Berkshire Hathaway said Wednesday that a former top executive who many believed might one day succeed Warren Buffett as CEO violated the company's insider trading and ethics policies by buying stock in a chemical company Berkshire is acquiring and failing to disclose key details.
Buffett released a report that Berkshire's audit committee produced after examining David Sokol's $10 million investment in Lubrizol.
Sokol resigned from Berkshire shortly after Buffett's Omaha, Neb., company announced plans to acquire Lubrizol for $9 billion. When his resignation was announced, Sokol said he was leaving to start his own firm.
Berkshire's board said Sokol offered "misleadingly incomplete disclosures" about his Lubrizol trades, which were made while he was scouting acquisition candidates for Berkshire.
The audit committee said even if Sokol's actions could somehow be justified, they would still violate the standard Buffett establishes when he periodically encourages all Berkshire managers to avoid any behavior that even comes close to being unethical. Buffet sends a letter to his managers every two years reminding them to "zealously guard Berkshire's reputation."
"By engaging in such questionable conduct, Mr. Sokol threatened Berkshire Hathaway's reputation -- or would have done so had he remained with the company," the audit committee said in the report.
Sokol did not immediately respond to a message left at a number listed for him in Omaha, and no one answered the phone at a number listed for him in Florida. He has generally declined to comment since making an initial appearance on CNBC right after his resignation was announced.
Buffett did not immediately respond to a message left with one of his assistants Wednesday afternoon.
A spokesman for the Securities and Exchange Commission also did not immediately respond to a message Wednesday.
The new report on Sokol's actions was released days before Saturday's Berkshire Hathaway annual shareholders meeting. Buffett and Berkshire Vice Chairman Charlie Munger are almost certain to face questions about Sokol at the meeting. Berkshire said Wednesday that it would release a transcript of any questions about the topic on its website afterward.
Sokol bought nearly 100,000 Lubrizol shares in early January for about $100 a share even though he knew Lubrizol's board had been discussing Berkshire's possible interest in acquiring the chemical company.
About a week after Sokol bought his Lubrizol shares for about $10 million, he recommended that Berkshire buy the company. Buffett said Sokol mentioned owning Lubrizol stock in passing, but he didn't learn the details of the transactions until shortly after the deal was announced March 14.
Buffett said that the decision to offer $135 in cash for each share of Lubrizol was entirely his but that the offer wouldn't have happened without Sokol's early efforts. The deal made Sokol's shares worth roughly $13 million.
Berkshire's board said Wednesday that it may consider legal action against Sokol to recover his trading profits and any damage that Berkshire sustained.
Before Sokol's departure, he had been serving as chairman of Berkshire's MidAmerican Energy, NetJets and Johns Manville units.
Berkshire owns roughly 80 subsidiaries, including clothing, furniture and jewelry firms, but its insurance and utility businesses typically account for more than half of the company's net income. Berkshire also owns The Buffalo News, and Buffett is the newspaper's chairman.
Berkshire has more than 260,000 employees worldwide but only 21 at its headquarters in Omaha.