OMAHA — Berkshire Hathaway's annual meeting on Saturday was dominated by somber topics, as Warren Buffett explained to about 40,000 shareholders how the company had been battered by a trusted former employee's misdeeds and a string of natural disasters.
Buffett assured the crowd at an Omaha convention center that Berkshire is strong enough to withstand both the David Sokol scandal and the estimated $1.7 billion in insurance losses that drove profits down 58 percent in the first quarter.
Buffett said he doesn't think he will ever understand why Sokol bought stock in Lubrizol shortly before recommending that Berkshire buy the chemical company. Buffett said he believes Sokol clearly violated Berkshire's ethics and insider trading policies.
"It's a situation that's sad for Berkshire and sad for Dave," Buffett said.
Buffett acknowledged that he made a mistake by not asking Sokol more about his Lubrizol stock when they first discussed the company in January. Buffett said he had no reason to think Sokol had just bought the stock the week before.
Buffett previewed Berkshire's earnings at the annual meeting, before their scheduled release on Friday. He said the biggest factor in the earnings drop was about $1.7 billion in pretax losses related to the Japanese earthquake and tsunami, Australian floods and the New Zealand earthquake.
"We had probably the second-worst quarter for the insurance industry in terms of disasters around the globe," Buffett said.
Reinsurance companies, like Berkshire's General Re and National Indemnity, sell backup insurance to primary insurers so the industry can cover big losses.
Buffett estimates that Berkshire will report $1.5 billion in net income, down from $3.6 billion last year. He did not offer earnings-per-share figures.
Buffett and Berkshire Vice Chairman Charlie Munger spent nearly six hours answering questions at the annual meeting.
One of the early questions asking why Buffett wasn't tougher on Sokol drew mild applause from the audience because Buffett has always promised to be ruthless with anyone who hurts Berkshire's reputation.
Buffett said he didn't have all the information about Sokol when he announced the former MidAmerican Energy chairman's resignation in March. Buffett said he learned that Sokol had met with investment bankers about Lubrizol only after the deal was announced.
Buffett and Munger acknowledged that the March 30 news release, which included a line in which Buffett defended Sokol's conduct as legal, was poorly written.
Sokol denies any wrongdoing. Before his departure, Sokol had served as chairman of Berkshire's MidAmerican Energy, NetJets and Johns Manville units.
Buffett said part of the reason he finds Sokol's actions inexplicable is that years before, Sokol rejected a compensation plan that might have paid him a $50 million bonus. Instead, he shared the bonus equally with one of his fellow managers at MidAmerican.
Jeff Matthews, a shareholder who wrote "Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett" and another Buffett book, said that story about Sokol helps explain why Buffett was surprised by his actions. Matthews said he appreciated Buffett's explanation and his willingness to take questions.
"I think he did exactly what he should have done," Matthews said. "He didn't duck anything."
