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03.31.11

Warren Buffett's Tarnished Halo

As reputations go, Warren Buffett’s was Teflon. Charlie Gasparino on how his deputy’s strange trading profits reveal the Oracle of Omaha as—gasp!—another overambitious businessman.

The Securities and Exchange Commission is now “kicking the tires” on the bizarre news that David Sokol, Warren Buffett’s heir apparent to run Berkshire Hathaway—a guy who manages two large companies for Buffett, among many other duties—has a little job on the side in trading large blocks of stock, including shares in one company he helped convince Buffett to buy.

This may or may not lead to a full blown investigation (even if it does, I can’t imagine anyone being charged) but it should lead to a full blown reassessment of Warren Buffett as Wall Street’s white knight.

Sokol's resignation is less baffling than Buffett’s PR spin last night: “Dave’s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea.” In other words, Buffett’s defense is that the man he was grooming to take over was so clueless that he had no idea how he’d react.

“Neither Dave nor I feel his Lubrizol purchases were in any way unlawful,” Buffett continued in the memo. “He has told me that they were not a factor in his decision to resign,” and that somewhere along the way “in a passing remark” Sokol did his corporate duty and faithfully disclosed he had owned shares in a company that is now part of the Buffett empire, thus profiting handsomely from his trade.

Since when did a passing remark constitute proper disclosure of such a large, and as it turns out, controversial trade?

I can’t tell you whether all of this constitutes insider trading or some other violation of the federal securities laws such as “front running” (where traders take positions in stocks in advance of someone else buying the stock). The SEC will decide, I am told, shortly whether to add Sokol’s trade to its burgeoning list of official cases that never seems to end.

Buffett’s defense is that the man he was grooming to take over was so clueless that he had no idea how he’d react.

But I can tell you that this entire episode shows why investors and the media should stop portraying Warren Buffett as a saint, who never lies, cheats or equivocates and surrounds himself with similar heavenly characters. Instead, Buffett should be seem for what he is: A great investor and businessman motivated by greed and ambition and like his unheavenly deputy.

If this weren’t Warren Buffett, the immediate fallout would be greater. Consider the following: Sokol bought 2,300 shares of a stock in a company called Lubrizol in mid-December 2010, sold it a week later, then made a massive bet by snapping up close to 100,000 shares in early January when the company was trading around $110 a pop. That’s an $11 million position, which is huge even for the most sophisticated individual investor.

Like I said, Sokol also runs two companies for Buffett, MidAmerican Energy Holdings and NetJets Inc., so you have to wonder where he has all the time to moonlight as a day trader. You also have to wonder why he would buy a $110 stock in a chemical company that seemed to be fully priced; shares of Lubrizol had risen from about $80 that summer and looked to be stuck in the $100-$110 range. In other words, Sokol was taking a huge gamble.

But gambling as a day trader could in theory produce some easy money if you have the ability to prod one of the world’s most prestigious investors to buy one of your holdings.

That’s exactly what Sokol did. A week later, he told Buffett that he thought Berkshire should buy Lubrizol, makes that little passing remark about owning shares, and the rest is history. In mid March, Berkshire buys Lubrizol, and the stock rises to around $135 a share, and in a little more than two months, Sokol “earned” between $2.5 million and $3 million.

Buffett’s halo has been dimming for some time. He tried to downplay the role that rating agencies played in missing the financial crisis while he owned a chunk of one of the biggest raters, Moody’s Investors Service. He stood behind Goldman Sachs CEO Lloyd Blankfein despite general sleaze at the firm, while he boasted that he was earning $15 a minute, on his ownership stake in Goldman.

In last night’s memo, which spun the the notion that Sokol wasn’t really booted from the firm, Buffett said that he and his longtime No. 2, Charlie Munger, make all the investing decisions. “(Sokol) he knew he would have no voice in Berkshire’s decision once he suggested the idea; it would be up to me and Charlie Munger, subject to ratification by the Berkshire Board of which Dave is not a member,” Buffett wrote, before closing with the line: “I have held back nothing in this statement. Therefore, if questioned about this matter in the future, I will simply refer the questioner back to this release.”

Not even St. Warren will get away with that line if the SEC asks him to explain these troubling circumstances in more detail.

Charlie Gasparino is a senior correspondent for Fox Business Network. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His latest book, Bought and Paid For, is about the Obama administration and Wall Street.