For David Sokol to be found liable for the circumstances that led him to resign from Berkshire Hathaway last week, he has to have bought his $10 million worth of shares in Lubrizol – the chemicals company Berkshire Hathaway is buying for $9 billion – based on his misappropriation of material, non-public information in Berkshire Hathaway’s possession. That’s according to John Coffee, a renowned corporate governance expert and Columbia Law School professor.
‘The SEC is investigating, but I don’t think we know the facts yet,’ says Coffee. ‘There conceivably could be liability and the SEC could bring a proceeding if it decides [Sokol] made this investment based on his knowledge that Citigroup, [the investment bank helping Sokol to explore acquisition ideas], was pushing Lubrizol as an acquisition candidate.’
What Sokol did know before he bought 96,060 shares of Lubrizol was that he was pushing for the Lubrizol acquisition. Sokol reportedly picked the company from a list presented to him by Citigroup and asked Citigroup to convey Berkshire’s interest to James Hambrick, Lubrizol’s chairman, more than a week before Sokol made his significant personal investment in the chemicals company.
That doesn’t amount to material information, says the author of the popular financial markets blog, Kid Dynamite. ‘I think the material information is Lubrizol’s reaction, not Sokol’s interest,’ he writes.
Coffee is doubtful, too. ‘If Citigroup came in with a list of 20 companies and all of those were equally plausible candidates, it’s hard to say that any one company amounts to a material fact, particularly because Sokol had no power to make the decision for Berkshire Hathaway,’ he explains.
This determination of whether Sokol misused material, non-public information is relevant to the SEC’s theory of insider trading based on misappropriation, according to Coffee. Pursuant to that theory, an alleged perpetrator can be liable for insider trading if he steals confidential, material and non-public information from a company to which he owes a duty.
Sokol can’t be liable under the traditional definition of insider trading, Coffee says, because that requires the alleged perpetrator to be a fiduciary to the company in whose stock he invested. ‘Sokol was never a fiduciary to the shareholders of Lubrizol because he’s not an insider, officer, director, agent or adviser of that company,’ he concludes.