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Berkshire audit: Sokol intended to deceive company

| Thursday, April 28, 2011

NEW YORK -- Former Berkshire Hathaway executive David Sokol intended to deceive the company in the way he disclosed his interest in Lubrizol Corp. and violated Delaware law in the way he behaved, the company's audit committee concluded in a scathing report.

The report, released by Berkshire just three days before its annual meeting, leaves Sokol open to civil proceedings, a move Berkshire's board said it was considering.

It may also answer the demands of shareholders who expected CEO Warren Buffett to address the controversy at that meeting, his plans to remain silent on the matter notwithstanding.

Buffett previously said he would have nothing further to say about Sokol's actions, a stance that became untenable over time given the intense pressure on the conglomerate.

Though the report suggests Buffett was repeatedly deceived as to what was happening around him, one shareholder said it was also crafted to exonerate him from wrongdoing.

"This report makes it clearly look like this was not Warren Buffett's fault, this was Sokol's fault," said Michael Yoshikami, chief executive of wealth manager YCMNET Advisors and a Berkshire shareholder. "There really is an effort here to make clear that this was not Warren Buffett's behavior in any way, this was Sokol's behavior."

Buffett announced Sokol's resignation in March, noting that Sokol bought shares in Lubrizol before suggesting to Buffett that Berkshire buy the company. While Sokol mentioned to Buffett in "passing" that he held some Lubrizol stock, Buffett said he only later found out that Sokol held nearly 100,000 Lubrizol shares worth about $10 million.

Sokol made a profit of about $3 million -- a gain that could be at risk. The Berkshire board said it was still considering legal action against Sokol to, among other things, recover any trading profits he made.

"It hardly sounds like Berkshire is trying to circle the wagons to protect Sokol," said Francis Pileggi, a partner at Fox Rothschild LP in Wilmington, Delaware. "If I had my druthers, I would rather be representing Berkshire in this matter than Sokol in a Delaware court."

The law firm representing Sokol, Dickstein Shapiro, could not immediately comment on the Berkshire statement.

The board also said it would cooperate with any government investigation. A spokesman for the Securities and Exchange Commission declined to comment.

Sokol, who used to run Berkshire subsidiaries MidAmerican and NetJets, was widely seen as Buffett's heir apparent, an image Buffett biographers say the "Oracle of Omaha" cultivated.

Yet Sokol, in his one public appearance since the scandal broke, told CNBC he had no aspiration to the job. In yesterday's statement, Berkshire said Sokol reiterated as much to Buffett before Buffett announced Sokol's resignation.

When Buffett made that announcement, he said he believed Sokol had not done anything unlawful. The statement seemed to suggest otherwise.

"His misleadingly incomplete disclosures to Berkshire Hathaway senior management concerning those purchases violated the duty of candor he owed to the company," the board said -- noting that an executive's duty of candor was part of the duty of loyalty under Delaware law where Berkshire is incorporated.

Berkshire's board also said certain answers Sokol gave to Buffett in response to questions about the nature of his holdings appeared "intended to deceive."

In total, the 18-page statement uses variations on the word "violation" some 11 times.

"One way or another, Mr. Buffett will have to address this. It's conceivable that this release relives Mr. Buffett from the chore of addressing what is an unpleasant issue," said Jerry Bruni, CEO and portfolio manager at J.V. Bruni and Co, which owns Berkshire shares and has $450 million of assets under management.

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