text: NEW YORK (Reuters) - Former Berkshire Hathaway executive David Sokol deliberately misled Warren Buffett when pitching an investment to him, the company's board concluded in a scathing report that may add fuel to a pending SEC probe of Buffett's one-time heir apparent. 
   
   The board said it may sue Sokol to recover the $3 million of trading profit he made when Berkshire bought chemicals company Lubrizol Corp and could seek damages from him for harm to the company's reputation. The company will cooperate with any government probe in the matter as well. 
   
   The U.S. Securities and Exchange Commission is probing Sokol, a person familiar with the matter said on Wednesday. 
   
   Sokol's high-profile attorney disputed the board's report and said his client is "a man of uncommon rectitude and probity." 
   
   "I have known Mr. Sokol and have represented his companies in business litigation since the mid 1980s," said Barry Levine of the Washington firm Dickstein Shapiro. "He would not, and did not, trade improperly, nor did he violate any fair reading of the Berkshire Hathaway policies." 
   
   Levine said in a statement late on Wednesday that Sokol had been studying Lubrizol for personal investment since the summer of 2010 and such investments are specifically allowed by his employment agreement. 
   
   "Buffett was told twice, not once, about Sokol's ownership of Lubrizol stock before Buffett engaged in any discussions with Lubrizol," Levine said. 
   
   Levine, who has done work for Sokol's former company MidAmerican Energy, co-heads Dickstein's white collar criminal defense practice and has also represented attempted Ronald Reagan assassin John Hinckley. 
   
   The report is an unusual statement from a board that has historically been very close to Buffett, who is CEO and chairman. It may begin to answer the demands of shareholders who expected Buffett to address the controversy at the company's annual meeting in Omaha, Nebraska this weekend. 
   
   Buffett previously said he would have nothing further to say about Sokol's actions, a stance that became untenable over time given the intense pressure on the conglomerate. 
   
   The report paints a picture of Buffett as having been duped by Sokol. However, one shareholder said it was also crafted to exonerate Buffett from wrongdoing. 
   
   "This report makes it clearly look like this was not Warren Buffett's fault, this was Sokol's fault," said Michael Yoshikami, chief executive of wealth manager YCMNET Advisors and a Berkshire shareholder. "There really is an effort here to make clear that this was not Warren Buffett's behavior in any way, this was Sokol's behavior." 
   
   GAIN AT RISK 
   
   Buffett announced Sokol's resignation in March, noting that Sokol bought shares in Lubrizol before suggesting to Buffett that Berkshire buy the company. While Sokol mentioned to Buffett in "passing" that he held some Lubrizol stock, Buffett said he only later found out that Sokol held nearly 100,000 Lubrizol shares worth about $10 million. 
   
   Sokol made a profit of about $3 million -- a gain that could be at risk. The Berkshire board said it was still considering legal action against Sokol to, among other things, recover any trading profits he made. 
   
   "It hardly sounds like Berkshire is trying to circle the wagons to protect Sokol," said Francis Pileggi, a partner at Fox Rothschild LP in Wilmington, Delaware. "If I had my druthers, I would rather be representing Berkshire in this matter than Sokol in a Delaware court." 
   
   Besides the potential civil recovery, Berkshire's board also said it would cooperate with any government investigation. A spokesman for the Securities and Exchange Commission declined to comment. 
   
   Legal experts said Sokol appears to be in more trouble now than was first thought. 
   
   "I think Mr. Sokol has a real problem here," said Duke University Law Professor James Cox. "This is not a close call at all." 
   
   FALLEN HEIR 
   
   Sokol, who used to run Berkshire subsidiaries MidAmerican and NetJets, was widely seen as Buffett's heir apparent, an image Buffett biographers say the "Oracle of Omaha" cultivated. 
   
   Yet Sokol, in his one public appearance since the scandal broke, told CNBC he had no aspiration to the job. In Wednesday's statement, Berkshire said Sokol reiterated as much to Buffett before Buffett announced Sokol's resignation. 
   
   When Buffett made that announcement, he said he believed Sokol had not done anything unlawful. The statement Wednesday seemed to suggest otherwise. 
   
   "His misleadingly incomplete disclosures to Berkshire Hathaway senior management concerning those purchases violated the duty of candor he owed to the company," the board said -- noting that an executive's duty of candor was part of the duty of loyalty under Delaware law where Berkshire is incorporated. 
   
   Berkshire's board also said certain answers Sokol gave to Buffett in response to questions about the nature of his holdings appeared "intended to deceive." 
   
   In total, the 18-page statement uses variations on the word "violation" some 11 times. 
   
   The board's audit committee held three meetings this month to consider the report. 
   
   Berkshire attorney Ron Olson said Sokol was interviewed at least three times regarding his Lubrizol trading and contacts with Citigroup Inc bankers. "In connection with the preparation of the audit committee report, a request for a further interview with Mr. Sokol was made to his attorney. Mr. Sokol was not made available," Olson said in the statement. 
   
   The audit committee members are chairman Thomas Murphy, 85, and a decades-long Buffett friend; Donald Keough, 84, a former president of key Buffett holding Coca Cola Co; and former Microsoft executive Charlotte Guyman, 54. 
   
   Their report is likely to take some pressure off Buffett this weekend when tens of thousands of shareholders descend on Omaha for Berkshire's annual festival-cum-general-meeting. 
   
