Ethical Issues at Berkshire Hathaway: Controversy Following the Lubrizol Acquisition Deal

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Case Details:

Case Code : BECG127
Case Length : 16 Pages
Period : 2010-2013
Organization : Berkshire Hathaway Inc.
Pub Date : 2013
Teaching Note :Not available
Countries : US; Global
Industry : Diversified

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Berkshire's Acquisition of Lubrizol

David L. Sokol, who headed two Berkshire subsidiaries, MidAmerican Energy Holdings and NetJets Inc., periodically met different investment banking firms, including Citi, to deliberate on capital-raising and transaction deals. On December 13, 2010, Sokol and Citi's officials met to talk about a list of companies previously given by Citi to Sokol for probable takeovers. Sokol expressed interest only in The Lubrizol Corporation (Lubrizol), a company that manufactured lubricants used in engines, largely employed for big trucks, buses, and boats. Sokol asked one of the Citi officials to inform James L. Hambrick (Hambrick), Lubrizol's Chairman, President, and CEO, that he would like to talk to him about a possible takeover of Lubrizol by Berkshire...

Business Ethics Case Studies | Case Study in Management, Operations, Strategies, Business Ethics, Case Studies

Sokol's Departure and the Immediate Fallout

On March 30, 2011, shortly after the deal, Berkshire issued a newsletter, personally addressed by Buffett, stating that Sokol had resigned from Berkshire. Expressing surprise over his departure, Buffett stated that he had not asked Sokol to quit. He further stated that Sokol had first proposed the buyout of Lubrizol to him either on January 14 or January 15. But Buffett had not been convinced. However, after Sokol briefed him about a conversation he had had with Lubrizol's CEO on January 25, he had been impressed. According to Buffett, though Lubrizol's purchase was done entirely at his discretion, the deal would not have materialized without Sokol's initial groundwork...

The Question of Materiality

Some experts agreed with Buffett's and Sokol's stance, mentioned in Buffett's March 30 letter, about Sokol's purchase of Lubrizol shares and his subsequent recommendation to Buffett not being illegal. A legal expert commented, “Warren Buffett's job is to purchase stock and companies. If Sokol goes to Buffett and says, ‘I love this stock, I bought some for myself, you should look at it,' there's nothing inappropriate in Buffett doing his own analysis and making a purchase, as long as no trading decisions are made on the basis of material, nonpublic information.”...

Were Sokol's Dealings an Act of Insider Trading?

Certain sections of the media, starting March 31, 2011, reported that SEC had begun an inquiry into Sokol's purchase of Lubrizol shares. According to some experts, if it had even occurred to Sokol that he was engaging in an unlawful act, he would not have openly bought the Lubrizol shares as he would have been sabotaging his employment prospects and wealth for profits of lesser magnitude. He had also divulged his possession of Lubrizol shares to Buffett, though in a casual manner. Hence, they doubted if the SEC would be able to establish illegality in an act where there seemed to be no intent to disguise the purchase or the part played by him in the deal...

Sokol's Privileged Position

According to some commentators, it was inappropriate for Sokol to retain the shares when a probable acquisition was on the cards as he was an important Berkshire employee backing the transaction and had also garnered ample operating details about Lubrizol which were required to convince Buffett. A law professor remarked that the details that Sokol had received from Citi and also the inputs that he had secured from the Lubrizol CEO were Berkshire's property. Also, the reasoning that it was not Sokol but Buffett and Munger who had to give the green signal for the deal was rubbished...

Buffett's Handling Under the Lens

Observers and commentators also expressed their disapproval over the manner in which Buffett had handled the entire episode. Analysts criticized Buffett for not querying Sokol about the time and the value of his holdings in Lubrizol shares when the latter had first broached the subject of Lubrizol's takeover and had also mentioned his personal dealings in Lubrizol shares. According to experts, the majority of corporate heads, at that moment, might have raised questions, instructed the executive to consult legal experts, or would have put the acquisition on hold. However, Buffett did not do any of these...

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