Case Study – Insider Trading

Case Study – Insider Trading

Introduction

An ‘insider’ is a person who has access to non-public information about the ownership of stocks at a company equaling to more than ten percent of a corporation’s equity. Insiders can participate in shares trade, but the transactions must be registered with the Securities Exchange Commission (SEC). Being a high-level executive, David Sokol violated the insider trading rule due to the failure to inform the SEC and Berkshire Hathaway’s audit committee of his intended purchase of Lubrizol stock.

The issue of whether David Sokol violated the rules of insider trading or not is debatable, but one thing is clear: he broke Berkshire Hathaway’s code of conduct and business ethics. In his defense, Sokol argues that Lubrizol was not on Berkshire’s restricted list and that there was a 5% chance that Berkshire would purchase Lubrizol (Greenberg, 2011). However, Warren Buffet admitted that Sokol purchased shares at Lubrizol around the same time he engaged Citigroup Bank to fund Berkshire’s acquisition of Lubrizol. Berkshire’s code of ethics and business conduct requires that Sokol should have informed Berkshire’s auditor, Thomas Murphy, of the intended purchase. The code, in particular, requires Berkshire’s CEO and its subsidiaries’ chief financial officers to notify the audit committee of such conflicts of interest (Greenberg, 2011). The code also relates to the application o common sense, that the leaders should avoid anything that will attract negative press. Finally, the code addresses insider trading by banning the use of insider information to tip others or use it for their gain (Greenberg, 2011). By using insider information for private profiteering without informing the audit committee or resigning, Sokol violated Berkshire’s code of business conduct and ethics.

Although the SEC ultimately cleared David Sokol of any wrongdoing due to inadequate evidence, I strongly feel that he violated insider trading rules. Sokol misled Buffet about his intentions from the outset, evidenced by the latter’s initial input on the matter only to change the narrative later. Sokol bought the $10 million stock while representing Berkshire in an acquisition negotiation deal, a clear indication that he sought to profiteer from the deal yet had access to insider information (Prasad, 2013). Sokol’s actions violate Delaware’s state law, where Berkshire is incorporated. Sokol essentially failed in his fiduciary duties to his Berkshire Company. Delaware State’s laws are known for not being strict regarding corporate fiduciary duties (Hazen,1982). The court’s decision to acquit Sokol was a result of a conflict between federal and state laws on insider trading.

David Sokol’s actions are unethical at best and unlawful at worst. Buffet’s analysis of Sokol’s actions is that they are unethical. Despite his betrayal of the company, Sokol had dedicated years of service to Berkshire Hathaway. Sokol betrayed his company (Berkshire) by probably agreeing to an unfavorable deal to make more money. However, Sokol has the right to make personal investments; hence, the purchase was not illegal.

The Christian view of faith and work avers that people should conduct themselves to contribute to others’ common good. The requirement extends to the workplace since it requires people to use their vocations as avenues to promote human flourishing. Sokol used his position for personal prosperity and not the common good. Therefore, Sokol’s actions are unethical even by Christian standards.

Conclusion

David Sokol’s purchase of shares at Lubrizol Corp. just before Berkshire signed a deal to acquire Lubrizol goes against Berkshire’s ethical and business code of conduct. The purchase also goes against the federal law on insider trading. However, Sokol’s ultimate acquitting is a result of a conflict between federal and Delaware State laws on insider trading.

References

Hazen, T. L. (1982). Corporate Insider Trading: Reawakening the Common Law. Wash. & Lee    L. Rev., 39, 845.

Greenberg, H. (2011, March 31). Greenberg: Sokol, At the Very Least, Violated Berkshire’s Code of Ethics. Www.cnbc.com. https://www.cnbc.com/id/40071141

Prasad, S. (2013, January 4). SEC drops case against ex-Berkshire exec Sokol: lawyer. Reuters. https://www.reuters.com/article/us-sokol-berkshirehathaway-idUSBRE90304520130104

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Case Study – Insider Trading

The purpose of this assignment is to review a relevant business scenario to determine if the code of conduct and SEC prohibition may have been violated during a potential insider trading incident.

In 2011, Warren Buffett reluctantly (and belatedly) acknowledged that David Sokol violated Berkshire Hathaway’s insider trading rules to score a $3 million windfall profit on shares of U.S. chemicals maker Lubrizol, which rose by nearly a third after Berkshire Hathaway announced it would buy the company.

Using the topic Resources, write an essay (500-750 words) in which you address the following:

Review Sokol’s conduct as reported in the Reuters timeline and describe if and how you believe he may have violated the “Berkshire Hathaway Inc. Code of Business Conduct and Ethics.”
Review Sokol’s conduct as reported in the Reuters timeline and describe if and how you believe he may have violated the SEC prohibition against insider trading.
Review Sokol’s defense of his actions in the CNBC transcript and, in your own words, compare “unlawful behavior” and “unethical behavior.”
Through the Christian worldview, it is believed that one should carry out one’s work within the public arena with compassion, justice, and concern for the common good. Utilizing the Christian worldview, determine whether Sokol’s actions were unethical using support from the “Statement on the Integration of Faith and Work.”
While APA style is not required for the body of this assignment, solid academic writing is expected, and documentation of sources should be presented using APA formatting guidelines, which can be found in the APA Style Guide, located in the Student Success Center.

This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.