read by their spouses, children, and friends, with the reporting done by an informed and critical reporter. If they follow this test, they need not fear my other message to them: lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.

There was a whoop from the crowd.