Last Updated: 5:07 AM, April 30, 2011
Posted: 11:20 PM, April 29, 2011
If Berkshire Hathaway's annual meeting is the "Woodstock of capitalism," then the David Sokol affair may become the bad acid.
Berkshire founder Warren Buffett has been weathering the worst trip of his career since he disclosed last month that Sokol, his heir apparent, had resigned from the company after a series of shady stock trades in chemical giant Lubrizol.
After a virtually unblemished record, the Oracle of Omaha is suddenly facing questions about his management style, the company's corporate governance and internal controls and the future management of the company.
Buffett -- who at Berkshire's yearly meetings typically strums the ukulele and sips root-beer floats between gab sessions where he doles out folksy wisdom to investors -- said he won't be dodging any questions on Sokol at the gathering in Omaha, Neb., this weekend.
"You will not hear 'no comment,' " Buffett told Fox Business Network on Thursday. "If our lawyer gets up and wrestles me to the ground, I will still talk."
Nevertheless, Buffett's position has flip-flopped since he revealed that Sokol had bought a $10 million personal stake in Lubrizol while successfully egging on Buffett and Berkshire's board to acquire the chemical maker for about $9 billion in March.
This week, Berkshire's directors issued a scathing report that accused Sokol of making "misleadingly incomplete disclosures to Berkshire Hathaway senior management" that "violated the duty of candor he owed the company." Berkshire said it is considering "possible legal action" against Sokol, who it said violated its insider-trading policies.
The board found no fault with Buffett's handling of the situation.
The Securities and Exchange Commission is reportedly investigating Sokol's actions, while Sokol's attorney Barry Levine has denied the accusations. Levine also alleged the board didn't give Sokol a chance to respond to its allegations -- a charge Berkshire denies.
Before this week's fracas, however, Buffett had bent over backwards to defend his former lieutenant.
"Neither Dave nor I feel his Lubrizol purchases were in any way unlawful," Buffett declared in a March 30 statement.
"Why did it take so long to recognize there was a problem?" said Gregory Little, a partner at the law firm White & Case.
It's possible, Little said, that Berkshire was "inclined to give [Sokol] the benefit of the doubt" as it gathered information before reaching its conclusions this week.
Still, some legal experts have trouble making sense of the fact that Buffett was so protective of Sokol after assessing the situation himself.
"At that time, Buffett knew Sokol had betrayed him and he still defended Sokol," said one veteran securities lawyer. "That's what's wrong. I can't figure out how Buffett's advisers could have let him line up behind Sokol."
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