[  by Howard Haykin ]

The SEC announced Thursday that it ended its 18-month probe into questionable trades by David Sokol, a onetime top lieutenant at Berkshire Hathaway.  Accordingly, the Commission will not be filing insider trading charges against Sokol. 

The investigation pertains to shares in Lubrizol that Sokol purchased about 2 months before Berkshire announced it would acquire the company.  Sokol initiated Berkshire Hathaway's interest in the company by recommending the Lubrizol to Warren Buffett and the Berkshire board.   The acquisition of Lubizol cost $9 billion and, after the deal was announced, the value of Sokol's Lubrizol stake rose by $3 million.

David Sokol first came under scrutiny in 2011 after abruptly resigning as chairman of Berkshire's MidAmerican Energy Holdings.  At the time, Berkshire revealed that Mr. Sokol had bought shares in Lubrizol, a maker of lubricants that he wanted Mr. Buffett to buy.  

Sokol's Profile.   Sokol had been a star manager, and while at Berkshire he ran several subsidiaries, including MidAmerican Energy and NetJets.  Sokol, now 56, was long considered to be a leading candidate to succeed Mr. Buffett, 82.  Sokol also had become a crucial player in the conglomerate's frequent deal-making, earning the nickname "Mr. Fix-it." He served as a point man for Mr. Buffett on a number of potential transactions, particularly during the financial crisis.

His sudden resignation caught Berkshire by surprise.  Mr. Buffett said he did not ask for Mr. Sokol's resignation, suggesting at the time that it was a personal decision by Mr. Sokol.  In fact, Mr. Buffett initially defended his protégé's trading.  "Neither Dave nor I feel his Lubrizol purchases were in any way unlawful," Mr. Buffett said at the time.

A Black Eye for Berkshire.   Yet, the resignation in 2011 became a rare black eye for Berkshire.  Additional information surfaced after the Berkshire board investigated Mr. Sokol's trading record.  Berkshire directors ultimately accused Mr. Sokol of misleading the company about his personal stake in Lubrizol.

All told, Sokol bought $10 million worth of stock in Lubrizol shortly before bringing the company to Mr. Buffett's attention, according to the board.

• Sokol only made a "passing remark" to Mr. Buffett about his trading, and never told Mr. Buffett that he had bought his stake in Lubrizol.
• Sokol bought a large stake in Lubrizol after Citigroup bankers pitched the company as a potential takeover target.
• Sokol bought some of the shares, according to the Berkshire directors, after learning that Lubrizol might entertain a takeover offer.

As Noted in the Board of Directors' 2011 Report:  "His misleadingly incomplete disclosures to Berkshire Hathaway senior management concerning those purchases violated the duty of candor he owed the company."  It adds that Sokol may have failed his fiduciary duty under the law of Delaware, where Berkshire is incorporated.  Mr. Buffett stands by the position that the trades violated company trading policy and called Mr. Sokol's actions "inexplicable and inexcusable."

SEC's Position.   The evidence was circumstantial, SEC officials concluded, and it was unclear whether Sokol had a true window into the Lubrizol deal-making process. He also had no indication at the time of his stock trades that Mr. Buffett would be interested in acquiring the company.  Since resigning from Berkshire, Sokol has been managing his own portfolio, according to his attorney, Barry Levine, a partner at the law firm Dickstein Shapiro in Washington.  Mr. Levine added that he was happy his client was "exonerated" and that Mr. Sokol never acted improperly in the trades - calling him a " paragon of rectitude."

John Nester, a spokesman for the SEC, declined to comment on Thursday.  The agency typically does not comment when it decides not to pursue action in such cases.  The news was first reported online by The Wall Street Journal.

[C-I Note:   Here are some of my initial thoughts on the matter prior to reading the news content.:

WAFFLING ONCE AGAIN!!!!!!!!!!       --- HOW FRUSTRATING.           ----------    SUCH A DAMN SHAME;  TRADING AHEAD – IF I RECALL THE ISSUE WAS – IS A VIOLATION FRO INVESTMENT ADVISERS, AS WELL AS BROKER-DEALERS.   AND HOW DIFFICULT IS IT TO ESTABLISH GUILT

IF WARREN BUFFET  TERMINATED HIS EMPLOYMENT – ALTHOUGH I CAN’T RECALL FOR SURE, THEN WHY CAN’T OR DOESN'T THE SEC HAVE ABILITY TO ROOT OUT THE VIOLATIONS AND CHARGE THIS CHEATER.

As you can see, the comments were expressed in a pique of anger and frustration.
 

For further details, go to:   [Dealbook, 1/3/13].