Buffett Scandal Could Have Been Worse: Sokol’s Other Trade

  • Share
  • Read Later

David Sokol, a former Berkshire Executive, resigned on Wednesday. (Mario Anzuoni/Reuters)

Warren Buffett’s Berkshire Hathaway trading scandal could have been a twofer.

It appears Lubrizol wasn’t the first time David Sokol, who was until his resignation yesterday a top executive at Berkshire and a leading contender to succeed Buffett, tried to profit from a Berkshire acquisition. As early as late 2008, Sokol may have tried to talk Buffett and his company into buying a bank in which he was a large shareholder.

The name of the bank is Middleburg Financial Corporation, which is based in Middleburg, Virginia but has most of its operations in western Washington, D.C. Sokol began buying stock in the company in 2008 and disclosed in August of that year that he had bought 227,000 shares, which at the time were trading for about $17.50. Sokol continued buying shares in the bank after the stock dropped in the financial crisis. In March 2009, Sokol inked a deal with the company to buy a block of shares worth $5 million in a private transaction. In all, Sokol owns a little over 20% of the shares of the small bank, which means his stake in the company is now worth nearly $25 million.

Sometime after Sokol initially bought into Middleburg, he apparently approached Buffett with the idea of Berkshire buying the whole bank. Buffett didn’t bite. This morning on CNBC, Sokol said that Lubrizol was not the first time he had recommended one of his investments to Buffett. He said he had previously advised Buffett to consider buying a small bank in which he had invested. According to Securities and Exchange Commission filings, Middleburg is the only bank Sokol owns shares in.

Sokol’s investment has come in handy for Middleburg. The bank used the money it got from Sokol along with money it received in another private placement to repay funds it borrowed from the government as part of the Troubled Asset Relief Program. According to the New York Times’ Dealbook, in one marketing document Middleburg cited Sokol’s investment, and the fact that he was a top executive at Berkshire Hathaway, as an indication that the bank was well capitalized. Curiously, shares of Middleburg have jumped 17% today on the news of Sokol’s resignation from Berkshire.

Sokol was reportedly a hard charging executive. He worked long hours and reportedly always keep a ranking of his employees handy, so when cut backs needed to be done he would immediately know who to fire. Now it looks like his efforts to boost his investment portfolio may have been a little too aggressive.