Is Warren Buffett Telling the Truth?

I have been trying to figure out what is so disturbing about the exit of David Sokol, Warren Buffett’s former heir-apparent, who submitted a letter of resignation last week that gave vague reasons about wanting to create “enduring equity value” outside of Berkshire.

A collection of respected law professors included here and summarized here at the Delaware Corporate and Commercial Litigation Blog appears to conclude that based on the facts as we know them, Sokol did not engage in insider trading when he bought shares in an industrial lubricants company called Lubrizol. Nine or ten days after buying them, Sokol then suggested that Buffett’s Berkshire Hathaway buy out the company. Sokol’s potential profit on the deal is almost $3 million.

Nobody is suggesting that Sokol knew Buffett would go for buying out Lubrizol, so he was not front-running. Berkshire shareholders seem not to be paying any more than they would have paid if they had tried to buy the company when Sokol did. Still, Sokol just mentioned (but apparently did not write) to Buffett that he owned Lubrizol, and Buffett said he never investigated how long Sokol had owned the shares or how many Sokol held.

Buffett only learned of the extent of the Sokol investment in Lubrizol from a senior vice president at Berkshire instead of from Sokol himself, according to Andrew Ross Sorkin at the New York Times’ Dealbook.

Buffett tells us that Sokol surprised him with a resignation letter just as all of this came to light. That letter that sounded like the canned “spend more time with my family” or “pursue other opportunities” we’ve grown used to hearing — and often doubting.

Smart Money’s James B. Stewart came closest to nailing the issue: the Buffet/Sokol narrative just doesn’t seem credible.

It would have been so much better if Buffett had said something like: “Dave is a brilliant investor and Berkshire is a more valuable company thanks to his efforts, but his judgment in the timing of his Lubrizol purchase was flawed even if no laws were broken. I did not have to ask for his resignation and did not try to talk him out of leaving.”

Buffett is on record as saying he would much rather have employees lose his company money than even “a shred” of reputation. What remains today of Berkshire’s reputation? A whole lot, but certainly a bit less than before the Sokol events came to light.

The Buffett Sokol episode is typical in one way of a lot of investigations into complicated, powerful people: in the end, we report on a person who has broken no laws and seems legally above reproach. The problem instead is one of judgment. Would you want someone with Sokol’s brilliance scouting out investment opportunities for you? Sure. Would you want him to run your entire company? Perhaps not.

As for Warren Buffett, he’s a hero to many because he of all people can afford to speak his mind. At 80 he’s justly celebrated as a genius and a great philanthropist, and is one of the world’s richest men. But if he’s reduced to careful press releases accepting turgid resignation letters, Berkshire Hathaway looks like just another company a with a good long-term track record for investors.

Berkshire Hathaway, meet General Electric.