"Say It Ain't So, Warren"

Sydney M. Williams

Thought of the Day

“Say It Ain’t So, Warren”

April 7, 2011

While the Weezer’s 1990s song “Say it Ain’t So” is what most people remember, the line originated in 1920 when a small boy allegedly called out to White Sox left fielder “Shoeless” Joe Jackson, as he was leaving a Chicago court where he had admitted to participating in a scheme to throw the 1919 World Series in which Chicago played Cincinnati. Jackson, who still holds the sixth highest batting average at .408, was a hero to the young. Leaving the courthouse in the custody of a sheriff, a young boy called out: “Say it ain’t so, Joe.” Jackson responded, “Yes, kid, I’m afraid it is.” If only Warren Buffett had been as forthcoming in the David Sokol scandal.

Mr. Buffett, because of his own strict, and publically expressed, high standards, operates in a self-imposed fishbowl. His investment prowess is matched by what we all believed was the integrity of his operations. In recent days, in the wake of the Sokol scandal, the press has reminded their readers of the Berkshire memo, “Insider Trading Policies and Procedures,” sent last May to his senior executives, but in place for ten years. His annual letter to shareholders is filled with homilies expressing sentiments such as: “It takes twenty years to build a reputation and five minutes to ruin it. If you think about that you will do things differently;” “Only when the tide goes out do you discover who’s been swimming naked,” and “It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.”

Warren Buffett is an icon. The business and investment community have virtually deified the man; that glorification may have infected him with hubris. He seems to have risen above most mortals, into a sphere where no matter what he does, his actions will always be considered not only legal, but within the bounds of his own high ethical standards.

While the resignation of David Sokol, one of Mr. Buffett’s most important lieutenants, last week was a surprise, the shock was that there was no sense of shame or remorse that Mr. Sokol, while perhaps not breaking the law, certainly seems to have violated the intent of Mr. Buffett’s memo regarding insider trading. That memo, according to yesterday’s Wall Street Journal, specifically bars “certain Berkshire officials” from trading in public companies “that may be involved in a significant transaction with Berkshire.” The Journal reported: “Mr. Sokol certified having reviewed the policy, according to a person familiar with the matter.” It turns out Mr. Sokol bought $10 million of Lubrizol stock about a week before suggesting to Mr. Buffett that he look at the company.

In the press release issued at the time of David Sokol’s resignation, Warren Buffett stated, “I had not asked for his resignation, and it came as a surprise to me.” He added, “Dave’s contributions have been extraordinary.” In terms of Mr. Sokol’s stock purchase, Mr. Buffett said: “In our first talk about Lubrizol, Dave mentioned that he owned stock in the company. It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings.” Mr. Sokol committed a sin of omission in failing to disclose details of his recent purchase. Alexander Green, Investment Director of the Oxford Club, once wrote, “Sins of commission are easy to identify. But sins of omission? That’s trickier.” In this case, it’s not very tricky.

David Sokol, in a CNBC interview last Thursday following his resignation, insisted he had behaved legally and honorably and that he had no influence over which companies Buffett invested in. Reading back issues of Mr. Buffett’s annual letter, and noting the praise he regularly heaped on Mr. Sokol, it is hard to believe that David Sokol “had no influence.” A reputation, as Mr. Buffett once reminded us, can be destroyed in a few minutes.

While Mr. Sokol’s timely purchase of Lubrizol may have conformed to laws governing insider trading (I am not qualified to pass judgment on that aspect), they certainly appear to have violated the rules Mr. Buffett imposed on his senior managers. What Mr. Sokol did certainly does not pass the “smell” test. Questions that persist include: Why didn’t Mr. Buffett elicit details about David Sokol’s purchase? And why didn’t he ask him to sell his stock in the open market prior to the announcement of the deal? The latter would have been an easy out for both parties. In 2007, David Sokol self-published a 127-page business guide. In it he wrote, “Integrity is merely doing what is right, even when no one is looking.” He should have taken his own advice. Thus the blame lies primarily with him, for not being forthcoming; unfortunately, however, the tarnished image will cling to that investment genius and paragon of corporate ethics, Warren Buffett.

What is particularly dismaying to those of us who have so long admired the man from Omaha is discovering that he is as human as the rest of us. It is akin to that moment in childhood when we learn we did not arrive in the beak of a stork, nor were we the result of Immaculate Conception; we realized our birth was a result of old fashioned copulation. Just as the scales of childish beliefs fell from our eyes so many years ago, they have done so again.