Warren Buffett’s current misstep calls to mind Shoeless Joe Jackson, the White Sox star hitter who fixed the 1919 World Series, and the small disillusioned boy’s reported wail, “Say it ain’t so, Joe.”
Mr. Buffett, the widely respected legendary investor and third wealthiest person in the world, has been standing up for his former deputy, David Sokol, who made a $3 million paper profit in a few weeks by investing in a company before talking his boss into buying it for $9 billion. Mr. Sokol, often considered heir apparent to the 80-year-old Mr. Buffett, abruptly retired, saying he needed to manage his own investments.
The facts of the incident are simple enough, as told in a statement by Mr. Buffett. In December, Mr. Sokol examined a list of 18 companies proposed by CitiGroup officials as possible acquisitions by Mr. Buffett’s huge conglomerate, Berkshire Hathaway. Mr. Sokol liked only Librizol, a promising producer of lubricants. He bought a few shares for himself and then sold them.
In January, Mr. Sokol bought 96,000 shares on his own account for about $10 million. A week later, he called Lubrizol’s chief executive officer about a possible deal with Berkshire Hathaway and then took the idea to Mr. Buffett, saying “in passing” that he owned some shares in the company. Apparently he did not say how many shares or when he bought them. Mr. Buffet expressed skepticism about the suggested Lubrizol purchase but said nothing about Mr. Sokol’s stock ownership.
Mr. Sokol pursued the matter at a dinner with the Lubrizol CEO, reporting the conversation to Mr. Buffett, who then became interested. In early February, Mr. Buffett made the $9 billion offer to buy Lubrizol.
The New York Times columnist Joe Nocera asked how the sequence of events could not be evidence of insider trading. He found it “ridiculous” for Mr. Buffett to say that Mr. Sokol had “no knowledge of how I might react to the idea” or “what Librizol’s reaction would be if I developed an interest.” Mr. Nocera found “these flimsy excuses” embarrassing and said, “They damage Buffett’s own reputation, which he cares deeply about.”
The Times reported that Berkshire’s conflict of interest policy requires all top officials to “disclose any material transaction or relationship that reasonably could give rise to such a conflict” to the audit committee.
The Financial Times reported that the Securities and Exchange Commission has begun an investigation of Mr. Sokol’s trades.
Whatever the SEC does, the episode re-enforces the suspicion that Wall Street trading is a tilted field, with big players exchanging information, leaving the little guys to play the market in ignorance.