Sokol’s Ways Questioned in Past Suits
Brendan Hoffman/Bloomberg News
Last year, a judge ruled that MidAmerican Energy, run by David Sokol, had improperly changed its accounting on a project.
By GERALDINE FABRIKANT
Published: April 4, 2011
Lawsuits involving David L. Sokol after he joined Berkshire Hathaway suggest that management had some warnings about his rules-pushing nature long before his resignation last week for buying stock in a company shortly before Berkshire acquired it.
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In a rebuke last year, the judge ruled in that case that MidAmerican had improperly changed its accounting on the project and criticized Mr. Sokol directly. The change in accounting was “intended to eliminate the minority shareholders’ interests,” the judge wrote, awarding more than $32 million to the minority shareholders. The case had taken more than five years to work its way through the courts. During that time, Warren E. Buffett, the chief executive of Berkshire, expressed confidence in Mr. Sokol by broadening his portfolio beyond MidAmerican to include Netjets, a company that sells fractional use of private aircraft.
After Mr. Sokol took over Netjets in July 2009, some critics complained about his management style and his strategy for shrinking the company, which had been ailing even before the financial crisis did more severe damage.
Under Mr. Sokol’s direction, the aircraft company filed a suit last November seeking to learn which employees had provided information to Alice Schroeder, the author of “The Snowball,” the best-selling biography of Mr. Buffett. Ms. Schroeder declined to supply the information, and her lawyer characterized the action as a witch hunt. The suit was dropped on Monday.
The lawsuits would have been “yellow lights: if not danger signals, at least warning signs,” Ms. Schroeder said in an interview on Monday. “Disputes in business are common, but both of these speak to the integrity of the management, not just ordinary business wrangling.”
Some others have questioned Mr. Sokol’s hard-charging style as well. Michael Lissack, who was an investment banker at Smith Barney in the late 1980s, worked with Mr. Sokol when he ran Ogden Projects, the resource recovery subsidiary of the Ogden Corporation.
He characterized Mr. Sokol as “very bright” but at times wondered about his motivation. “There is nothing wrong with being tough,” Mr. Lissack said. “There is something wrong with only looking out for No. 1 when you pretend to be a team player.”
The Netjets suit was dropped less than a week after Mr. Sokol said he was resigning from Berkshire, which acknowledged that he had owned shares of Lubrizol, a specialty chemicals company, before Berkshire announced it would acquire the company.
Investment bankers talked with Mr. Sokol about Lubrizol as a possible acquisition target. In January, Mr. Sokol accumulated about $10 million in shares of Lubrizol and had a discussion with Lubrizol’s chief executive. Mr. Sokol subsequently promoted the company to Mr. Buffett, Mr. Buffett has said.
Two months later, when Berkshire agreed to buy the company, Mr. Sokol’s shares soared about $3 million in value.
After the resignation, Mr. Buffett said that he did not believe the purchases were unlawful. He also said that they were made before Mr. Sokol had discussed Lubrizol with Mr. Buffett, so he could not have known whether Mr. Buffett would be in favor of a deal.
At Netjets, Mr. Sokol faced a difficult task because of the recession and because, by most accounts, the company had grown bloated. Ms. Schroeder, who tracks Berkshire and its companies, noted that Netjets had shown improvement, but added that public information was very limited because the company was a tiny part of Berkshire.
The Netjets lawsuit “claimed that some employees, or at least one employee, had violated his or her confidentiality agreement with Netjets by forwarding an internal e-mail from Mr. Sokol distributed to more than 2,000 of the companies’ employees,” said Cameron Stracher, of counsel to Levine, Sullivan, Koch & Schulz, the firm representing Ms. Schroeder.
In January, the company started a proceeding in Ms. Schroeder’s home state of Connecticut to subpoena her to produce her sources. “To sue to get an e-mail that was distributed companywide is clearly a witch hunt,” Mr. Stracher said.
Michele L. Noble, a partner at Thompson Hine, the firm representing Netjets, said she could not comment on the company’s decision to withdraw its suit. Mr. Sokol did not return e-mails, and a company spokeswoman declined to comment.
According to the Netjets complaint, an employee shared an e-mail with Ms. Schroeder that was then posted on her Web site. The e-mail, which is still posted there, is signed by Mr. Sokol. “Former executives and current employees are working diligently to harm you, your families, and our business with rumor mongering, deceit and other forms of unethical behavior,” it says in part.
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Mr. Sokol’s tough style was evident in the MidAmerican case, which involved a builder in the Philippines that had a minority stake in a venture with MidAmerican. Judge Gary Randall, ruling from a Nebraska District Court, wrote that MidAmerican Energy acted “inequitably, unfairly and dishonestly,” and that it did not come to the court with “clean hands.”
The lawsuit was based on a deal in 1993 when the builder, San Lorenzo Ruiz Builders and Developers Group, sought investors for an irrigation project in the Philippines. At the time, CalEnergy, which became MidAmerican, was headed by Mr. Sokol. The firm agreed to invest in the project with San Lorenzo Ruiz as a minority shareholder.
The deal stipulated that if the internal rate of return fell below a certain level, the minority shareholders would be eliminated. The judge found that the company’s decision to change the method of calculation for the internal rate of return, which Mr. Sokol made himself, was a “breach of obligation.”
The judge awarded San Lorenzo $32 million in past damages and 115,000 shares of stock in the project company. James W. Kennedy, a partner at Kennedy Johnson Gallagher, which represented San Lorenzo Ruiz, said that based on project distributions to shareholders, the shares could generate more than $100 million in additional payments. The figure was based on projections by MidAmerican in court documents, according to Mr. Kennedy, who tried the case with Gabriel Berg.
Bart McLeay, the lawyer representing MidAmerican, did not return a phone call seeking comment.
Mr. Kennedy also represented La Prairie Group Contractors, which had designed the irrigation project. Before the San Lorenzo Ruiz suit, La Prairie had sued MidAmerican in a California state court in 2002. Ultimately, Judge Richard Kramer ruled that La Prairie was entitled to payments of about $30 million from MidAmerican and a stake in future profits, according to Mr. Kennedy.
A smaller legal dispute over the actual sale of MidAmerican to Berkshire was settled with little fanfare. MidAmerican shareholders argued in a lawsuit that the board had sold the company for less than its value. The lawsuit claimed that MidAmerican was worth $37.37 a share and was sold for $35.05 a share. MidAmerican agreed to pay $7.5 million.
No claims were ever brought against Berkshire Hathaway in the suit, and there was “no element of personal benefit in the lawsuit at all,” noted Roxanne Conlin, the lawyer for the plaintiffs.
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