Posted on May 12, 2011 by Claire Moore

David Sokol (© Nati Harnik/AP Images)

A lawsuit filed on April 19 calls for repayment of gains by David Sokol to former employer Berkshire Hathaway. The plaintiff, Berkshire Hathaway Shareholder Mason Kirby, also named Warren Buffett and other directors to repay Berkshire Hathaway for any losses attributed to damages caused by Sokols actions in the acquisition of Lubrizol Corporation stock.

Lubrizol Acquisition by Berkshire

In January 2011, David Sokol, the heir apparent to Warren Buffett, senior executive of investment giant Berkshire Hathaway, purchased more than 96,000 shares of Lubrizol stock. Shortly after his purchase, Sokol recommended to Buffett that Berkshire Hathaway invest in Lubrizol and made only a mention of his own investment in the company. When, in March, Berkshire made a $9 billion investment in Lubrizol, Sokols stock in the company increased in value by $3 million.

The Sage of Omaha

The Sokol affair has rocked the investment community where Buffett is known as the sage of Omaha for his legendary ability to choose winning investments. For example, on April 29, 2011, Forbes columnist Robert Lenzner reflected on the publics eagerness to pull heroes from their pedestals in an article entitled, “Warren Buffett Is Human, After All ,” stating, Oh my God, a flaw in the Great Buffett. Lets scrutinize his corporate governance bylaws. Lets see if hes morally or ethically fallible. Lets go over it and over it and over it to tantalize the Bloomberg TV audience, because it is such a grave matter.

Warren Buffett, Advisor

The fact that Warren Buffett is one of the richest people in the world is a testament to his professional prowess at investing and his personal frugality. Buffett has never been one to go with the herd. He adheres to a philosophy of value by investing in companies with long-term potential. Buffetts expertise is not restricted to the investment community, though. Political leaders also seek his opinion on matters of finance and economics. So, when doubts arose as to Warren Buffetts abilities and objectivity, the ripples spread out worldwide.

Searing Independence

Roger Lowenstein, who has written a Buffett biography, weighed in on the Sokol matter in a May 2, 2011 Newsweek article titled “Buffett on the Spot .” Lowenstein said, When I was writing a biography on Buffett, in the early 90s, the trait that most distinguished him was his searing independence. Buffett was a brilliant, socially responsible investor, who engaged with the world only on his terms. He refused to be co-opted or recruited, whether with regard to stocks, philanthropy, or politics.

Much Ado about Nothing

Not everyone thinks that Berkshires investment in Lubrizol is a betrayal of investor trust, however. For instance, John Tamny, of Toreador Research and Trading and contributor to Zero Hedge, avers that Sokol could not know if Berkshire would invest or if the Lubrizol stock would increase in value.

In his April 5, 2011 post titled “Berkshire Hathaway, David Sokol, and Much Ado About Nothing ,” Tamny states, Even if David Sokol knew that Berkshire Hathaway would ultimately buy Lubrizol, which is a fanciful assumption on its very best day, many investors (including this one) want those pitching companies to have a stake in them. The greater conflict is when they dont, and as Berkshire is presented with myriad deals on a daily basis, the idea that Sokol bought shares knowing he would ultimately profit is a laugh for countless reasons, including the simple fact that not all Berkshire investments are winners.

The Aftermath

After Sokols resignation, Buffetts reaction was typically non-confrontational. Thus far, Buffett has not rebuked his former right-hand man. At least, not publicly. Commentators such as Lowenstein see this as a flaw that others will exploit. But, Lowenstein also suggests that the Lubrizol affair is an opportunity for Berkshire to review its board membership of close Buffett cronies. Finally, Lowenstein reminds us that for the past 50 years, Buffett has accrued a success record second to none.