Buying Lubrizol Case Analysis

Z5093991

David Sokol was chairman of many of Berkshire Hathaways 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 Sokols subsequent
recommendation to acquire the same company. This case analysis attempts to
identify the CFA Standards of Professional Conduct applicable to Sokols 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 companys prospects with him, he may have violated
this Standard if his recommendation to Buffett was based on Citis, rather than
his own, thorough analysis.
I (C) Misrepresentation As long as Sokols recommendation reflected
adequate research about Lubrizol, there is no violation of this Standard.
I (D) Misconduct Sokols 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 Sokols trades were of a substantial
value, there is no indication that he intended to manipulate the movement of
Lubrizols share price.
Standard III (A, B, C, D, and E) are not applicable to David Sokols 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 Sokols actions.
V (A) Diligence and Reasonable Basis As long as Sokols 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 Sokols 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 Sokols 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.