Berkshire Hathaway’s audit committee claims that former NetJets chairman and CEO David Sokol violated “the highest standards of business ethics” maintained by NetJets parent Berkshire Hathaway in his trading of shares in Lubrizol. Sokol resigned from Berkshire Hathaway on March 28. A longtime Berkshire Hathaway executive, Sokol took over at NetJets after company founder Richard Santulli was forced out in August 2009.

Berkshire Hathaway became interested in acquiring Lubrizol late last year after the company was brought to Sokol’s attention by Citigroup. According to the audit committee, on December 13 Sokol asked Citigroup to see if Lubrizol CEO James Hambrick was interested in a meeting to discuss Berkshire Hathaway’s interest.

On Dec. 14, 2010, Sokol bought 2,300 shares (closing price $108.03), “a partial fill of a 50,000 share limit order,” the committee noted. He sold those shares on December 21 (closing price $109.28). In a partial fill of a 100,000-share limit order, Sokol bought 96,060 shares between January 5, 6 and 7. The January 7 closing price was $103.28.

On January 14, Hambrick called Sokol to arrange a meeting. On January 14 or 15, Sokol met with Berkshire Hathaway chairman Warren Buffett and proposed the purchase of Lubrizol. According to the report, “During the conversation, Mr. Buffett asked Mr. Sokol how he had become familiar with Lubrizol. Mr. Sokol mentioned that he owned the stock.” However, “he did not disclose…the amounts and timing of his purchases” and other key information related to his knowledge of Lubrizol’s interest in being acquired.

Sokol met with Hambrick on January 25. Buffett met with Hambrick on February 8. On March 14, the two companies announced the signing of a merger agreement. Lubrizol’s Friday, March 11 closing price was $105.44. The March 14 closing price was $134.68.

After resigning from Berkshire Hathaway, Sokol told Buffett “that his resignation was for the reason stated in his letter, namely to build wealth for his family and philanthropic activities.”

On March 29, a day after he resigned, Buffett allowed Sokol to review a draft press release about the resignation and Lubrizol trades. Sokol asked that Buffett delete a passage “that implied that Mr. Sokol had resigned because he must have known the Lubrizol trades would likely hurt his chances of being Mr. Buffett’s successor,” according to the report. “Mr. Sokol told Mr. Buffett that he had not hoped to be Mr. Buffett’s successor, and was resigning for reasons unrelated to those trades.”

The report further noted that Sokol had not disclosed that on December 17, “Citi informed Mr. Sokol that Mr. Hambrick had said he would discuss Berkshire Hathaway’s possible interest with the Lubrizol Board.”

The audit committee concluded that Sokol’s trading violated company policies and it listed ways that his actions did so, including the trading policy, which “expressly forbids the trading of securities of any public companies while the trader is in possession of material nonpublic information relevant to those companies.”

The committee concluded that Sokol’s explanation of how he came to know Lubrizol “implied that [he] owned the stock before he began considering Lubrizol as an acquisition candidate, when the truth was the reverse.”

In a statement responding to the audit committee report, Sokol’s attorney, Barry Levine, expressed disappointment that the committee failed to ask any questions of Sokol. “During this time, his indefatigable efforts helped create enormous value for the Berkshire shareholders. He deserved better.”

According to Levine, Sokol “had been studying Lubrizol for personal investment since the summer of 2010; such investments are specifically allowed by his employment agreement. Mr. Buffett was told twice, not once, about Mr. Sokol’s ownership of Lubrizol stock before Mr. Buffett engaged in any discussions with Lubrizol. I know him to be a man of uncommon rectitude and probity. He would not, and did not, trade improperly, nor did he violate any fair reading of the Berkshire Hathaway policies.”

Many who respect Sokol wonder about the issues surrounding Berkshire Hathaway’s purchase of Lubrizol. Sokol’s personal philosophy is well documented in a book that he self-published, Pleased But Not Satisfied, which features a foreword written by Buffett, dated December 2007. The piece ends thus: “But I have a small confession to make: by the standards of personal behavior and his value to Berkshire Hathaway, I am more than pleased and fully satisfied by all the experiences I have had with Dave.”

In the book, Sokol outlines the six essential principles that he said any company should adhere to. In the section on the integrity principle, Sokol writes: “It is playing by the rules and not attempting to get around them. There is no excuse for a lack of ethics or integrity. If you are uncertain about an issue, it’s useful to ask yourself, ‘Would I be absolutely comfortable for my action to be disclosed on the front page of my hometown newspaper in an article written by a knowledgeable and thorough reporter and read by my family, friends and co-workers?”

The audit committee, in fact, echoed that philosophy, noting that it is “Berkshire Hathaway policy that employees should conduct themselves as if any act they contemplate would be reported in their local paper.”

The committee concluded that it will cooperate with any government investigations related to this matter. Although there are reports that the Securities and Exchange Commission is investigating Sokol’s trades, this has not been confirmed by the SEC.