A Look Back at Warren Buffett's Only Brush With The SEC
Berkshire Hathaway Chairman and CEO Warren Buffett has cultivated the absolute best reputation in the finance world. After many decades of leading Berkshire Hathaway, Buffett has largely stayed out of trouble, conducting himself in an honest and forthright fashion from day one onwards.
Sure, there have been headaches for Buffett along the way - antitrust charges (Buffalo Evening News acquisition), the Salomon Brothers situation and charges against Berkshire subsidiary General Re, just to name a few.
But the SEC actually scrutinizing Warren Buffett specifically?
That only happened once (at least, this is the only public record of scrutiny directed at Warren Buffett himself).
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In the fall of 1974, the SEC announced a formal investigation into Warren Buffett and Berkshire Hathaway ("In the Matter of Blue Chip Stamps, Berkshire Hathaway Incorporated, Warren Buffett HO-784").
The investigation centered around Blue Chip Stamps (which Berkshire Hathaway owned), Wesco and Santa Barbara Savings and Loan.
Berkshire Hathaway and Buffett liked Wesco, though there was just one problem - Wesco was going to merge with Santa Barbara Savings and Loan instead.
Eventually the Wesco/Santa Barbara merger fell apart, and Blue Chip Stamps swooped in and bought over 80% of Wesco.
The kicker? Blue Chips paid above-the-market prices for Wesco, even though the merger had fallen through. Buffett said that he felt this was "fair", he though he could have paid a much lower amount for the shares.
The SEC thought that this entire situation was very strange, so they announced a formal investigation. In fact, it was so serious that Buffett and Charlie Munger were subpoenaed and had to testify for two days straight.
The SEC was investigating a number of possibilities, including whether or not Munger had shorted shares of Santa Barbara Savings and Loan, whether Berkshire had conspired to commit fraud, whether Blue Chips had manipuated Wesco's share price. Did Blue Chip work to stop the Wesco/Santa Barbara merger because they wanted Wesco for themselves?
It was a serious matter and could have put a serious stain on Buffett's reputation.
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In the end, the SEC charged Blue Chip a $115,000 penalty, but did not name Buffett in its finding.
Buffett maintained his reputation, and his company now owns Wesco outright.
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The entire situation begs the question - how would Buffett's career have changed if the SEC had named him in their consent decree at the time?
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This situation was, by far, Buffett's most worrying brush with the SEC, and nothing close to this has ever happened again.
Filed under: General Knowledge
