Insider to outsiders

SEC/Buffett: The commonsense case against David Sokol looks like a no-brainer — at least by any reasonable lay reading. It doesn't take a juris doctor to feel that Warren Buffett's departing deputy, who bought $10 million of Lubrizol shares for himself shortly before Berkshire Hathaway acquired the company for $9 billion, was an insider who traded for personal gain. Yet there seems to be substantial ambiguity in the legal community that there's a clear-cut case against Sokol.

Lawyers — and seemingly Buffett himself — see the facts through a prism influenced by years of precedent and parsing of the letter of the law. One former watchdog reckons there’s no legal case, another that it's “highly unlikely” Sokol violated federal securities laws. Much of the reasoning boils down to the notion he could not have known for certain that Buffett-led Berkshire would buy Lubrizol.

The logic should befuddle the masses. Any reasonably aware investor, learning that one of Buffett's potential successors was presenting Lubrizol to his boss as a possible takeover target, would have deemed it material information. It doesn’t take a deep dive into the SEC website to find an occasion when the agency argued that insider trading can occur when an individual has access to information “intended to be available only for a corporate purpose and not for the personal benefit of anyone” and then “takes advantage of such information knowing it is unavailable to those with whom he is dealing.”

Legal minds arguing in Sokol’s favour point to strict interpretations of case law and to mitigating circumstances, including his lack of a say on whether Berkshire would ultimately do the Lubrizol deal.

But that misses the point, even by the SEC’s own interpretation of its rules: “We are not to be circumscribed by fine distinctions and rigid classifications.” The watchdog doesn’t shy away from insider trading cases. Just on Wednesday, the SEC accused a lawyer and trader of illegally making $32 million using stolen confidential merger-related information. If the agency can’t find a way to at least make a decent attempt at a legal case against Sokol, it will make a mockery of the insider trading laws it enforces, its own credibility, or both.