It never actually became a case, but maybe you remember this matter from a few years ago. In January 2011, former Berkshire Hathaway executive David Sokol bought about 100,000 shares in Lubrizol Corporation shortly before suggesting to Warren Buffett that Berkshire consider acquiring the company. Berkshire did acquire Lubrizol on March 14th, and the company’s stock soared. It was a big hoo ha. Berkshire’s audit committee quickly issued a report accusing Sokol of violating company standards by misleading Berkshire about his personal stake in Lubrizol. The committee stopped short of concluding that Sokol committed insider trading, but stood ready to cooperate “with any government investigations relating to this matter.”
The question for many observers: had Sokol insider traded? More specifically, was Sokol’s knowledge about Berkshire’s potential acquisition of Lubrizol material nonpublic information? Regardless, the SEC never made a case, and ended its investigation into Sokol almost two years later. But the question was out there. Could a holding company’s or hedge fund’s investment plan regarding other issuers by itself be material information for insider trading purposes?
The SEC finally got around to answering this question last week, when it filed administrative insider trading cases against Filip Szymik and Jordan Peixoto. According to the SEC’s orders, Szymik learned from his roommate, then an analyst at Bill Ackman’s Pershing Square Management, that Pershing planned to publicly announce that it had taken a $1 billion short position in Herbalife, Ltd. on December 20, 2012. The SEC says Szymik tipped Peixoto, who bought Herbalife put options the day before the announcement and made $47,100 in illicit profits.
Similar to the Sokol matter that never materialized, the only material information at issue was another investor’s plans to take a massive position in a separate issuer, just with Pershing and Ackman standing in the places of Berkshire and Buffett. Material for insider trading purposes? Apparently, though I don’t think this is a radical position.
Matt Levine, whose thinking about insider trading is as sophisticated as anybody’s these days, notes that Peixoto thought better of it after the trades went through and tried to let his put options expire without exercising them. His plan didn’t go that well and he was stuck with a $47,100 target that the SEC hit last Tuesday. Levine points out the logical inconsistency in the SEC’s charging Szymik and Peixoto but not the Pershing analyst who was the source of all of this. But if the analyst really didn’t intend for Szymik to trade, he wouldn’t have had the necessary intent for an insider trading case. It may be that the SEC’s staff just made a reasonable judgment not to recommend charging the analyst even if it technically could have. I suppose that happens from time to time.
Szymik has settled his case, but Peixoto’s continues. His litigation in administrative court will likely not be a lot of fun. We’ll see how it goes.