   "One way or another, Mr. Buffett will have to address this. It's conceivable that this release relieves Mr. Buffett from the chore of addressing what is an unpleasant issue," said Jerry Bruni, CEO and portfolio manager at J.V. Bruni and Co, which owns Berkshire shares and has $450 million of assets under management. 
   
   Berkshire's actively traded class B shares were flat at $82.99 in after-hours trading. (Additional reporting by Jonathan Stempel, Moira Herbst, Matthew Goldstein, Dan Wilchins, Alina Selyukh and Jonathan Spicer in New York, Sarah N. Lynch in Washington and Sakthi Prasad in Bangalore. Editing by Robert MacMillan) ||||| David Sokol violated Berkshire Hathaway Inc. (BRK/A)’s insider-trading rules and misled the company about his personal stake in Lubrizol Corp. (LZ), which he recommended as a takeover target to Chairman Warren Buffett, the firm said. 
   
   Berkshire will cooperate with any government investigations related to Sokol’s Lubrizol transactions and weigh suing the former manager to recover his trading profits, according to a report from Omaha, Nebraska-based Berkshire’s audit committee. 
   
   Sokol’s purchase of about $10 million in Lubrizol stock while facilitating Buffett’s deal to buy the lubricant maker “violated company policies, including Berkshire Hathaway’s Code of Business Conduct and Ethics and its insider-trading policies and procedures,” according to the report. 
   
   Buffett, 80, is facing questions about his oversight of managers and criticism for not condemning the stock trading that preceded Sokol’s resignation from Berkshire. Buffett had said March 30 in announcing Sokol’s departure that he didn’t believe the trades were unlawful. 
   
   “They’re throwing Sokol under the bus,” said Stephen Bainbridge, a professor at the UCLA School of Law who has written and taught about corporate governance. 
   
   Sokol, 54, told Buffett in January he had a stake in Lubrizol, which the billionaire chairman took to mean that Sokol had been following the company as a shareholder and then deemed it a takeover candidate, the audit committee found. Buffett didn’t realize until March 14, when the $9 billion deal was announced, that investment bankers at Citigroup Inc. had brought Wickliffe, Ohio-based Lubrizol to Sokol’s attention as a potential target, according to the report. 
   
   ‘Misleadingly Incomplete’ 
   
   Sokol’s “misleadingly incomplete disclosures to Berkshire Hathaway senior management concerning those purchases violated the duty of candor he owed the company,” according to the report. 
   
   Buffett learned of Citigroup’s role introducing Sokol to Lubrizol only when a representative from the bank called to congratulate him on the deal, according to the report. Sokol told CNBC last month that he did nothing wrong. Attempts to reach Sokol for comment weren’t immediately successful. 
   
   ‘Gloves are Off’ 
   
   “The gloves are off,” said Michael Yoshikami, chief investment strategist at Berkshire shareholder YCMNet Advisors. Buffett’s “response was benevolent, and now the audit committee is coming back and saying, ‘You might be benevolent but, as a protector of the values of the firm, we don’t think benevolence is appropriate.’” 
   
   Photographer: Jonathan Fickies/Bloomberg David Sokol, former executive of Berkshire Hathaway Inc., speaks during an interview in New York on Aug. 16, 2010. Close David Sokol, former executive of Berkshire Hathaway Inc., speaks during an interview in... Read More Close Open Photographer: Jonathan Fickies/Bloomberg David Sokol, former executive of Berkshire Hathaway Inc., speaks during an interview in New York on Aug. 16, 2010. 
   
   Sokol joined Berkshire in 2000 when he sold MidAmerican Energy Holdings Co., which he led, to Buffett for about $9 billion. Under Berkshire, Sokol retained a minority equity stake in MidAmerican and expanded the unit by buying a natural gas pipeline and power producers in California and the U.K. 
   
   Buffett had sent Sokol to China to scout an investment in carmaker BYD Co. and tasked the executive with the turnaround of NetJets Inc., Berkshire’s luxury-flight unit. Buffett biographer Andrew Kilpatrick had said Sokol was the most likely candidate to replace the billionaire as chief executive officer. 
   
   Sokol told Buffett before the March 30 statement that he hadn’t hoped to become CEO, according to the report. Sokol made the statement when given an opportunity to review a draft of Buffett’s comments for accuracy. 
   
   Statement Revised 
   
   The draft had a passage, which Buffett excluded from the eventual report, “that implied that Mr. Sokol had resigned because he must have known the Lubrizol trades would likely hurt his chances of being Mr. Buffett’s successor,” according to the report. 
   
   Buffett said March 14 he would pay $135 a share for Lubrizol, compared with the closing price of $105.44 on the New York Stock Exchange in the last trading day before the announcement. Sokol’s investment may have given him a profit of about $3 million, according to Buffett’s disclosure and data compiled by Bloomberg. 
   
   To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net 
   
   To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net
target: – Warren Buffett's former heir apparent David Sokol misled his boss and violated insider-trading rules when he bought shares in Lubrizol and then recommended Berkshire Hathaway buy it, Berkshire's board has concluded. A scathing report from the board portrays Buffett as a victim of Sokol's deception and says the company may sue to recover the $3 million Sokol made from the deal, Reuters reports. Sokol—who insists he did nothing wrong—has resigned from the company and is the target of an SEC probe, which will gain ammunition from the board's report. "They're throwing Sokol under the bus," a corporate governance experts tells Bloomberg. Buffett is facing questions about his oversight of managers, but analysts believe the board's report will take some pressure off the billionaire investor ahead of Berkshire's annual meeting this weekend.