Monday, April 4, 2011

Buffett, Sokol and Insider Trading


I am sad about the case of David Sokol, the right hand of Berkshire Hathaway Chairman Warren Buffett, who had bought nearly $10 million worth of stock in Lubrizol just over a week before he suggested to Mr. Buffett that Berkshire should acquire the company. For those of you who are not familiar with the case, you can watch this clip from BloombergTV. Two days ago, the WSJ published an op-ed piece entitled: "Insider Trading: Why We Can't Help Ourselves" (here). At least two important questions arise: is there anything morally wrong with Mr. Sokol's trading given that - as Stephen Bainbridge, an expert on securities at the UCLA School of Law says - it falls "in an enormously gray area of the law"? Second, is this an indication that character does not matter, that even Buffett is weak-willed?

14 comments:

  1. Sokol bought the stocks and sold them (quote, due to tax purposes) before there was any initiation to take over Lubrizol. Sokol sold the stocks before he met with CitiGroup to consult a possible take over of Lubrizol by Berkshire Hathaway.
    Thus, I don't see how this is insider trading.
    Another aspect of this case that seems important is the fact that Sokol did NOT make a profit.

    It was not Sokol who would have the take over happen; it would be up to Buffet as well as the chairman/ceo of Lubrizol to strike that deal.

    The reason I believe this sounds fishy is because it is in a gray area; if Sokol and Buffet as well as Citi is lying, and they actually all planned to take over Lubrizol and bought stocks to make a profit; that would be a problem.

    However this is not the case. INSIDER TRADING= TRADING ON NONPUBLIC MATERIAL INFORMATION

    There was NO informtion to be trading on yet.
    If he would have bought Lubrizol stocks after Buffet and Lubrizol Chairman agreed on merger, then this would be insider trading.

    Its sad for me to see such a smart, acknowledged man (Buffet) to even have to deal with this annoyance.

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  2. Yes, I believe this is a case of insider trading. Insider trading is defined as trading in stock of publicly held corporation on the basis of material, nonpublic inforamtion. The stock prices rae material information and the meetings of Mr. Sokol are regarding for solely company interests. It is clear, with Mr. Sokol's inside information, that he used it to but stock to earn profits. This is a clear case of insider trading.

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  3. It'd only be insider trading if there was insider information George. As Sokol claims, and the NYTimes article edited by Sorkin (that we read in class) Sokol bought and sold stocks before even meeting with Citi to talk about possibilities of buying Lubrizol.

    It's shady and it is in a gray area-but there was no information to trade on. He made no profit.

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  4. Guys, I appreciate your taking the time to discuss this case. In order to make any progress, I believe, we need to go a bit deeper into the details. You both agree on the facts of the matter (you both read the NYT article I gave you in class last Friday). And you both say that
    IT=trading on Non-Public and Material Information.

    So, if there is a difference in your conclusion, it is not about
    the facts of the matter or
    the definition of insider trading.

    It is, simply, about HOW YOU DEFINE:
    1. non-public
    2. material, and
    3. information

    Sokol and Buffett say that they did not do anything illegal. So does Raj Rajaratnam and Gupta. Why are so many people concerned about the behavior of Sokol and Buffett? Why did Sokol buy Lubrizol shares in early January? Could Mr. Sokol provide an honest and unbiased advice to Mr. Buffett given that he was holding more than 10 million Lubrizol shares? What is "information" if the agent has the ability to produce such information through shaping decision-making?

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  5. I think the major reason people, including myself, are concerned about the behavior of Sokol and Buffett is because both appear to be handling the situation in such a nonchalant manner, like it happens every day. I watched an interview that Sokol gave on CNBC and he talked about the whole situation as if he was talking about what he did on his last vacation. Never once did he give the impression that he had acted in an improper manner or regretted his decision. Also, the fact that Warren Buffet, who in the past has sworn to be “ruthless” in dealing with unethical behavior, seems to find nothing wrong with Sokol’s actions indicates that this is a “run of the mill” situation in the financial world. To me, this is troubling.

    I‘m not sure if Sokol’s actions fit the exact definition of insider trading as it stands now, but there is definitely a conflict of interests and a lack of fairness. He may have used public information to make his initial investing decision, but few other people in the world can then relay that information to the world’s most powerful investor to make an even greater profit. Sokol used his unique position to create an unfair advantage for himself and there is no way he could have provided Buffett with unbiased advice. This is a massive grey-area in the law that needs to be addressed.

