Buying Lubrizol – Case Analysis Z5093991
David Sokol was chairman of many of Berkshire Hathaway’s subsidiaries, and was widely tipped to succeed Warren Buffett as chairman of Berkshire Hathaway itself, in future. This all changed when Sokol executed a series of trades that were deemed controversial, with regards to their timing and Sokol’s subsequent recommendation to acquire the same company. This case analysis attempts to identify the CFA Standards of Professional Conduct applicable to Sokol’s actions, and which of those Standards were violated by him. I (A) Knowledge of the Law – Sokol denied any wrongdoing when asked about the transactions, implying that he was aware of the laws governing the nature of his trades. I (B) Independence and Objectivity – Although Sokol met with the CEO of Lubrizol and discussed the company’s prospects with him, he may have violated this Standard if his recommendation to Buffett was based on Citi’s, rather than his own, thorough analysis. I (C) Misrepresentation – As long as Sokol’s recommendation reflected adequate research about Lubrizol, there is no violation of this Standard. I (D) Misconduct – Sokol’s recommendation of Lubrizol may be seen as dishonest, given that he failed to disclose his holdings in the company until after the completion of the acqusition. This is a clear violation of this Standard. II (A) Material Nonpublic Information – Sokol received internal forecasts for Lubrizol prior to executing his personal trades. This implies that his trade may have been prejudiced by knowledge unavailable to the public, which is a clear violation of this Standard. II (B) Market Manipulation – Although Sokol’s trades were of a substantial value, there is no indication that he intended to manipulate the movement of Lubrizol’s share price. Standard III (A, B, C, D, and E) are not applicable to David Sokol’s actions. IV (A) Loyalty – Sokol did not violate this Standard as he did not disadvantage his employer in any way through his trades. Standard IV (B, C) are not applicable to David Sokol’s actions. V (A) Diligence and Reasonable Basis – As long as Sokol’s recommendation was based on a thorough analysis of his own and he had a sound basis for the recommendation, this Standard has not been violated. Standard V (B, C) are not applicable to David Sokol’s actions. VI (A) Disclosure of Conflicts – Sokol violated this Standard by failing to disclose holdings in the company until after the completion of the acqusition.
VI (B) Priority of Transactions – There is not enough information to suggest that Sokol was obliged to obtain approval from his employer before executing his personal trades, indicating that this Standard has not been violated. Standards VI (C) and VII (A, B) are not applicable to David Sokol’s actions. Mikkel Orut, CFA, must suggest to Sokol that he have an adequate basis for his recommendation, and that he refuse to trade in future, if in possession of Material, Nonpublic, information. He must also suggest to Sokol that any holdings in a target have to be disclosed, as they constitute a potential conflict of interest. He must also suggest to Sokol, to deal with the current situation, that there was no intent to manipulate the market, and that his transactions were based solely on his own thorough analysis of Lubrizol, through publicly available information.
