Monday, October 19, 2020

Never Ever, Thought I Would See This . . . . Warren Buffett Gets Bamboozled?

Just out . . .  Berkshire Hathaway, Warren Buffet's investment firm, is suing international law firm Jones Day for fraud.  In 2017, a Berkshire Hathaway subsidiary Precision Castparts purchased Wilhelm Schulz, a German oil and gas pipemaker for $940 million dollars.  Only problem, Wilhelm Schulz fraudulently manufactured invoices, invented "phantom customers," and misrepresented their financial position during the acquisition (they were in fact at the time in discussion with insolvency representatives).  Precision Castparts, the Berkshire subsidiary, ended up losing some $755 million in the deal as the fraud and misrepresentation later became clear.  In fact, an arbitrator recently awarded Precision Castparts 643 million euros ($756 million) based on Wilhelm Schulz's true value at the time of acquisition of 157 million euros (approximately $200 million).  Because Wilhelm Schulz is in bankruptcy, it is very unlikely that Precision Castparts will recover much of any of the arbitration award.  Thus, the lawsuit against Jones Day, the lawyers that represented Wilhelm Schulz in the acquisition.

From Bloomberg:  "According to the suit, Jones Day conspired with Schulz to create a misleading picture of the German company’s value. Toward that end, the firm’s lawyers drafted documents including a securities purchase agreement and disclosure statements they knew were false, Precision claims."

This represents a rare misstep in Warren Buffet's empire, as he is recognized as one of the world's savviest investors.  If Berkshire and Precision were taken in a "fast shuffle," one has to assume that the fraud was deep indeed.



hat tip to Molly Curington, University of Arkansas at Little Rock Bowen Law School, 2L
photo: public domain

9 comments:

  1. Even the titans are human. While I am sure the shareholders of both Berkshire Hathaway or Wilhelm Schulz are infuriated at the massive investment of corporate funds into a flop, the intensity with which Berkshire Hathaway likely researches and investigates its investments and various business dealings, and the potential depth and complexity of the fraud perpetrated against them will likely survive any shareholder challenge.

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    1. This comment was posted by Sierra Glover. I apologize, I believed it showed it replying as my UALR email.

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    2. great comment sierra, and i agree, that as far as berkshire hathaway's shareholders are concerned, they likely have no claims against the corporation for waste or duty violations as i, like you, am confident that berkshire has a robust due diligence and research methodology when looking at acquiring new firms. i imagine that this wilhelm schulz fraud was deep and buried. remember, that buffet is going after jones day, the law firm, for assisting in perpetrating the fraud. berkshire hathaway, having succeeded in prevailing against wilhelm schulz in arbitration, will likely see no recovery from them, so is seeking compensation from jones day.

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  2. Besides the unfortunate side of Warren Buffet, I would like to point towards the conduct of Jones Day law firm and the conspiracy of helping trick Mr. Buffet. Assuming that they did in fact contribute to tricking Buffet, it is absolutely disappointing and disgusting to see a prestigious law firm participate in the fraud involved here. This is part of the reason that lawyers in general have such a negative perception among the American people.

    -Kyle Vise

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    1. interesting comment kyle. i agree that if in fact jones day engaged in defrauding berkshire hathaway, then those lawyers need to be reported to the state bar and face potential disbarment. i am curious by what you mean about the "unfortunate" side of warren buffet, the oracle of omaha . . .

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  3. It looks like Precision asked for and was granted dismissal without prejudice after the court agreed to seal parts of the case containing proprietary information. It seems Jones is arguing both that it did nothing wrong and that all of the information related to the case is protected by attorney-client privilege. It will be interesting to see whether Precision decides to proceed. Given the monetary loss already suffered and the fact that Jones will certainly make the litigation as difficult as possible, moving forward with the case might make a bad business decision that much worse.

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  4. Wow, this is fraud on a huge scale. Wilhelm Schulz seems to have committed fraud in the inducement and fraud in the execution, if I recall my Contracts I material correctly.
    I agree with Ms. Glover that the Berkshire Hathaway board of directors probably conducts incredibly detailed investigation of their potential acquisitions. I'm sure they don't make the same slapdash determinations we saw the Board of Directors in the Van Gorkom case make.
    I think Schulz has a steep hill to climb in claiming as much information as they have as privileged, especially if they have already made a lot of it available in discovery. Although if that law firm represented Trump's campaign I'm not as surprised they committed fraud, and got caught doing it. -Chris Brunson

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  5. Although the Securities Acts provide remedies, such as making the issuer liable to the investors for rescission, it seems like most of the time, the coffers of the fraudulent entity are empty, forcing the defrauded investors to walk away empty handed. Just like in this case, "Wilhelm Schulz is in bankruptcy", therefore, "it is very unlikely that Precision Castparts will recover much of any of the arbitration award." The sting of not being able to recover must be nearly as severe as learning of the fraudulent scheme in the first place. When capitalism works as intended, it pushes individuals to innovate. However, the unfortunate reality is that innovation will not always be achieved through legal or ethical means, such as the scheme before us.

    - Taylor Mackenzie Mounger

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