David Sokol stepped down from board of Berkshire Hathaway after disclosure of controversial share deal
Warren Buffett's former heir apparent misled the investment guru's senior management and violated company policies, according to a report from the audit committee of the board of Berkshire Hathaway.
David Sokol, once seen as the executive most likely to succeed Buffett, stepped down last month after the disclosure of a controversial share deal involving chemicals firm Lubrizol.
Sokol bought shares in the firm shortly before recommending that Berkshire acquire the company outright. Buffett originally said that neither Sokol nor he felt that "his Lubrizol purchases were in any way unlawful" and that they were not a factor in Sokol's decision to resign.
"I don't believe I did anything wrong," Sokol told CNBC. "I made an investment that I believed in. If I didn't believe in the company, I wouldn't have invested in it."
After an internal investigation, Berkshire said Sokol could face legal action from the board.
The report examined Sokol's disclosures to the Berkshire chairman, who is the world's most famous investor.
Buffett said in March that Sokol bought $10m of Lubrizol shares about a week before he suggested it as a potential takeover target for Berkshire. The value of Sokol's shares rose by about $3m when Berkshire bought the firm.
Sokol met investment bankers representing Lubrizol before his share purchase and told them that Berkshire was interested in a takeover. After the deal was done, a Citigroup banker phoned Buffett to congratulate him on the deal. "This was the first time Mr Buffett heard that investment bankers played any role in introducing Lubrizol to Mr Sokol, and did not square with Mr Sokol's remark in January that he had come to know Lubrizol by owning the stock," the report said.
The report concludes: "His misleadingly incomplete disclosures to Berkshire Hathaway senior management concerning those purchases violated the duty of candor he owed the company."
Sokol's remarks "did not satisfy the duty of full disclosure inherent in the Berkshire Hathaway policies and mandated by state law," the report added.
"His remark to Mr Buffett in January, revealing only that he owned some Lubrizol stock, did not tell Mr Buffett what he needed to know ? [I]ts effect was to mislead: it implied that Mr Sokol owned the stock before he began considering Lubrizol as an acquisition candidate, when the truth was the reverse."
The internal report follows the threat of legal action from Berkshire shareholders. Last week, shareholder Mason Kirby filed the lawsuit in Delaware seeking to recover any allegedly improper gains that Sokol made on the Lubrizol shares. "Sokol's trades and Buffett's failure to fully inform himself about these trades are in direct violation of the company's policy and amount to a breach of the duty of loyalty and due care owed to Berkshire and its shareholders," the lawsuit said.
Sokol had been viewed as a top contender to take over from Buffett, 80.
Sokol has said that the disclosure of the purchases of Lubrizol shares and his resignation were unrelated. He has also said that he was not a decision maker on the Lubrizol purchase and did nothing wrong.
The report comes ahead of Berkshire Hathaway's annual genneral meeting in Omaha, Nebraska, where Buffett is expected to face more questions about the affair.
Source: http://www.guardian.co.uk/business/2011/apr/28/warren-buffett-heir-misled-report
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