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By Root 3576 0

possibly need?—he tried to defend Blue Chip against the charge that it was trying to bust up the Santa Barbara merger and to explain why Blue Chip had paid more than was strictly necessary for Wesco’s stock. Yes, Blue Chip had thought about getting control, he said, but those plans were only “remote and contingent” until the Santa Barbara merger blew up. This discussion became somewhat circular given his and Buffett’s role in talking to Vincenti and their admitted “wooing” of Betty Peters and the Casper family’s votes. Munger had a regrettable tendency to interrupt and lecture the SEC staff lawyer, Larry Seidman. “We wanted to look very fair and equitable to Lou Vincenti and Betty Peters,” he said.27 But the SEC lawyers had never met the intractable Lou Vincenti. They could not possibly understand. What about your Blue Chip shareholders? Seidman asked. Seidman saw no reason for Blue Chip to be so generous to Wesco shareholders; Wesco’s stock by then was largely in the hands of arbitrageurs.

These were people who had bought Wesco’s stock knowing it would rise to the price that Santa Barbara had offered once the deal closed. They partly hedged their bets by shorting Santa Barbara’s stock, much as Graham-Newman had once bought Rockwood stock in exchange for cocoa-bean warehouse receipts. But when the Wesco deal blew up, it was as if the price of cocoa beans had collapsed.28 Why do the arbs a favor by propping up the price?

Munger reached for his ultimate weapon—Benjamin Franklin. “We didn’t feel our obligation to the shareholders was inconsistent with leaning over backward to be fair. We have that Ben Franklin idea that the honest policy is the best policy. It had a sort of shoddy mental image to us to try to reduce the price.”29

Seidman seemed a little baffled by this argument, and even Munger admitted that the details of what had been done did not look good. He begged Seidman to look at the big picture. “As you look at the overall records, we go way beyond any legal requirement in trying to be fair with people to observe the niceties of fair-dealing; I simply hope that you will reach the conclusion that this averages out as not an appropriate case for any sort of prosecution…. If there’s any defect at all, it’s not intentional.”

When Buffett appeared, they asked him why he and Munger hadn’t let Wesco go into the tank so they could buy it cheap. “I think the general business reputation of Blue Chip would not have been as good,” Buffett said. “I think someone might have been sore about it.” But why should he care? Because, said Buffett, it was “important how Wesco management feels about us. You can say, well, we own the controlling interest, so it doesn’t make any difference. But Lou Vincenti doesn’t really need to work for us…. If he felt that we were, you know, slobs or something, it just wouldn’t work.”

Now Buffett—who, like Munger, startled the enforcement lawyers by showing up alone—made himself helpful, venturing back to Washington several times, patiently explaining how Blue Chip worked, expounding on his investment philosophies, and talking about his childhood years in Washington. He made a favorable impression on Seidman, but not on the senior SEC staff lawyer who was in charge of the investigation, and who was known as a “tiger” whose motto was “They shall not pass.” He found these arguments unconvincing.30 The senior investigator’s attitude was that nobody who did anything close to the line would ever get by him.31

The SEC staff kept delving. It seemed fascinated by the intricacies and complications of Buffett’s empire. It even started looking into whether he had traded on inside information about San Jose Water Works.32 The staff started kicking around Source Capital, the closed-end investment fund that Munger had bought a twenty percent interest in as a cigar butt and helped turn around. By then, the stock market had recovered. Ruane’s Sequoia Fund had made a huge comeback in 1975, up almost sixty-two percent compared to thirty-seven percent for the market. Munger had just about made back his partners’ money,