Case Study – Buying Lubrizol Question 1 Discuss the possible adverse consequences Sokol faced following the joint announcement by Berkshire and Lubrizol on 14 March and prior to his resignation. Did his resignation reduce the risks and associated costs? Evaluate the cost/benefit of Sokol’s actions in the Lubrizol matter. The possible adverse consequences Sokol faced following the joint announcement by Berkshire and Lubrizol on 14 March and prior to his resignation include:
Increased publicity and pressure on Sokol and Berkshire to explain their actions Regulatory organisations investigating Sokol and Berkshire Further reputation loss for Berkshire
His resignation reduced the risks and associated costs.
Question 2 Evaluation Sokol’s conduct regarding Lubrizol, and determine which, if any, of the CFA Institute Standards of Professional Conduct are applicable to the conduct. For each applicable Standard, determine whether Sokol’s conduct complied with or violated the Standard. 1. Professionalism – Sokol’s conduct violated this Standard a. Knowledge of the law b. Independence and Objectivity – violated c. Misrepresentation – violated – omission of facts d. Misconduct – violated 2. Integrity of Capital Markets 3. Duties to Clients – Sokol’s conduct violated this Standard (including loyalty to clients) a. Loyalty, Prudance and Care – violated loyalty – carried out investment actions for the sole benefit of himself b. Fair Dealing c. Suitability d. Performance Presentation e. Preservation of Confidentiality 4. Duties to Employers 5. Investment Analysis, Recommendation and Actions – Sokol’s conduct violated this Standard (including diligence and reasonable bias) 6. Conflicts of Interest – Sokol’s conduct violated this Standard (including disclosure of conflicts)
7. Responsibilities as a CFA Institute Member of CFA Candidate – Sokol’s conduct violated this Standard
Question 3 Recommend a course of action for Mikkel Orut, CFA. A course of action for Mikkel Orut would be to admit to the wrongdoings of Sokol and restore trust by:
Embracing transparency o Clearly articulate investment missteps o Disclose conflicts of interest and quickly address problems o Fully disclose fees and impact Demonstrate integrity o Resolve conflict of interest in favour of clients o Structure fees to align with clients’ risk/return objectives Improve communication o Communicate with clients early and often throughout the investment process o Fairly represent the investments made, risk, expenses o Avoid ambiguity in communications
