Friday, April 1, 2011

It's excuses all the way for Warren Buffett

Whenever the world’s greatest investor gets in a tight squeeze, he straps on his angel wings, readjusts his halo, and leans on his reputation for avuncular straight talk to make the problem go away.

Warren Buffett did it in the early-1990s, when one of his holdings at the time, Salomon Brothers, was caught in a Treasury bond scandal. He did it in the mid-2000s, when executives at General Re, owned by Buffett’s company, Berkshire Hathaway, were prosecuted for concocting a phony transaction with AIG.

Now he’s doing it again as he attempts to gloss over the actions of a close associate that look suspiciously like insider trading. The deputy, David Sokol, resigned earlier this week, claiming he wanted to concentrate on his “philanthropic interests.” (That’s what they all say.) The resignation, said Buffett, came as a “total surprise.” (They all say that, too.)

In a statement, Buffett laid out the facts about Sokol’s stock purchases of Lubrizol, a company Berkshire Hathaway agreed to buy two weeks ago. To give Buffett his due, this is decidedly not what chief executives usually do in this circumstance. That’s why the Oracle of Omaha has such a glowing reputation in the first place. But the statement also contains a sentence that only Buffett would have the chutzpah to write:

“Neither Dave nor I feel his Lubrizol purchases were in any way unlawful.”

Yeah, well, Raj Rajaratnam has said he didn’t do anything unlawful either — and he’s being prosecuted for insider trading. No matter how pure Buffett believes Sokol’s heart is, it shouldn’t prevent the government from investigating this case. either. Yes, it’s possible that there’s an innocent explanation. But based on what we know so far, it smells to high heaven.

Let’s recount the story, shall we? On December 13, some investment bankers meet with Sokol to pitch possible acquisitions. He expresses an interest in Lubrizol and tells them to convey his interest to its chief executive, James Hambrick. He then buys 2,300 shares, selling them a week later.

The plot soon thickens. In early January, Sokol goes back into the market and buys 96,000 shares at around $100 apiece. A week later, Sokol calls Hambrick and has a preliminary discussion about a possible deal. Sokol then takes the idea to Buffett, mentioning “in passing” that he owns some Lubrizol stock. Buffett expresses “skepticism” about a deal. Inexplicably, he says nothing about Sokol’s stock holdings.

Does Sokol let the matter die there? No. For some reason — what could that be? — he’s got a bee in his bonnet about this deal. On January 25, he has dinner with Hambrick; when he reports back to Buffett about the conversation, Buffett becomes interested in making a deal. By early February, Buffett himself is wooing Hambrick. He tells the Lubrizol chief executive that he would like to buy all the company’s outstanding shares for $135 a share.

Sokol, of course, owns a nice little chunk of those outstanding shares. When the deal is announced in mid-March, Buffett’s trusted deputy walks away with a nifty little profit of $3 million or so. Not bad for a few weeks’ work.

How is this not, on its face, evidence of insider trading? A guy buys stock in a company and then talks his boss into buying the company. The fact that his boss is Warren Buffett makes it even more “material,” to use the word the S.E.C. favors when it investigates insider trading. If a company executive trades on material information, knowing that he is privy to stock-moving news that hasn’t yet been divulged to other shareholders, he is likely to be committing a crime. When Warren Buffett buys a company, the stock price goes up. Everybody knows that — including, presumably, Dave Sokol.

What is galling about Buffett’s stance is not the recitation of facts, but the way they were spun to make Sokol’s actions look benign. “Dave’s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea,” he writes. “In addition, of course, he did not know what Lubrizol’s reaction would be if I developed an interest.”

I’m sorry, but that’s ridiculous. Since when do companies turn their backs on Buffett? Besides, Sokol knew that his idea would get a serious hearing; he was so esteemed by Buffett that he was rumored to be the Great Man’s successor. When you strip away the Buffett gloss, the facts are harsh. Sokol (a) brought the deal to Buffett, (b) brokered between Buffett and Hambrick, and (c) persuaded Buffett to pull the trigger. All while owning 96,000 shares he’d bought a few weeks earlier.

No one is suggesting that Buffett himself did anything wrong. But these flimsy excuses are embarrassing. They damage Buffett’s own reputation, which he cares deeply about. If he keeps it up, he’s going to have to turn in his angel wings.