Even when he’s a no-show, Warren Buffett steals the show. And so it was that the billionaire Berkshire Hathaway chairman, even in his absence, dominated a New York courtroom where the fate of Rajat Gupta, the former McKinsey & Co. chief charged with a slew of insider-trading violations, was being determined. But it’s another insider-trading situation involving Buffett that still has Wall Street riveted: the curious case of his former heir apparent, David Sokol.
Buffett was more a bystander than a participant in the Gupta affair. Though Gupta might have adhered to McKinsey’s vows of discretion when he ran the place, he’s accused of sharing sensitive information he obtained as a Goldman Sachs director with the now-jailed hedge-fund manager Raj Rajaratnam. After a call with Goldman's board during the 2008 financial crisis, Gupta allegedly tipped off Rajaratnam that Buffett was about to inject $5 billion of fresh capital into the Wall Street firm.
That this constituted a material event—a requirement for an insider-trading -conviction—is of little doubt. Byron Trott, the former Goldman banker who engineered the deal, testified last week: “This was about as top secret as you could get.” What’s less clear, though, is whether Gupta had anything to gain by passing the information. In that sense, it’s the reverse image of Sokol’s situation.
A little more than a year ago it emerged that Sokol, Buffett’s lieutenant, had personally traded shares of a company that his boss later acquired. The affair tarnished Buffett’s reputation for running a tight, ethical ship—and ended Sokol’s career at Berkshire.
While Sokol hasn’t been charged with -securities-law violations, it’s undeniable that he was trading: his purchases of $10 million of Lubrizol stock were disclosed by Buffett himself. What’s missing is any proof that Sokol made the trades on the basis of material, nonpublic information.
Securities and Exchange Commission filings on the $9 billion sale of Lubrizol, however, catalogue how Sokol got the ball rolling on the deal. While he was apparently not privy to whether Buffett would approve the takeover, the documents show that Sokol knew, before he bought his stock, that Lubrizol’s board would discuss a possible purchase—something not known to shareholders. As Trott’s testimony suggests, the very knowledge that Buffett is considering an investment or acquisition may, by itself, be market -moving—and therefore material.
What happens in the Gupta trial may not be applicable elsewhere. And to make a case that Sokol violated insider-trading laws will require more than evidence that he traded stocks and had some material information. But with Buffett still footing up to $200,000 a month for his former acolyte’s legal fees, it’s a good bet—even without insider information—that we haven’t heard the last of the Sokol case.