By Reynolds Holding
NEW YORK, Jan 4 (Reuters Breakingviews) - David Sokol's
escape from an insider trading probe further fogs an already
hazy law. Warren Buffett's fallen heir-apparent was a prime
investigation target for buying $10 million of Lubrizol shares
shortly before Berkshire Hathaway acquired the company for $9
billion. Yet Sokol's lawyer says the U.S. Securities and
Exchange Commission dropped the matter. Even with a broad
insider trading crackdown since the affair was disclosed almost
two years ago, the crime's contours remain elusive.
It's illegal to trade on material, non-public information in
breach of some duty. At least based on what was disclosed
publicly, that would seem to be exactly what Sokol did. He
bought Lubrizol stock a day after bankers pitched the company as
a possible Berkshire takeover target. He sold those shares and
then bought more after he was informed by bankers that
Lubrizol's chief executive would raise Buffett's interest at a
meeting of the lubricant maker's board.
Sokol's inside information may not, however, have been
material. He couldn't be sure Berkshire would offer to acquire
the company when he purchased the shares. It's also unclear
whether he necessarily breached a legal duty of trust.
These weaknesses could be what persuaded the SEC to drop the
case, though it's hard to know for sure. The agency isn't
saying. What is clear is that the evidence wasn't as strong as
in, say, the prosecution of Rajat Gupta, the former McKinsey
boss and Goldman Sachs director. Sokol's situation did, however,
come off as similar to another insider trading case the SEC has
opted to pursue, against billionaire brothers Samuel and Charles
On balance, the regulator may have saved some face by not
pursuing Sokol if it wasn't sure it could win. After
embarrassing losses like last year's acquittal of Citigroup
employee Brian Stoker on securities fraud charges, the watchdog
is probably wary of being too aggressive.
Despite scores of recent insider trading convictions, many
since the Lubrizol trades came to light, it's still unclear what
is and isn't allowed. The bitter taste that lingers from the
Sokol affair is that insider trading isn't always what it seems.
- The U.S. Securities and Exchange Commission has dropped
its insider trading investigation of David Sokol, one of Warren
Buffett's former deputies at Berkshire Hathaway, Sokol's lawyer
said on Jan. 3.
- Sokol resigned last year after Berkshire discovered and
disclosed that he had bought and sold shares in Lubrizol shortly
before Berkshire agreed to buy the company for $9 billion. A
subsequent report by the audit committee of Berkshire's board
accused Sokol of breaching his duty of candor and violating the
company's insider trading policy.
- Sokol denies any wrongdoing and has been "completely
cleared," his lawyer, Barry Levine, told Reuters.
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
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