The resignation of Berkshire Hathaway executive David Sokol, the former presumed heir apparent to investing great Warren “Sage of Omaha” Buffet, has created a legal stir. Sokol had invested in shares of Lubrizol Inc. prior to recommending to Buffett that Berkshire Hathaway buy the company. Buffett agreed with the recommendation and, after Berkshire announced the deal, Lubrizol’s share price rose. Sokol reportedly made about $3 million in profits. But did he “earn” those profits? The press has been buzzing with discussions about whether Sokol violated insider trading rules and/or engaged in front running his client’s transaction. Buffett issued a letter denying that Sokol’s conduct was unlawful.
An interactive WSJ poll is running 73% to 27% in favor of an SEC investigation, which the New York Times reports the SEC is currently evaluating. Oddly, few reports have discussed whether a corporate employee trading policy that would permit Sokol’s transactions would be legally adequate, much less prudent. If the SEC considers the broader question of whether the companies will view the Sokol transactions as consistent with proper corporate policies, it may have no choice but to take some kind of action. Berkshire’s Code of Ethics might be the first place to look.