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  6. I believe that this case IS in fact insider trading on Sokol's behalf. The timeline of events shows clearly that he would not have been able to give Buffet an unbiased opinion on the future of Lubrizol. The behavior of Buffet does not strike me as fishy or deceiving as he was just acting on the advice of Sokol, whom he trusted.

    Like Sal said above me though, I agree that there is a grey area in this law that needs to be re-defined.

    -Brendan G.

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  7. I don't see a moral reason why insider trader is wrong. The way I see it, insider trading is an issue of legality. This particular case falls in a grey area of the law so the decision could go either way.
    Ethically, trading with material, non public information doesn't seem wrong. A person has information and they use it to gain money and utility for themselves. What's wrong with that? Yes, this person may have more information that others, but I don't see the moral issue.
    If others were deceived or given incorrect information, it would be immoral because the intent was to harm these people. Having insider information does not intentionally harm anyone, it only benefits some.

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  8. I don’t feel that profit has any relevance in deciding whether this is insider trading or not. If a person steals an empty wallet, he or she gains nothing, yet it is still wrong by virtue of ethical and philosophical principles. However, if you look at the share price on Jan 5 -7, the dates when Sokol made his $10 million investment, shares of Lubrizol were trading roughly around $103. By March, the shares were trading $30 higher. If he held his shares, Sokol would have made nearly $3,000,000 in profit.

    But regardless of how much money he made, what is in question here is the morality of Sokol’s actions. Personally, I feel as though he traded on material, non-public information because during the business meeting on Dec. 13, Sokol expressed interest in an acquisition. Right from the get-go, he possessed material information regarding shares of Lubrizol that was unavailable to the public. The book states that executives should refrain from transacting on information that significantly affects share prices until it is publicly available. It is an understood trend in acquisitions that the target company’s shares will generally increase in value. How I see things, Sokol had a lapse in proper judgment and acted unethically in his investment. What’s controversial about this case, in my view, is the decisive moment in time as to when “buzz” about the deal became actual insider information.

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  9. In my honest opinion i believe that he should not be proven guilty with the lack of info that the scenario reveals. He sold the stock and made no profit. It remains clear that he could have done that due to suspicion of possible insider trading laws but it still doesnt provide enough information to call it an unlawful move. I believe that sokol has no right to give anyone advice with the amount of shares that he had. It is evidently impossible for someone with that amount of assets to give a biased answer on whether he should invest or not.

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  10. I believe that Sokol did engage in insider trading. Sokol essentially initiated the take-over of Lubrizol. He met with bankers from Citigroup to discuss potential takeover targets and asked the bankers to let the chairman of Lubrizol know that he was interested. It was only after this meeting that Sokol bought nearly 10 million worth of shares in Lubrizol. Sokol did make this trade on material non-public information, even though Sokol had not yet talked to Buffet about the takeover. This is material information because a takeover of a company is information that any rational investor would want to know before making a stock purchase. Further, Sokol had it confirmed by bankers that Lubrizol would be a good company for Berkshire Hathaway to purchase. Even though some would consider this information merely a possibility for Berkshire Hathaway, this information is pretty definite considering it was discussed with bankers and a call was made to Lubrizol. Only three parties knew about this potential takeover, making this non-public information that Sokol traded on.

    Sokol’s behavior is highly questionable when in discussing the possible takeover with Buffet, he selectively fails to disclose that he owns 10 million dollars worth of stock in the company. After Buffet shoots the takeover down when Sokol first brings it up, Sokol has a dinner with the Lubrizol chairman and then goes to talk to Buffet again about the matter. Sokol is obviously pushing Berkshire Hathaway to takeover Lubrizol. His questionable behavior in pushing the company to takeover Lubrizol and not disclose to Buffet his interest in the company, proves that he could not give Buffet an unbiased and honest opinion.
    -Christine Fitzsimmons

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  11. According to NYT:

    December 21 - Sokol sells his 2,300 Lubrizol stock (bought 12/14/10) for "tax purposes"

    January 5-7 - Sokol accumulates 96,060 Lubrizol shares worth $10M

    January 6 - Lubrizol's board holds a "special meeting" to discuss Berkshire Hathaway's possible interest in the company...the board agrees to hire lawyers to advise on a possible deal

    January 7 - Hambrick meets with a law firm to discuss BRK's interest

    January 14 or 15 - Sokol mentions a possible Lubrizol deal to Buffett for the first time

    After January 25 - Buffett "warmed to the idea" of a Lubrizol deal

    February 8 - Hambrick and Buffett meet to discuss a possible deal

    I'm not sure whether this would be considered insider trading. The buying and selling of Lubrizol stock 12/14 and 12/21 is definitely not considered insider trading as insider trading is defined to be "trading on the basis of material, nonpublic information" (323). At the time of this particular trade, there was no information, public or nonpublic.

