Question

David Sokol worked at Berkshire Hathaway for legendary investor Warren Buffet, who is renowned not only for his investment skills but also for his ethics. Bankers suggested to both Sokol and the CEO of Lubrizol that the company might be a good buy for Brekshire. Sokol then found out that the CEO of Lubrizol planned to approach Berkshire about a possible acquisition. Sokol purchased $10 million worth of Lubrizol stock before recommending Lubrizol to Buffett. Sokol mentioned to Buffet "in passing" that he owned shares of Lubrizol.

Buffet did not ask any quesitons about the timing or amount of Sokol's purchases. Sokol made $3 million profit when Berkshire acquired Lubrizol.

Did Sokol violate insider trading laws? Did he behave ethically? What are Buffet's ethical obligations?

Answer 1

As David works at Berkshire he is an employee of the company. He had undisclosed price sensitive information. He did violate insider trading laws. According to CFA Code of Ethics an employee should not act on price sensitive information till it becomes public. For the employee of an investment banking firm interest of the clients and employee ranks first than his own interest. First preference is given to clients followed by employer and then the employee can act on the information given he has received permission from his supervisor and the compliance team.

No, David did not behave ethically. He has violated the code of ethics by acting on the information. Clients interest are not safeguarded. Client trusts are very important in an investment banking firm.

By not asking question Buffet has also violated the Code of Ethics. The ethical obligations of Buffet's are the employer should ensure that none should act on the price sensitive informaton. A proper complaince team is required who will look into such matters. Proper supervision is required. The employer should ensure that every employee follows CFA prescribed Code of Ethics whether the person is CFA or not. A user manual should be there. Proper training on integrity should be there to the employees wherein employee must ask the supervisor and the complaince team before acting. If not doing so the employee is guilt and proper action should be taken against him.