Better Legal Advice for Sokol (No, he was not “trapped”)

Time to put on the lawyer hat again:

As soon as this story broke, the immediate question was “Why would you be actively trading stocks for your own account when you work for Warren Buffett and recommend acquisitions?

That seems fraught with potential for problems. Does anyone on Berkshire’s legal staff and/or compliance department have an iota of common sense? (Apparently not)

The second piece of silliness from the non-legal analyst community is that Buffett’s lieutenant Sokol was “trapped” by the Berkshire purchase of Lubrizol. That reads more like a defense attorney’s trial balloon than any sort of actual legal analysis.

We will surely learn more details in the future, but the facts we know are as follows:

1. You recommend a company for acquisition (repeatedly) to your employer

2. The company rejects it

3. You make a substantial share purchase for your own account

4. Your company makes the acquisition.

5. You keep your trade profits

That pattern does not suggest black letter insider trading. But it does reveal problematic decision making, and some very poor judgment. Not only is the trading for one’s own account an issue given Sokol’s job, but the fact pattern above, for a public company, is simply foolish.

I am curious: Did some Berkshire lawyer merely opine: “Well, technically, its not really insider trading.

Consider the legal advice that should have been given. Once your employer agrees purchase a company that you recommended and then purchased, you have issues: Beyond the legal concerns, you have conflict of interest concerns, PR problems. (There is certainly the appearance of impropriety, but that is not a standard I believe Sokol is legally held to).

Better advice: Transfer your purchase to Berkshire on announcement of acquisition.  The personal buys should be deemed “on the company’s behalf,” and you agree to transfer the shares to BRK. Perhaps they throw you a nice bonus for your troubles.

It is proactive approach, avoids any conflicts of interest, removes concerns about insider trading. End of problem, end of story.


One of the consistent things that surprise me in these sensational legal cases is how apparently poor legal advice by high priced legal talent can roil a company, and how following bad advice or ignoring good counsel leads to unpleasant surprises.

The flipside of this are situations that do not show up in public view. There are millions of decisions that don’t blow up in players’ faces, that reflect better advice, judgment, outcomes, etc. We do not hear about these because they do not cause a problem, and there is no media coverage.

Too bad we don’t get to quantify the data on legal advice on major corporate events. It would be nice to be able to see the batting records of major law firms and in house legal departments at the major investment banks . . .

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