    It is the accumulation of the $10M worth of Lubrizol stock between 1/5 and 1/7 that makes this case part of a gray area. I think it may depend on how many stocks he Sokol bought on each date specifically that may tip this case in one direction or the other. The fact that Lubrizol met with a law firm to discuss a possible deal with Berkshire is the only part of the second trade that makes me wonder whether this case should be considered insider trading or not.

    While Sokol didn't know for sure whether or not the deal would go through, the fact that Lubrizol was even considering such a deal would be considered nonpublic information that most likely few but the top officers would even know of. Thus, while Sokol did make a bet on whether or not the deal would go through, he had inside knowledge about this possible deal.

    I think the second trade would be considered to be insider trading, but not in the traditional sense.

    Nonpublic means that this information is not known by most traders. Because Lubrizol was only meeting with their lawyers to discuss a possible deal, this knowledge would not have made known public unless Lubrizol decided to enter into the deal.
    Material information is information relevant to the trade. The fact that Lubrizol had plans to meet with their lawyers 1/6 and actually met with their lawyers 1/7 is material knowledge to Sokol's trades from 1/5-1/7 because I doubt Sokol would have been willing to make this bet had they not considered the deal and showed possible interest in it.
    Information is knowledge about the trade and the company stock being traded. The fact that Lubrizol was considering a deal with Berkshire is information (and highly relevant to this case).

    Since none of this information was confirmed at the time of the trade, it technically wouldn't be considered insider trading, as the decision for the deal could go in either directions. Interest in a deal doesn't necessary involve a closing of the deal.

    I think the fact that Sokol sold his stocks on 12/21 is a little suspicious and I think it would be better if we got Lubrizol's side of the story as well, especially if they ever showed signs that they thought the deal wasn't a good idea between 12/14 and 12/21.

    There is also a conflict of interests involved in this case. Since most of Sokol's pushing of the Lubrizol deal happened after he acquired $10M worth of stocks, of course he would have an interest in the deal going through!

    I agree with Sokol and Buffett in that they did nothing wrong and thus, I also believe that Sokol did not engage in insider trading. I think the reason why most people find this disconcerting is because of a combination of Buffett's nonchalant attitude towards this case and because they're walking a very fine line between what is and is not legal.

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  12. This article states that "On December 17, 2010, Citi informed Mr. Sokol that Mr. Hambrick had indicated that he would discuss Berkshire Hathaway’s possible interest with the Board,” Lubrizol said in yesterday’s filing. The company first learned of Sokol’s stock purchases on March 30, Lubrizol said." Lubrizol released a second statement, thereby proving Sokol did in fact know and is guilty of insider trading.

    My opinion is that it doesn't matter if he didn't make a profit because he almost did, he wanted to, and he intended to. He still committed the (illegal) act so he should still suffer consequences for it, otherwise we're saying that you're only guilty of doing something wrong when you benefit of that which is simply not true nor permissible.

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  13. This article states that "On December 17, 2010, Citi informed Mr. Sokol that Mr. Hambrick had indicated that he would discuss Berkshire Hathaway’s possible interest with the Board,” Lubrizol said in yesterday’s filing. The company first learned of Sokol’s stock purchases on March 30, Lubrizol said." Lubrizol released a second statement, thereby proving Sokol did in fact know and is guilty of insider trading.

    My opinion is that it doesn't matter if he didn't make a profit because he almost did, he wanted to, and he intended to. He still committed the (illegal) act so he should still suffer consequences for it, otherwise we're saying that you're only guilty of doing something wrong when you benefit of that which is simply not true nor permissible.

    http://www.businessweek.com/news/2011-04-12/sokol-knew-lubrizol-board-to-be-told-of-berkshire-s-interest.html

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  14. Also- I think character matters because up till now Buffett has proven to be moral so if you look at him as a whole you can still argue that he's a moral being. At the same time though even if he is guilty it's because he's human and we all make mistakes even knowingly. I don't know if it's fair to assume that anyone will always pick the right choice every single time because that might be asking too much for any human.

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