Sokol’s trades

Larry Ribstein —  31 March 2011

Per the WSJ, Buffett associate David Sokol bought shares of a potential Berkshire target, Lubrizol, the day after expressed interest in the company on behalf of Berkshire. He sold those shares a week later, but soon bought more around the time the Lubrizol board met to discuss Berkshire’s interest.  Sokol told Buffett about the deal and the fact that he owned Lubrizol shares a week or so later.  Buffett initially wasn’t keen on the deal, but bit ten days later. Buffett learned the details of Sokol’s purchases only after the Berkshire board offered to buy the company.

Based on these facts, Sokol may have had material information when he bought his second batch of shares: i.e., that he was going to pitch the company to Buffett.  Although he didn’t know whether Buffett would go for it, a company’s just being pitched to Buffett by a trusted insider likely increases its value. [Update:  See Sorkin: "though he had no control over Mr. Buffett’s ultimate decision, he was one of a select few who were in a position to influence such a transaction."]

But did Sokol breach a duty to Berkshire?  The company policy says employees should ask “themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper—to be read by their spouses, children and friends—with the reporting done by an informed and critical reporter.”

On the other hand, Buffett knew.  On the third hand, did Buffett know the extent of Sokol’s ownership, or the fact that he bought the shares knowing of Berkshire’s possible interest?  On the fourth hand, it seems highly unlikely Sokol thought he was doing anything wrong.

Berkshire might be hurt if Sokol had a conflict of interest in pitching the deal.  But that conflict was disclosed.  It also might be hurt by revelations of a breach of integrity by top executive, though its stock decline on the revelation is probably because of Sokol’s resignation.  

My question:  what should federal law have to do with all this?  The “hook” for federal securities liability is the trading in Lubrizol — but the breach of duty that triggers liability has to do with the details of Sokol’s dealings with Buffett and Berkshire.  This, as I’ve said before, is appropriately a matter of state law.  See my article, Federalism and Insider Trading, 6 Supreme Court Economic Review, 123 (1998).

Nevertheless, the WSJ article says SEC is investigating.  Let’s hope nobody at the SEC has stock in Berkshire.

Update:  More on Sokol’s potential insider trading liability from Bainbridge, Bradford, and Davidoff.  I’ll stick to my initial post re materiality.  Bainbridge has a point that Sokol’s disclosure of his conflict may not be exonerating on state law, as I said recently.

Larry Ribstein

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Professor of Law, University of Illinois College of Law

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