Warren Buffett warned Berkshire Hathaway Inc.'s top employees last year against trading in shares of companies in which Berkshire might invest—the very issue that now is dogging the conglomerate.
His memo, "'Insider' Trading Policies and Procedures," sent last May and in place for more than 10 years, could turn up the heat on Mr. Buffett regarding recent trading by his top lieutenant David Sokol.
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David Sokol
Mr. Buffett revealed last week that Mr. Sokol bought shares of a chemicals maker about a week before Mr. Sokol suggested that Berkshire buy the company, which it later agreed to do. Mr. Buffett added that he believed Mr. Sokol's purchases weren't unlawful.
However, the memo bars certain Berkshire officials from trading in public companies "that may be involved in a significant transaction with Berkshire," including those "in which Berkshire has invested or may in the future invest."
At issue is whether Mr. Buffett should have pressed Mr. Sokol for more details about his stock holdings in Lubrizol Corp., such as when he purchased them, given the timing of the acquisition.
Few executives in corporate America are as revered as Mr. Buffett, as much for his integrity as his investment acumen. Now, the unfolding events are raising questions about controls and governance at the highest levels of his business.
Messrs. Sokol and Buffett stunned investors last Wednesday with news that Mr. Sokol was resigning from Berkshire. In the unusual announcement, Mr. Buffett also revealed Mr. Sokol's purchase of the shares in Lubrizol, saying the executive had bought what amounted to about $10 million worth before Berkshire reached a $9 billion deal to acquire the company in mid-March. Berkshire's purchase price of $135 per share meant that Mr. Sokol's stake rose $3 million in value.
Mr. Sokol, 54 years old, was widely seen as a leading contender to succeed the aging billionaire at the helm of the Omaha insurance and industrial conglomerate, one of the nation's biggest companies. In his announcement last week, Mr. Buffett said the resignation was Mr. Sokol's choice but noted that, unlike past instances where the younger executive contemplated leaving, he didn't try to stop him from resigning.
Separately, the Securities and Exchange Commission intends to investigate past acquisitions by Berkshire to see whether Mr. Sokol held shares in other target companies before deals were announced, according to people familiar with the situation.
The Buffett memo on the company's trading policy, reviewed by The Wall Street Journal, covers top executives of Berkshire subsidiaries, such as Mr. Sokol. It has been in place for more than 10 years and is consistent with the broad legal ban on insider trading. Mr. Sokol certified having reviewed the policy, according to a person familiar with the matter.
The memo raises questions about why Mr. Buffett didn't allude to the possible violation of his own policy when on March 30 he revealed details of the trades. In that statement, he praised Mr. Sokol for his "extraordinary" contribution to the company. He said he didn't ask Mr. Sokol for his resignation and said it came "as a surprise" to him.
“This restriction applies...[to] securities of other public companies in which Berkshire has invested or may in the future invest.” —Excerpt from Berkshire Hathaway insider-trading policies memo
Now, an independent committee of the conglomerate's board will be reviewing the transaction and Mr. Sokol's trades to determine whether there was a violation of the trading policy, a person familiar with the matter said.
Mr. Buffett didn't immediately respond to a request for comment on his directive and whether Mr. Sokol's actions violated it. Berkshire CFO Marc Hamburg said Mr. Buffett intends to field questions on the matter at the April 30 annual meeting in Omaha and isn't expected to comment publicly before then.
Mr. Sokol also didn't respond to a request for comment.
Mr. Sokol has said he believes he did nothing wrong in making the trades and they weren't a factor in his decision to resign.
Despite the strong wording of the trading-policy memo, Mr. Buffett by his own account didn't have much concern when Mr. Sokol told him in January he owned shares in Lubrizol as he recommended to Mr. Buffett that Berkshire buy it. Mr. Buffett called it a "passing remark." Only after the deal was announced two months later did Mr. Buffett ask Berkshire's chief financial officer to get the details from Mr. Sokol. That was when they learned Mr. Sokol bought about $10 million in shares around a week before he recommended the company as an acquisition.
Mr. Buffett assumed Mr. Sokol had the ownership stake for some time, and there was no mention of recent purchases in January when the two men first discussed acquiring Lubrizol, according to people familiar with the matter.
The separate SEC inquiry is part of the agency's look into whether Mr. Sokol's purchases of Lubrizol shares violated insider trading or other securities laws. An SEC spokesman declined to comment.
The Berkshire policy says that from "time to time" the SEC has asked Berkshire to disclose the names of employees who "may be aware of our trading activities." Mr. Sokol is among the employees whose names have been given to the agency in the past, a person familiar with the matter said.
The memo says the purpose of these requests is to "determine whether any insider trading has occurred among our employees or their 'tippees,'" meaning people with whom employees share inside information.
The existence of the memo may help Berkshire counter critics who have said the company's lean bureaucracy and high trust in its leaders have left it vulnerable to potential ethics violations.
The policy says, among other things, that if a person covered by the policy is aware that Berkshire is "actively considering" taking a position in a public company's securities, trading in the company's securities is "expressly prohibited" prior to public disclosure of Berkshire's actions.
An attorney for Lubrizol said the company became aware of Mr. Sokol's resignation and his purchases of Lubrizol stock when Berkshire put out its press release last week.
—Serena Ng contributed to this article.
Write to Leslie Scism at leslie.scism@wsj.com and Erik Holm at erik.holm@dowjones.com
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