A New Definition of "Chump Change"

It might be nice to think of $3 million as "chump change", but I doubt that I'll ever be able to do that.

The question is, Is it ever worth profoundly damaging your reputation (at the very least) or risking massive fines and jail time (at the worst) for chump change?

Martha Stewart, please pick up the phone.

News broke Wednesday that David Sokol, "heir apparent" to Warren Buffett's Berkshire Hathaway, had bought shares in a company that he then encouraged Berkshire Hathaway to acquire. It sounds an awful lot like insider trading, but Mr. Sokol (and Mr. Buffett) insist that he did nothing wrong.

Mr. Sokol has resigned from Berkshire Hathaway, and, according to today's New York Times, the SEC is investigating (full story here).

From a timeline prepared by Reuters, it's not clear that Mr. Sokol actually broke the law. He did make a profit of at least $3 million which would be a rich reward to most of us, but is likely only chump change to Mr. Sokol, who has earned many times that amount in the last three years as chairman of MidAmerican Energy, a subsidiary of Berkshire Hathaway. Would it be worth risking everything for such a (relatively) small amount?

Even if the investigation proves that Mr. Sokol's actions in buying Lubrizol shares only days before recommending the acquisition to Berkshire Hathaway were not illegal, the appearance of his action is bad; the ethics is certainly shaky; and the best one can say for it is, Stupid stupid stupid. So if it's not a trifecta of illegal, immoral, and dumb, it's definitely a two-fer.

Actually, I find Mr. Buffett's behavior a little more puzzling than Mr. Sokol's. According to the timeline, in mid-January, "Sokol suggests buying Lubrizol to Buffett, with a 'passing remark' that he owned some stock in the company."

Despite the fact that Mr. Buffett was apparently not interested in acquiring Lubrizol at the time (again, per the timeline), wouldn't you have expected him to ask some questions?

As reported in today's Times "Dealbook" (full story here),

At that point, most corporate chieftains would have asked questions, directed the executive to seek legal advice or even put the idea of a deal on ice, experts said. But Mr. Buffett did none of those things — even though his company, Berkshire Hathaway, like most large companies, has policies that restrict employees from using or sharing confidential information for “stock trading purposes.”

“It just seems odd to me that it didn’t throw up some red flags,” said Greggory Warren, a senior stock analyst at Morningstar. “As much as they don’t like to have their hands in what managers are doing, there are occasions like this where they have to.”

Mr. Buffett assumed that Mr. Sokol had held the stock for years, not days, which would make the timing of the deal less suspicious. “It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings,” Mr. Buffett said in a statement on Wednesday announcing Mr. Sokol’s resignation.

Well, that seems a little disingenuous, doesn't it? Why would Mr. Buffett have simply "assumed" that Mr. Sokol had held the stock for years? Particularly when Mr. Buffett has for so long built and protected his company's reputation for ethical dealing.

Mr. Buffett seems to understand just how quickly a carefully-developed reputation can be undone; "Dealbook" also reported that in a July 2010 letter Mr. Buffett had told his managers to guard the company's reputation "zealously".

Mr. Buffett is quoted as saying, "We can afford to lose money — even a lot of money. But we can’t afford to lose reputation — even a shred of reputation."

Prescient words, unfortunately.