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Warren Buffett admits error in Sokol affair Add to ...

Warren Buffett said he had made a mistake by not asking more about David Sokol's purchases of Lubrizol Corp. stock while his former top lieutenant was pitching the chemicals company as a possible takeover target for Berkshire Hathaway Inc.

Mr. Sokol was widely considered a leading candidate to succeed Mr. Buffett as Berkshire's chief executive, but he resigned last month after it was revealed that he had bought $10-million of shares in Lubrizol. Mr. Sokol got a roughly $3-million (U.S.) profit on that stake when Berkshire agreed to buy Lubrizol.

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The U.S. Securities and Exchange Commission is probing Mr. Sokol, a person familiar with the matter has said, and the controversy has put Mr. Buffett's management style into question.

Speaking on Saturday to shareholders from the stage at Berkshire's annual meeting in Omaha, Nebraska, Mr. Buffett said he should have probed more deeply when Mr. Sokol first revealed in January that he owned Lubrizol stock.

This was after Mr. Sokol had spoken with Citigroup Inc. bankers about Lubrizol, and two months before Berkshire agreed to buy the chemicals company for roughly $9-billion.

"I obviously made a big mistake by not saying, 'Well when did you buy it,'" Mr. Buffett told shareholders. He called the Sokol situation "inexplicable and inexcusable."

In a scathing report, a committee on Berkshire's board this week found that Mr. Sokol deliberately misled Mr. Buffett about his Lubrizol investments, and that his "misleadingly incomplete disclosures" violated his duty to be candid.

It also said some of Mr. Sokol's responses to Mr. Buffett's questions about the stake appeared "intended to deceive."

"I think that for reasons that are laid out in the audit committee report, I don't think there's any question about the inexcusable part," Mr. Buffett said.

Mr. Buffett said he did not understand Mr. Sokol's actions, and added, "We hope to get some value out of this experience."

Berkshire's vice-chairman Charlie Munger, seated beside Mr. Buffett, attributed Mr. Sokol's behaviour to "hubris."

Barry Levine, a lawyer for Mr. Sokol, did not immediately reply to an e-mailed request for comment.

Berkshire is expected to split the CEO and chief investment officer roles after Mr. Buffett leaves. Mr. Buffett hired hedge fund manager Todd Combs as a potential successor for the latter.

Prior to Mr. Sokol's departure, Berkshire had said it had four internal managers to potentially succeed Mr. Buffett as chief executive.

Ajit Jain, who oversees many Berkshire insurance businesses and speaks with Mr. Buffett almost daily, is widely thought to be on that list. Many analysts believe Burlington Northern Santa Fe railroad chief Matthew Rose is also on that list.

Others may include Geico auto insurance chief Tony Nicely, MidAmerican Energy chief Greg Abel and reinsurer General Re chief Tad Montross.

Mr. Buffett, 80, told shareholders he was not sure it had been warranted to assume Mr. Sokol was his most likely successor.

"Certainly the candidate that I think is the leading candidate now, I would lay a lot of money on the fact that he is as straight as an arrow," Mr. Buffett said.

Some of Mr. Buffett's comments drew polite applause from the audience. The event is expected to draw close to 40,000 people.

Earthquakes hit profits

Mr. Buffett also revealed that losses from earthquakes in Japan and New Zealand and other catastrophes would likely drive Berkshire's first-quarter profit down 58 per cent.

Preliminary results indicate that net earnings fell to $1.51-billion from $3.63-billion a year ago. Operating earnings fell 28 per cent to $1.59-billion from $2.22-billion.

Mr. Buffett said Berkshire had lost $821-million from insurance underwriting in the quarter, and would in 2011 likely post its first full-year insurance underwriting loss in nine years.

The company relies on insurance businesses as a low-cost funding source for investments because it receives premiums well before it pays out money to cover insurance losses. Such losses can effectively raise funding costs.

Berkshire lost $1.07-billion from the Japan earthquake, and $412-million from the New Zealand quake.

Mr. Buffett said that "pretty much all" of Berkshire's roughly 80 other businesses, apart from those tied to residential housing, were "getting better."

Reuters

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