The above quote from Warren Buffett hangs on a wall in Bristlecone's office, a constant reminder of the high ethical standards which we hold for ourselves and our industry. The quote came to mind following the recent revelations surrounding the resignation of one of Buffett's top lieutenants, David Sokol.
Briefly, Mr. Sokol committed a series of actions which, while potentially not illegal, certainly strike us as unethical. In late December and again in early January, Mr. Sokol purchased for his personal portfolio a large amount of stock in a chemical company called Lubrizol, which he was then considering recommending as a potential acquisition for his employer, Berkshire Hathaway. Mr. Sokol made the recommendation to Mr. Buffett in January, apparently mentioning only in passing that he held stock in Lubrizol in his personal account (according to Mr. Buffett, Mr. Sokol did not disclose the specific number of shares he owned, nor when he had acquired them). Upon Berkshire announcing a deal for Lubrizol on March 14th, the stock increased approximately 30% and Mr. Sokol realized a profit of about $3 million on his recent investment.
On March 30th, Warren Buffett issued a press release stating that Mr. Sokol had resigned from his position at Berkshire, while simultaneously revealing the details surrounding Mr. Sokol's personal transactions in Lubrizol stock. Mr. Buffett claims to have been surprised by Mr. Sokol's resignation (even though he admitted that Mr. Sokol had twice previously attempted to resign in recent years). He also repeated Mr. Sokol's claim that his decision to resign was not in any way connected to his personal trades in Lubrizol stock, and claimed that neither he nor Mr. Sokol believed that these trades were in any way illegal.
The legality of the trades is for others to determine; from our perspective, the trades definitely failed an ethical sniff test. Mr. Sokol certainly had a conflict of interest here which was not adequately disclosed. Moreover, as CEO and Chief Investment Officer of Berkshire, Mr. Buffet may be culpable for a lack of internal controls which enabled Mr. Sokol's trades.
At Bristlecone, all employees are subject to a code of ethics that is specifically designed, among other things, to prevent instances of front-running client trades or personally taking advantage of investment ideas prior to clients. While we continue to hold Mr. Buffett in esteem, this is one instance where his actions fell short of his own high standards.
