Insider Trading Haunts Berkshire Hathaway

Investment legend Buffett is the ultimate insider

After reading the NY Times account of David Sokol’s trading in Lubrizol just prior to pitching the stock to  his boss, Warren Buffett , it seems crystal clear that Sokol engaged in insider trading.

But why should anyone be surprised by this?  In my view Buffett and Berkshire have always been the ultimate insiders. Because of Warren’s status as a living investment legend he has access to all kinds of information average Joe investors only read about weeks later in the financial papers.  I assume that having  “insider” access is part of the culture at Berkshire, just as it is at big money hedge funds.

For example at the depths of the financial crisis, it was Buffett that got the call from Goldman Sachs offering him a sweet deal on 10% yielding  $5 billion in preferred stock.  Buffett also got a load of stock warrants.

Who get’s to buy $5 billion in Goldman Sach’s preferreds with a junk bond yield?  No one but Berkshire Hathaway. Warren got a similarly sweet deal from General Electric at the depths of the financial crisis.

At the time of the Goldman purchase, in the Fall of 2008, Warren was being asked to lend a big vote of confidence to the American financial system by making a big investment in the world’s best known investment bank.  Buffett’s profit on the whole Goldman rescue, including preferred dividends and stock warrant profits, will be north of $3.7 billion.  Not a bad ROI for a $5 billion cash outlay. It’s the kind of profits you would expect “insiders” to make, not average Joe investors.

So as Raj Rajaratnam’s trial plays out in the media, investors should keep in mind  that in the clubby moneyed world of giant hedge funds ( Berkshire is the probably biggest and most successful quasi-hedge fund ever), insider trading is pretty much commonplace. The  smart money guys get information earlier than the rest of us, they act on it and make huge profits.

Article source: http://blogs.forbes.com/schifrin/2011/04/13/insider-trading-haunts-berkshire-hathaway/