April 13, 2011
Sokol’s ‘I’m an idiot’ defense
Warren Buffett’s former main man, David Sokol, has denied he did anything wrong by purchasing shares in a company he was going to recommend to his boss. What Mr. Sokol didn’t mention was that Lubrizol was notified of Berkshire’s possible interest on December 17, 2010, and that Mr. Sokol knew that Lubrizol was entertaining the idea of a Berkshire takeover weeks before he accumulated shares. While these developments, released in a Lubrizol filing this week, are not necessarily proof that Sokol front-ran Berkshire’s Lubrizol takeover, they do suggest that Sokol lacks common sense. After all, when you initiate contact with a potential takeover target and that target says they are seriously considering your takeover idea, it is probably not the best time to start loading up. Below are the quotes from the timeline in question:
“On December 13, 2010, Mr. Sokol and Citi met to discuss the list of companies. During the course of the meeting, Mr. Sokol said that the only company on Citi’s list that he found interesting was Lubrizol. When Mr. Sokol learned from Citi’s representatives that Citi had an investment banking relationship with Lubrizol and its Chairman, President and Chief Executive Officer, Mr. James L. Hambrick, he asked one of the Citi representatives to inform Mr. Hambrick that he was interested in speaking with him and discussing Berkshire Hathaway and Lubrizol, if Mr. Hambrick were available. Mr. Sokol also advised Citi that Berkshire Hathaway does not engage in hostile transactions, and that Mr. Hambrick should understand that if they met and nothing came of the meeting, their meeting would remain confidential. Thereafter, Citi made Lubrizol aware of these discussions, as more fully described below.
On December 17, 2010, Citi called Mr. Hambrick and relayed the substance of the conversation between Citi and Mr. Sokol on December 13, 2010. Mr. Hambrick indicated that he would inform the Board of Berkshire Hathaway’s possible interest and discussed that Citi would so inform Mr. Sokol. Later on December 17, 2010, Citi informed Mr. Sokol that Mr. Hambrick had indicated that he would discuss Berkshire Hathaway’s possible interest with the Board.”
Obvious a Lubrizol filing is not the gospel, and Sokol may remember events a little differently. Nevertheless, in order to vanquish the stink of suspicion it appears that Mr. Sokol will either have to say that he was too drunk to remember telling Citi to contact Lubrizol on December 14 and/or he was suffering temporary amnesia on December 17 when Citi told him Lubrizol was salivating over the prospect of being on Buffett’s team. Whatever the option, it now appears likely that Sokol will pay a fine and move on.
As for those that think Sokol should suffer a harsher punishment (of which I am one), remember that when he loaded up (January 5, 6, and 7), he had absolutely no idea if Buffett would be interested in Lubrizol, and it is mere coincidence that his purchases were happening as Lubrizol was holding special meetings and dressing itself up for the big dance.
“But Mr. Sokol, how could you not know that Lubrizol was becoming extremely interested in the idea of sitting on Buffett’s wall?”
‘Well, ahh, it was the holidays, and, ah,…I’m an idiot’.
On January 6, 2011, the Board convened a special meeting. During the course of the special meeting, Mr. Hambrick outlined Berkshire Hathaway’s possible interest as he understood it from his conversation with Citi. The Board engaged in an extensive and thorough discussion about Berkshire Hathaway’s possible interest. The Board determined that it needed to retain outside legal counsel and financial advisors to assist it in connection with any response to Mr. Sokol, including the process that the Board should undertake in connection with its review of Berkshire Hathaway’s possible interest in acquiring Lubrizol. The Board decided to engage Jones Day and Evercore to assist it.
On January 7, 2011, Mr. Hambrick and other members of Lubrizol’s senior management met with Jones Day to brief the firm on Mr. Sokol’s expression of possible interest from Berkshire Hathaway...