Wednesday April 6, 2011

Billionaire Warren Buffett's Berkshire case highlights need for checks

Plain Speaking - By Yap Leng Kuen

THE case involving the purchase of shares by David Sokol a former manager ofBerkshire Hathaway Inc in Lubrizol Corp, whose takeover he helped to negotiate, highlights the need for higher governance in large funds.

In his statement following Sokol's resignation, Berkshire chief executive Warren Buffett admitted that Sokol had informed him in a “passing remark'' about his shareholding in Lubrizol but he (Buffett) did not pursue the matter.

“Shortly before I left for Asia on March 19, I learned that Dave first purchased 2,300 shares of Lubrizol on Dec 14, which he then sold on Dec 21.

“Subsequently, on Jan 5, 6 and 7, he bought 96,060 shares pursuant to a 100,000-share order he had placed with a US$104 per share limit price,'' said Buffett in the statement that appeared in the Telegraph last Thursday.

In this photo from May 1, 2010, David Sokol, chairman of Berkshire Hathaway's MidAmerican Energy, NetJets and Johns Manville units, speaks to shareholders at the annual Berkshire Hathaway shareholders meeting, in Omaha, Neb. Sokol, who suddenly resigned this week, said he wanted to start his own investment firm patterned after Warren Buffett's company. - AP

According to the statement, the two men first discussed the idea of buying Lubrizol in mid-January; however, Buffett became interested only after Sokol informed him of a talk with Lubrizol CEO James Hambrik on Jan 25.

Buffett then decided to buy Lubrizol, an engine lubricant maker, for US$9bil, in which Sokol may have made a profit of about US$3mil, according to Buffett's disclosure and data compiled by Bloomberg.

“Though the offer to purchase was entirely my decision, supported by Berkshire's board on March 13, it would not have occurred without Dave's early efforts,'' Buffett wrote in his statement.

Bloomberg reported, quoting an anonymous person, that the US Securities and Exchange Commission was examining if Sokol bought Lubrizol shares on inside information although there were opinions that this was more of a case of misconduct.

Buffett said in his statement that both men did not feel that Sokol's Lubrizol share purchases were in any way unlawful.

Sokol said in a CNBC interview that he didn't think he had done anything wrong.

This photo taken April 30, 2010, shows Todd Raba, left, president and CEO of Berkshire Hathaway subsidiary Johns Manville, as he walks with his boss, investor Warren Buffett, in Omaha, Neb. Raba will become chairman of Johns Manville following the surprise resignation of David Sokol. - AP

“I can understand the appearance issue and that's why we made it public in the press release,” Bloomberg reported, quoting Sokol.

“The reality is that I have no control over a deal ever happening,'' he added.

Top managers and supervisors are responsible for the actions of their key staff especially when it comes to sensitive implications like insider trading and conflict of interest.

Reliance on self-discipline may not be sufficient; instead, a system of checks and risk controls need to be put in place for better investor protection.

Similar cases can occur elsewhere and unless exposed, or in this instance, mentioned by Sokol himself, money made on the sidelines is usually quietly pocketed.

The lure of big money can lead to dangerous actions which, if left unchecked, can have overall disastrous consequences such as in the recent US subprime housing crisis.

There are moves to regulate hedge funds in the US and Europe but the industry should not just sit back and wait for the guidelines and rules before taking preventive measures on its own.

Top managers should be carefully screened for the job and their progress subsequently monitored. While too much micro managing is bad, it is inevitable that some form of surveillance has to be in place, especially after what happened in the subprime rout.

Associate editor Yap Leng Kuen views that it is often from small incidents that big mistakes develop.