Based on the timeline of events from Lubrizol's (LZ) recent SEC filings about how its deal to be acquired by Berkshire Hathaway (BRK.A) came to be, it sure seems like David Sokol is going to have problems making the case that he did not engage in insider trading when he bought Lubrizol stock for his own account.
We have learned that Sokol told Berkshire's investment bankers at Citigroup on December 13th to contact Lubrizol in order to express interest about discussing a possible acquisition of the company. The very next day, on December 14th, Sokol bought 2,300 shares of Lubrizol stock for his personal account.
The odd part of the story is that Sokol sold those 2,300 shares on December 21st and then bought back 96,060 shares between January 5th and January 7th. This second batch of stock purchases is more than 40 times bigger than the first, and only about two weeks later. Why the strange trading patterns?
Sokol appeared on CNBC this morning to explain the trades. He clearly seemed to think he did nothing wrong. He was asked why he sold the initial 2,300 share lot of Lubrizol only about a week after buying it. Sokol explained that it was for year-end tax purposes, which may seem reasonable at first blush.
Here's the interesting part. Sokol bought another 96,060 shares of Lubrizol after the new year had started, between January 5th and January 7th. If you recall how tax loss selling rules work, if you want to deduct a capital loss you have to wait 30 days before you buy back the same stock, or else it is considered a wash sale and you cannot deduct the losses sustained on the first trade.
If Sokol did indeed sell the initial 2,300 share lot of Lubrizol in order to offset some of his capital gains for the year, surely his tax advisor would have known that he had to wait until the end of January to buy the stock back, or else the tax break would be forfeited. The fact that Sokol bought the stock back two weeks later makes me wonder if his tax planning defense this morning is really the real story.
Another plausible explanation? Maybe Sokol realized that it looked really bad that he bought Lubrizol shares the day after expressing interest to Berkshire Hathaway's investment bankers about a possible acquisition of the company. Of course, if he sold the first batch of stock to avoid a conflict of interest, that does not explain why he bought another block of stock two weeks later, and why the second block was more than 40 times larger than the first.
Something tells me this story is far from over.