Revisiting the David Sokol/Berkshire Hathaway "Insider Trading" Debate: Part II

No insider trading, but what about state fiduciary duty law?

In an earlier post, at the request of Francine McKenna of The Dig Substack (which I recommend highly), I revisited the David Sokol insider trading saga.

Revisiting the David Sokol/Berkshire Hathaway "Insider Trading" Debate: Part I

For the benefit of those who missed that post, herewith a brief recap: About fifteen years ago, David Sokol was widely considered the most likely successor to Warren Buffett as chief executive of Berkshire Hathaway Inc.

In March 2011, however, Sokol suddenly resigned. In the wake of that action, Buffett released a statement announcing that Sokol’s departure came after it was discovered that Sokol had purchased stock in a petrochemical company called Lubrizol shortly before Stokol proposed that a Berkshire energy subsidiary, of which he CEO, acquire Lubrizol.

Specifically, between January 5 and January 7, 2011, Sokol purchased approximately 96,000 Lubrizol shares for about $104 each. He first recommended the acquisition to Buffett around January 14 and raised the idea again later that month after meeting with Lubrizol’s chief executive.

On March 13, Berkshire’s board approved an offer to purchase Lubrizol for $135 per share. Sokol later sold his shares, making a profit of roughly $3 million. After the transactions became public, he resigned from Berkshire. Buffett initially stated that he did not believe Sokol had violated the law. However, he later described Sokol’s behavior as both “inexplicable” and “inexcusable.”

In the earlier post, I explained why I thought—and still do—that Sokol had not committed insider trading in violation of SEC Rule 10b-5. I also dug into whether Sokol had violated the state law doctrine against usurping corporate opportunities. (Berkshire is incorporated in Delaware, so per the internal affairs doctrine Delaware law governs fiduciary duty disputes involving Berkshire employees and directors.)

For a detailed overview of the law of insider trading and the policy rationale for regulating insider trading, see my book Insider Trading Law and Policy (2d ed. 2023) (AMAZON LINK).

In this post, I turn to the question of whether Sokol breached his state law fiduciary duties to Berkshire under the Brophy line of cases, the agency law issues, and the federalism issues.