Warren Buffett’s heir apparent, David Sokol, made a huge mistake when he bought shares in Lubrizol this winter.Importantly, Sokol made a huge mistake whether or not the SEC ever investigates the trades or decides that Sokol should be charged with insider trading.
Because, as many folks in business have learned the hard way–and I’m one of them–the “appearance of impropriety” in a case like this is just as important as whether there was actual impropriety.
The appearance of impropriety is often all that is needed to trash reputations that companies and executives have spent decades building. And trading in the shares of a company that has been recommended by investment bankers as a possible acquisition candidate of the company you work for instantly creates the appearance of impropriety, no matter what was in your head when you bought or sold the stock.
How do we know David Sokol made a huge mistake buying Lubrizol stock?
Because he had to spend 20 minutes on live international television this morning explaining why, in his opinion, the trade wasn’t “unlawful.” And he wasn’t particularly persuasive.
No executive in a position as powerful as Sokol’s should ever do anything that might lead to a 20-minute interrogation on live TV about whether or not the behaviour was against the law–especially when the only positive thing that can come out of the behaviour is that the executive makes a bit of money.
Whatever money Sokol made on the Lubrizol trade is almost certainly not worth the reputation damage he just sustained. If the SEC does investigate, and charges Sokol with insider trading, whatever profits he made will have been vaporized, and he’ll have to deal with the costs, stress, and further damage of whatever penalties are ultimately assessed.In short, in a case like this, it doesn’t matter whether David Sokol feels the trade was not “unlawful.” It doesn’t really even matter whether a neutral third party deems the trade “not unlawful” (though that would certainly be better than having it deemed against the law).
All that matters right now is what the broader world and the SEC think of the trade. And most folks who look closely at this trade will rightly think this:
“Wait–an investment banker suggested to Sokol in Sokol’s capacity as a Berkshire executive that Berkshire should buy Lubrizol–and, before taking the idea to Warren Buffett, Sokol rushed out and bought the stock? How is that kosher? How could Sokol possibly think that making that trade–and risking the appearance of impropriety–will be OK?”
David Sokol never should have bought shares of Lubrizol under these circumstances. Berkshire Hathaway, moreover, never should have allowed Sokol to buy the shares under these circumstances. And Sokol’s suggestion on CNBC this morning that Berkshire executives like Sokol and Charlie Munger do this sort of thing all the time should, by all rights, prompt an investigation.
Whatever Sokol made from the trade, and whatever profits Munger and other Berkshire executives made from other similar trades, don’t come close to offsetting the reputational damage that these execs (and even Berkshire) may now sustain. And the fact that an executive of Sokol’s experience and intelligence didn’t instinctively understand that is startling, especially given Berkshire Hathaway’s pristine reputation.