Bloomberg News

Berkshire Failed to Apply Sokol Rule at RV Unit, Ex-Manager Says

June 02, 2011

June 2 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc., which investigated former executive David Sokol and said he violated insider-trading rules, failed to enforce its code of ethics when told of abuses at its recreational-vehicle unit, according to an ex-manager who is suing the company.

The board didn’t give such a review to accusations of fraud against Peter Liegl, head of the Forest River subsidiary, said Berkshire Chief Financial Officer Marc Hamburg in a sworn statement included in a court filing this week. Hamburg was deposed by lawyers for Brad Mart, who said he was unfairly fired in his suit against Berkshire, Forest River and Liegl.

“Brad Mart followed the Code and relied upon it,” Mart’s lawyers said in a May 31 filing in federal court in South Bend, Indiana. “Defendants simply ignored it.” Liegl, through a lawyer, denied wrongdoing.

Mart contrasted Berkshire’s handling of his complaints with the company’s probe and 18-page audit report on Sokol in April. Mart has claimed that Buffett and Omaha, Nebraska-based Berkshire didn’t protect him from retaliation after he confronted Liegl with his accusations. Mart said that he had brought his grievances directly to Buffett, Berkshire’s chief executive officer, and asked for direction.

“They discussed how to proceed, including the possibility of resolving the matter by reporting it to Rebecca Amick,” Berkshire’s director of internal auditing, Mart’s lawyers wrote. “But Buffett made it clear to Mart that Mart should instead discuss the matter directly with Liegl.”

‘Allegations Are Unfounded’

Liegl’s lawyer, Jeanine Gozdecki, a partner at Barnes & Thornburg LLP, said, “We believe that Mr. Mart’s allegations are unfounded.” Gozdecki also represents Forest River.

Liegl required Forest River to buy parts, at inflated prices, from a company he owned and appropriated cash from factory vending machines, Mart said in his complaint in April 2010. Liegl also reneged on a promise to make Mart CEO of Forest River and threatened his life, according to the complaint. Mart had been named general manager of the company’s financing business and was fired in 2009, according to the complaint.

Buffett, who oversees the CEOs of more than 70 operating companies, has faced questions about Berkshire’s personnel since Sokol’s departure. Sokol, who led energy and luxury-flight units, violated Berkshire’s code by buying Lubrizol Corp. stock this year while pushing Buffett to acquire the company, the audit committee said. Buffett has said he knew that Sokol owned shares and failed to press for details about his holdings. Sokol didn’t violate Berkshire rules, his lawyer has said.

‘A Loud Message’

“The company takes its policies very seriously,” Berkshire’s audit committee said April 27. “We expect this report to send a loud message that those policies are designed to be read broadly.”

Berkshire’s April 30 annual meeting was dubbed “The Great Inquisition” by New York Times writer Andrew Ross Sorkin in a column earlier that month. At the meeting, Buffett told shareholders he made a “big mistake” in not asking Sokol for more information about the Lubrizol stockholding. Sorkin was one of three journalists who selected shareholder questions for Buffett at the meeting.

Mart’s dismissal wasn’t related to his complaints, and Mart didn’t alert Buffett to any unethical or illegal activities, Berkshire Secretary Forrest Krutter said last year. Krutter said he was instructed by Buffett to investigate “business items” at the RV maker and subsequently looked into the fraud complaints. Krutter said he found no “fraudulent, unethical or illegal activities.”

Krutter and Cary Lerman, a Munger Tolles & Olson lawyer who is representing Berkshire, didn’t return calls seeking comment today. Buffett didn’t return a message left with an assistant.

Berkshire, which has said that Mart and Buffett spoke by phone on three occasions, has sought dismissal of the lawsuit for lack of jurisdiction. Berkshire, the parent company, doesn’t do business in Indiana and shouldn’t be subject to courts in that state, it said in the 2010 request for dismissal. Mart has said Berkshire’s control over Elkhart, Indiana-based Forest River submits the firm to the state’s law.

The case is Mart v. Berkshire Hathaway Inc., 3:10-cv-00118, U.S. District Court, Northern District of Indiana (South Bend).

--Editors: Dan Kraut, Michael Hytha

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


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