Did David Sokol Lie About His Lubrizol Trades on CNBC?

It appears David Sokol picked a bad time to resign from Berkshire Hathaway (BRKA) to start his own “mini Berkshire” investment firm. After appearing on CNBC this morning to try and get out in front of the media blitz regarding his trading in Lubrizol (LZ), Sokol didn’t do himself any favors on national television. Oddly, perhaps the most least talked about detail in press reports today was the explanation Sokol gave on CNBC when he was asked why he bought 2,300 shares of Lubrizol on December 14th, sold them a week later, and then bought them again two weeks after that (in early January). On the air Sokol claimed the sale was for “tax planning purposes” and nobody seemed to question that.

Of course, the problem with that explanation is that when you sell a stock at a loss and want to use that loss to cancel out other gains for the year (which is what Sokol was referring to when he said “tax planning”), you must wait 30 days before buying the stock back again. This is a very well known law called the “wash sale rule” and there is no way Sokol (or his tax advisor if he uses one) is unfamiliar with it. It appears that Sokol may been hiding the truth when he used the “tax planning purposes” defense. Either he is lying about his reasons for selling the stock, or he is unaware of the tax rules and routinely deducts losses even when he violates the wash sale rule.

And to think Sokol was considered a leading candidate to take Warren Buffett’s place. Berkshire Hathaway shareholders really caught a break there…

Update (6:30pm)

The first commenter below has pointed out that Sokol appears to have earned a profit of about $5 per share from his initial LZ sale. In such a case, wash sale rules would not have applied. It is a shame that Sokol did not provide a crystal clear and more detailed explanation for his actions, as opposed to having others speculate. But in terms of this particular speculation on my part, it does appear that Sokol sold the 2,300 share lot of LZ in order to avoid paying taxes on the gain, as opposed to offsetting gains elsewhere with a loss on the LZ position. Thanks to Michael Kelly for the insight. -CB

Enjoy this post? Subscribe and never miss another one: RSS | Email | Twitter

4 Thoughts on “Did David Sokol Lie About His Lubrizol Trades on CNBC?

  1. Chad Brand on March 31, 2011 at 6:30 PM said:

    Thanks, Michael. I will edit the article.

  2. Michael Kelly on March 31, 2011 at 5:56 PM said:

    There’s a lot wrong with the explanation that Sokol gave for his actions. It’s clear that non-financial firms that behave like financial firms (like Berkshire) need to take a long, hard look to see if they haven’t adopted what is common practice for standard, financial firms. His behavior would never have been tolerated at a street firm. You just don’t buy stock in companies that you promote internally. Period. That’s front-running. That’s a conflict of interest. Disclosing the conflict doesn’t make the conflict go away.

    However, your point in your post needs to be retracted. At the 8:13 mark in the interview he talks about the sale of the shares in question. He clearly states that he had a gain in the share position and is a little muddled about whether he’s offsetting a loss or a gain, but I take it that he says that he had existing losses that he is offsetting with the gain.

    Now, you may ask why that is tax planning. I live in the state of NJ where capital losses are not carried forward. That could be an explanation. (We have a gross income tax.) I can also think of AMT reasons and I’m sure accountants can think of other reasons. The point is that you do not know why he wanted to not carry forward the capital loss (and your whole point about the wash sale rule is off-base).

    I recommend, respectfully, that you listen to the interview again and amend your post accordingly. Here’s the link.

  3. Barry Randall on April 3, 2011 at 8:39 PM said:


    I agree: this is far from over. Aside from the issues you point out (and I agree they point to some serious inconsistencies in Sokol’s story), the larger issue is how Berkshire Hathaway apparently does not have a functional compliance department. Earlier in my career I worked for several large brokerage and money management firms. All of them had compliance procedures in place that would have not only prevented a trade like this from happening, but also would have broken such trades after-the-fact.

    I was especially astonished at Sokol’s claim that if he had to do things over he would simply have never told Buffett about it (and by extension have simply kept his own shares). This absolutely does not square with any known, SEC-approved procedure for upholding ones fiduciary duty as an employee.

    I have seen several analyses by securities law experts saying that Sokol couldn’t be found guilty of insider trading because he disclosed his position to Buffett. But that only puts the onus on Buffett to break Sokol’s trade, not simply countenance it and buy Lubrizol anyway.

    I think therefore that while Sokol may escape with only a tarnished reputation, Berkshire Hathaway’s compliance department is going to get a major league SEC audit and probably be sanctioned, and heaven help BRK if the SEC uncovers prior, similar patterns of pre-deal employee purchases.

    (I see from your prior blog post, you have some issues with BRK’s compliance department too.)

    Barry Randall
    Crabtree Asset Management

  4. adam lycett on April 25, 2011 at 12:21 PM said:

    Man up will you governance what a load of left wing bull crap, the guy did nothing illegal if i was buffett i would have pleaded with him to stay buffett as lost an able guy who broke no laws. Losing him is tragic for berkshire not the fact that he made 3million dollar WOW, no one right of mind would risk their career for that amount of money certainly not him on the wages he was on mid western and netjets he will make at $5 million dollars a year the issue isnt the money its the loss of talent that berkshire has lost. The US has so many losers concerned with sucessfull people than their own sad lifes. The US is pathetic it will lose its top talent to chinese companys over the next 5 years and No one will operate out of that dead dinosaur.

Post Navigation