Nocera on Buffett and Sokol

http://www.futureofcapitalism.com/2011/04/nocera-on-buffett-and-sokol

Writing in the New York Times, Joe Nocera weighs in on the Warren Buffett-David Sokol-Lubrizol situation. He writes:

How is this not, on its face, evidence of insider trading? A guy buys stock in a company and then talks his boss into buying the company. The fact that his boss is Warren Buffett makes it even more "material," to use the word the S.E.C. favors when it investigates insider trading. If a company executive trades on material information, knowing that he is privy to stock-moving news that hasn't yet been divulged to other shareholders, he is likely to be committing a crime. When Warren Buffett buys a company, the stock price goes up. Everybody knows that — including, presumably, Dave Sokol.

By this logic, Warren Buffett himself is guilty of "insider trading" every time he buys any stock in anything for Berkshire Hathaway, because "when Warren Buffett buys a company, the stock price goes up." After all, Berkshire may amass shares in some publicly traded company, and only disclose the stake later in a quarterly filing or when required to once the stake grows beyond a certain threshold. The people selling the shares don't know that they are selling them to Berkshire Hathaway — if they did know, they might not sell, because after all, "when Warren Buffett buys a company, the stock price goes up." But Mr. Buffett knows he is the buyer. It's insider trading! And it's even worse than the Sokol case, because while when Mr. Sokol bought Lubrizol shares he only thought there was maybe a slim chance that Mr. Buffett would buy Lubrizol for Berkshire, every time Mr. Buffett buys stock for Berkshire he knows with 100% certainty that he's buying stock for Berkshire. By this logic, no famous investor should ever be able to buy shares in anything without publicly announcing his interest beforehand and having to pay more because the would-be sellers now have a hint that whatever they are selling is more valuable than they thought it was.

Mr. Nocera goes on:

What is galling about Buffett's stance is not the recitation of facts, but the way they were spun to make Sokol's actions look benign. "Dave's purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea," he writes. "In addition, of course, he did not know what Lubrizol's reaction would be if I developed an interest."

I'm sorry, but that's ridiculous. Since when do companies turn their backs on Buffett?

I'm sorry, but that's ridiculous. Companies turn their backs on Buffett, implicitly or explicitly, all the time — otherwise he'd own everything at a price he names. The Wall Street Journal mentioned a case just the other day, when Mr. Buffett spoke of a deal and said, "somebody else beat us out on it." It seems to have involved the United Kingdom's second-largest electricity distributor.

by Ira Stoll  |  Apr 2, 2011 at 9:39 pm Related Topics:  Capital Markets Regulation, Warren Buffett receive the latest by email: subscribe to the free futureofcapitalism.com mailing list