The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [243]
For the first time they all realized that Blue Chip was in trouble.24 No sooner had Buffett achieved the glory of joining the Post board than his and Munger’s need for legal services was about to grow with stunning rapidity. Rickershauser, who already knew what it was like to work with Buffett, had once explained to a colleague that “The sun is nice and warm, but you don’t want to get too close to it.”25 He would spend the next couple of years testing what could be called Rickershauser’s Law of Thermodynamics.
In February 1975, the SEC issued subpoenas and launched a full-blown investigation of Blue Chip’s purchase of Wesco: “In the Matter of Blue Chip Stamps, Berkshire Hathaway Incorporated, Warren Buffet [sic], HO-784.” The commission staff speculated that Buffett and Munger had committed fraud: “Blue Chip, Berkshire, Buffet [sic], singly or in concert with others…may have engaged in acts which have, directly or indirectly, operated as a device, scheme, or artifice to defraud; or included an untrue statement of a material fact or omitted…”
The commission’s lawyers zeroed in on a theory that Blue Chip had planned from the beginning to take over Wesco Financial but had not disclosed that fact; that Blue Chip’s purchases of stock after the Santa Barbara deal dissolved must have been “tender offers” that were never registered with the SEC.26 This latter charge was most serious and carried with it the risk that the SEC would file, with great fanfare and publicity, civil fraud charges not only against Blue Chip but also against Buffett and Munger personally.
In considering action against a target, Sporkin had a choice. He could prosecute or settle. A settlement was a way of allowing the target to say sorry without having to officially admit guilt; it neither consented to nor denied the charge of fraud but agreed to accept a penalty. And in agreeing to a settlement, the SEC could also choose whether to name the individuals involved or simply to make a deal with the company itself without naming anybody. Being named in a settlement might not be the literal end of someone’s career, but there would be no elephant-bumping afterward. Having so recently been elevated into the high and mighty through Supermoney and Forbes and the board of the Washington Post, Buffett began to fight desperately to save his reputation.
Instead, the investigation widened. Under subpoena, Buffett had to open his files—which, naturally, represented a huge and comprehensive collection of documents, just as huge and comprehensive as everything he had ever collected. In violation of his cherished privacy, lawyers from Munger, Tolles sifted out trade tickets, information about recent stock purchases, memos to bankers, letters to See’s Candies, notes to Verne McKenzie at the textile mill, and the like and shipped them off to investigators in Washington, D.C. Buffett felt persecuted. He and Munger were being chased in a nightmare by a huge, lumbering giant. To survive, they would have to outrun it.
Letters flew back and forth like shuttlecocks between Munger, Tolles and the SEC. Buffett maintained a veneer of calm, but his back problems were plaguing him. Munger did not hide his agitation.
By March 1975, the investigation had wound its way to a command performance at the SEC. Betty Peters was hauled in. “Is your lawyer here?” they asked. “No. Do I need a lawyer?” she replied. “Well, everybody comes with a lawyer,” they told her. “Don’t you just want to know what happened?” she asked. They interviewed Peters without a lawyer.
Munger was summoned. For two days—also unaccompanied, for what additional legal counsel could Charles T. Munger