Sokol's Shadow Continues to Hang Over Berkshire

According to recent reports, Berkshire Hathaway is continuing to pay for David Sokol's securities fraud lawyers to the tune of $150,000-$200,000 per month for his alleged insider trading activities.

Berkshire Hathaway's David Sokol was more than a securities trading star. Highly expected to inherit Warren Buffett's throne, he lost it all amid allegations that he violated the company's own ethics policies regarding insider trading. The fact that the company policies set a higher standard of conduct than the legal standard for insider trading means that Sokol faces no criminal charges right now, despite an ongoing Securities Exchage Commission (SEC) investigation.

Insider trading legality depends on use of private knowledge, the investor's relationship to the company, and the timing of the purchase. Sokol resigned following disclosure that he had purchased 100,000 shares in a company he later brought to Buffett's attention. Subsequently Berkshire Hathaway purchased the company, and this increased the value of Sokol's investment.

Timing counts in this case. When Sokol purchased the stock, the buyout was not even under consideration. He had not yet told Buffett about it. Sokol denies even internal ethics violations, claiming to have considered the investment for a long time. However, he did not actually invest until just before talking to Buffett. This creates an impression of intent to manipulate the market, even if he had no such intent. Hence the lengthy SEC investigation of Sokol. Intent can be difficult to prove.

While the timing of insider trading weighs heavily on its legality, so does the nature of the purchase. Had Sokol waited to invest until after Berkshire announced intent to purchase, that would not likely have been illegal, as it would make it public knowledge. Investing in one's own company is also not illegal under securities laws, but passing private knowledge on for others to invest is.

Source: New York Times, "On Eve of Berkshire Meeting, Sokol's Legacy Lingers," Ben Protess, May 4, 2012

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