David Sokol’s escape from an insider-trading probe further fogs an already hazy law. Warren Buffett’s fallen heir-apparent was a prime investigation target for buying $10 million of Lubrizol shares shortly before Berkshire Hathaway acquired the company for $9 billion.
Yet, Sokol’s lawyer says the US Securities and Exchange Commission (SEC) dropped the matter. Even with a broad insider-trading crackdown since the affair was disclosed almost two years ago, the crime’s contours remain elusive.
It’s illegal to trade on material, non-public information in breach of some duty. At least based on what was disclosed publicly, that would seem to be exactly what Sokol did. He bought Lubrizol stock a day after bankers pitched the company as a possible Berkshire takeover target. He sold those shares and then bought more after he was informed by bankers that Lubrizol’s chief executive would raise Buffett’s interest at a meeting of the lubricant maker’s board.
Sokol’s inside information may not, however, have been material. He couldn’t be sure Berkshire would offer to acquire the company when he purchased the shares. It’s also unclear whether he necessarily breached a legal duty of trust.
These weaknesses could be what persuaded the SEC to drop the case, though it’s hard to know for sure. The agency isn’t saying. What is clear is that the evidence wasn’t as strong as in, say, the prosecution of Rajat Gupta, the former McKinsey boss and Goldman Sachs director. Sokol’s situation did, however, come off as similar to another insider-trading case the SEC has opted to pursue, against billionaire brothers Samuel and Charles Wyly.
On balance, the regulator may have saved some face by not pursuing Sokol if it wasn’t sure it could win. After embarrassing losses like last year’s acquittal of Citigroup employee Brian Stoker on securities fraud charges, the watchdog is probably wary of being too aggressive.
Despite scores of recent insider-trading convictions, many since the Lubrizol trades came to light, it’s still unclear what is and isn’t allowed. The bitter taste that lingers from the Sokol affair is that insider trading isn’t always what it seems.