Abrupt Resignation of Potential Warren Buffett Successor Raises Questions

March 31, 2011 — -- David Sokol was a member of one of the most elite groups in the world -- the Berkshire 4. And now his abrupt resignation from Berkshire Hathaway has not only taken him out of the running as a possible successor to Warren Buffett but has shaken up a succession plan at one of the most venerable companies in the world.

Many analysts are asking if the circumstances surrounding Sokol's surprising resignation will have repercussions for Berkshire Hathaway's solid gold reputation.

In a letter released to shareholders Wednesday, Buffett, announced that Sokol had submitted his resignation March 28. It wasn't the first time that Sokol had submitted a resignation letter to his boss, but it was the first time that Buffett had accepted one. Long seen as a rising star, Sokol had spent 11 years at Berkshire, where he was CEO of NetJets, one of the conglomerate's holding companies.

The questions surrounding Sokol's resignation focused on a $10 million investment Sokol made in a chemical company, Lubrizol, in January, which Berkshire Hathaway would acquire for $9 billion two months later, largely at Sokol's suggestion.

Sokol's investment value rose $3 million after the purchase.

In his letter, Buffett made it clear that Sokol's resignation had not come from his own urging, nor did it have to do with Sokol's private investment in Lubrizol. Instead, he said that Sokol had wanted to devote more time to investing "his family's resources."

In interviews both Wednesday evening and Thursday morning, Sokol made it clear that he had told Berkshire's general counsel of his personal investment in Lubrizol. For his part, Buffett said that while he had not asked Sokol about any possible investments he may have made, he did find out about them through Sokol's legal filings. Buffett went on to say that both he and Sokol did not believe that the share purchases were "in any way unlawful."

Did David Sokol Violate Berkshire's Conflict of Interest Code?

As for the larger picture, what does this mean for Berkshire's solid gold reputation with investors? How big of a monkey wrench does Sokol's resignation throw into a succession plan? In a note to investors Thursday morning, Doug Kass, a prominent money manager, had this to say.

"While the David Sokol situation at Berkshire Hathaway is not quite "a tempest in a teapot," the large after-hours drop to $83 a share more than discounts the economic consequence to the company, which is likely to be minor. Let me make it clear that the facts and timing relating to Sokol's purchase of Lubrizol stock are disturbing, as the calendar of facts surrounding the situation may be inconsistent with the law. Moreover, it certainly is inconsistent with the ethics and investment principles for which Warren Buffett has stood over the decades."

Kass goes to say that while "Sokol is a loss to Berkshire ... there are several equally qualified replacements for the oracle. Moreover, I have long thought that Sokol's frequent requests to retire from the company suggested it was unlikely that he was going to replace Buffett. ... That said, Mr. Buffett is not going anywhere for now."

Recent market activity suggests other investors agree with Kass. After trading down by as much as 3.5 percent Wednesday night, Berkshire stock has rebounded a bit.

Reports suggest that the Security and Exchange Commission is said to be reviewing Buffett's press release and considering whether to launch an investigation into Sokol's actions. It's an issue legal experts say is tough to break down.

Does this violate Berkshire's internal corporate guidelines for stock purchases? Should those guidelines be changed if, in fact, Sokol's acts were not in violation, especially given Buffett's rule of thumb: "I want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper -- to be read by their spouses, children and friends -- with the reporting done by an informed and critical reporter."

Sokol the Talk of the News

Here is the transcript from his interview this morning on CNBC's Squawk Box.