Buffet may face investor angst at ‘Woodstock of capitalism’
By By Nithin Rao | 29 Apr 2011
When Warren Buffett, among the richest individuals on earth, addresses shareholders of his Berkshire Hathaway Inc this weekend at Omaha – an annual event described as the 'Woodstock of capitalism,' – he will for the first time face investor anger and disgruntlement.
The annual meet of the investment firm attracts hundreds of shareholder-fans of the iconic businessman, oozing admiration for a man who has out-performed the markets for nearly 40 years.
But this time expect the fireworks, say commentators, as shareholders take on the ageing investor, buffeted by what is being dubbed as Sokol-gate.
Much to the embarrassment of the billionaire-investor, his one-time heir apparent David Sokol has been nailed by Berkshire's audit committee, which has accused him of not just misleading the firm about personal stock purchases of Lubrizol – and even encouraging Buffet to do likewise for Berkshire – but also indulging in insider trading.
Though Sokol was forced to quit Berkshire Hathaway in March, Buffet described his contribution to the company as 'extraordinary' and appeared to have gone out of the way to protect his trusted aide. But the audit committee report, released on Wednesday, accused Sokol of aiming to 'deceive' the company.
Questions are now being raised about the 'idiosyncratic' structure and management of Berkshire Hathaway, and about the future of the company, still being led by the 'sage of Omaha,' who at 80-plus, is well past his prime.
L'affaire Sokol is centred round the purchase of shares in Lubrizol by Buffett's former comrade – also dubbed as Mr Fix-it – days before he suggested to his boss the accumulation of shares in the chemical company. He made a paper profit of $3 million on his personal acquisitions, leading to charges of insider trading.
''Neither Dave nor I feel his Lubrizol purchases were in any way unlawful,'' Buffett remarked after Sokol quit abruptly in March. ''He has told me that they were not a factor in his decision to resign.''
But on Wednesday, the company's internal audit committee released a damning indictment of Sokol and also posted the complete report on its website. Sokol's purchases of Lubrizol shares while serving as a representative of Berkshire Hathaway in connection with a possible business combination with Lubrizol violated company policies, including its code of business conduct and ethics and its insider trading policies and procedures, said the committee.
According to the committee, in 2010, Sokol was encouraged to scout for, and to bring to the attention of Buffett, potential acquisition opportunities for Berkshire Hathaway. He was not authorised to make acquisition decisions for Berkshire Hathaway as that power remained with Buffett in consultation with Charles Munger, the vice-chairman, subject to ratification by the board.
Sokol met with investment bankers at Citi, discussed Berkshire's acquisition criteria, and suggested that it send him information about companies in the chemicals industry that might meet Berkshire Hathaway's acquisition criteria. Later in December, he told Citi officials that the only company he found interesting was Lubrizol.
That same month, he bought 2,300 shares of Lubrizol, a partial fill of a 50,000 share limit order. A few days later, he sold those shares, but acquired over 96,000 shares of Lubrizol a fortnight later. In mid-January 2011, Sokol proposed to Buffett the idea of purchasing Lubrizol. The latter told him that he was unfamiliar with the lubricants and additives part of the chemicals industry and was not too keen on acquiring its shares.
And when Buffett asked Sokol how he had become familiar with Lubrizol, Sokol told him that he owned the stock, without disclosing the quantity or timing of his purchases.
''It did not cross Buffett's mind at that time that Sokol might have bought Lubrizol shares after seeking through investment bankers to initiate discussions with Lubrizol concerning a possible Berkshire Hathaway acquisition of Lubrizol,'' said the committee report.
