Buffett: Citigroup is in an uncomfortable spot. Its bankers may have information needed to determine whether the onetime successor to Berkshire Hathaway Chairman Warren Buffett violated securities laws when personally trading in shares of Lubrizol, which Berkshire acquired for $9 billion. While uncomfortable, this doesn’t have to be damaging territory for Citi. Indeed, merger documents detailing the sequence of events that led to the Lubrizol deal on March 14 show Citi doing what investment banks are supposed to do: matching hungry buyers with willing sellers.
David Sokol, acting in some capacity as a dealmaker for Berkshire, asked Citi bankers last fall to come up with good ideas for “possible transactions” in a variety of industries, including chemicals. Citi delivered: On December 13, its bankers went over a list of 18 companies, including Lubrizol, which Citi had already been advising on “a range of strategic alternatives.” Sokol found Lubrizol attractive and asked Citi to let the company’s CEO, James Hambrick, know he’d be interested in having a discussion.
So far, so good for Citi. It reached out to Hambrick and got the ball rolling. On January 6 Lubrizol’s board met and had an “extensive and thorough discussion” about Berkshire’s interest and hired advisers. Shortly thereafter Sokol and Hambrick spoke, and agreed to meet on January 25 in Cleveland, where Sokol made clear he’d need to hand off discussions to Buffett, who closed the deal. All this is M&A 101. And, arguably, the Citi bankers who advised Lubrizol — Paul Smith, Nathan Eldridge, Sara Schwerin and Joe Sauvage — earned their fees for solving the needs of a client that felt its shares were underappreciated. Trouble is, Sokol, who says he did nothing wrong, bought shares in Lubrizol the day after the December 13 meeting with Citi at which he effectively kicked off the deal. He did so again on January 5, January 6 and January 7 — or before, during and after Lubrizol’s board meeting.
Apart from deciding whether Sokol’s conversations with Citi made him an insider, the SEC must answer a basic question. Did Sokol know the board was meeting on January 6 when he placed his $10 million trade? Again, going back to the M&A textbook, it wouldn’t have been out of the ordinary for Citi to have informed Sokol that Lubrizol’s board was meeting. If Citi’s bankers haven’t heard from the SEC yet on this conundrum, they’d better prepare.
