Warren Buffett's Most Notable Investment Controversies

Warren Buffett may be one of the world’s most respected investors, but he hasn't been without controversy. His reputation has faced challenges, including his investment in Goldman Sachs during the 2008 financial crisis and an SEC investigation involving Blue Chip Stamps. These incidents reveal the high stakes and scrutiny surrounding his decisions. This article explores how Buffett managed these controversies and maintained his standing despite these challenges.

Warren Buffett's Early Controversies 

Wesco Financial Corporation

Warren Buffett's first brush with controversy occurred during the acquisition of Wesco Financial Corporation in 1974. In 1972, Buffett and his business partner, Charlie Munger, began acquiring Wesco shares via their company Blue Chip Stamps.

As detailed in the 2000 book "Damn Right!: Behind the Scenes with Berkshire Hathaway
Billionaire Charlie Munger" by Janet Lowe, Buffett and Munger worked hard to stop a proposed acquisition of Wesco by another company in 1973. Then, they spent the next two years acquiring their own majority stake in Wesco.

Ultimately, the Securities and Exchange Commission (SEC) investigated this deal (and Buffett's investment practices, in general). It obtained a consent decree from Blue Chip Stamps that extracted a $115,000 payout for Wesco shareholders to compensate them for damages caused by the maneuver.

Buffalo Evening News

Buffett found himself the target of antitrust charges when he acquired the Buffalo Evening News for a reported $33 million in 1977, again through Blue Chip Stamps.

Buffett and the Buffalo Evening News prevailed in the legal proceedings. Moreover, the antitrust action seemed to some observers a desperate attempt by the newspaper's rival, Buffalo Courier-Express, to use the courts to take out its competition.

It was a stressful time all around, and Buffett was accused of failing to respect prior gentlemen's agreements. Berkshire Hathaway ultimately sold the Buffalo paper and 30 others it owned to Lee Enterprises in 2020.

The Middle Period

Salomon Brothers Scandal and Buffett's Intervention 

One of the most serious controversies involving Warren Buffett occurred in 1990. In 1987, Berkshire Hathaway had acquired a 12% interest in the investment banking firm Salomon Brothers.

In 1990, the news came out that a rogue trader had submitted bids in excess of Treasury rules and CEO John Gutfreund had failed to take disciplinary action. The U.S. government threatened to hold Salomon accountable. Buffett stepped into the breach; he directly intervened with the U.S. Treasury to reverse a ban on Salomon bidding in government bond auctions. (Such a ban would have crippled the investment bank.)

Buffett also stepped in to run Salomon Brothers for a time. Despite a $290 million fine levied on Salomon in 1992, Berkshire Hathaway ultimately saw its stake more than double when Travelers Group bought Salomon in 1997.

Controversy over Berkshire Hathaway's Charitable Giving

Berkshire Hathaway has experienced controversy due to its former charitable giving practices. Buffett believed that it was inappropriate for a company to direct its charitable giving to the pet causes of the board of directors.

Instead, he decided that shareholders of the company could allocate their proportionate share of the company's giving to the charitable organizations that they deemed worthy. Some shareholders elected to contribute to various pro-choice organizations.

This inflamed some conservatives who, in turn, organized negative public relations campaigns and boycotts against certain Berkshire Hathaway businesses. Most notable of these was The Pampered Chef, which relied on a direct sales business model.

In response to the controversy, Buffett ended Berkshire Hathaway's shareholder-designated contributions program.

Recent Challenges and Controversies for Buffett

General Reinsurance Co. and Legal Troubles 

The charges in 2006 against Berkshire Hathaway subsidiary General Reinsurance Corporation were serious. It was claimed that General Reinsurance Corporation cooperated with insurance giant AIG to engage in finite reinsurance.

Finite reinsurance was not insurance, entailing a corresponding transfer of risk. It was an accounting gimmick that allowed AIG to buff the appearance of its financial reports for a period of time.

The government aggressively pursued AIG and its then-chair, Hank Greenberg. Berkshire Hathaway did not escape unscathed. General Reinsurance agreed to pay $60.5 million through a civil class action settlement to AIG shareholders, $19.5 million to the U.S. Postal Inspection Service Consumer Fraud Fund, and another $12.2 million to settle the SEC charges.

Buffett's Controversial Goldman Sachs Investment

Berkshire Hathaway invested $5 billion in Goldman Sachs preferred stock during the 2008 financial crisis. Buffett believed that the stock purchase not only signaled confidence in the country's financial institutions but also demonstrated that the U.S. business community would take crucial action when the U.S. government wouldn't.

When the investment bank redeemed those shares in 2011, Berkshire made $3.7 billion. Buffett's association with Goldman Sachs—a company famously described by the writer Matt Taibbi as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money"—did his reputation no favors.

Wells Fargo Scandal's Impact on Berkshire Hathaway 

This episode is more of a cautionary tale than a threatening controversy because it occured while Berkshire Hathaway held a major portion of Wells Fargo shares.

In 1989, Berkshire Hathaway began investing in Wells Fargo, spending $12.7 billion and capturing a 10% stake. Buffett considered the bank one of his favorite holdings. However, in 2016, Wells Fargo was fined $185 million for illegal business practices. These centered on the bank's intense drive to cross-sell products and services to customers.

In fact, bank employees had opened millions of accounts fraudulently, charged customers for products and services they never requested, charged other inappropriate fees, and more. At first Wells Fargo ignored the unsavory revelations (a move that Buffett condemned). The bank paid $3 billion in 2020 to settle various civil and criminal investigations.

As a result of Wells Fargo's unethical behavior, Berkshire Hathaway sold almost all of its shares by 2021—and sold the rest in 2022.

The Debate Over the Independence of Berkshire's Board

One ongoing controversy involves corporate governance and the independence of the board of directors of Berkshire Hathaway. It's difficult to call it an independent board because many of its members are long-standing friends of Warren Buffett or Charlie Munger—or both men.

Buffett is the majority owner of the company. He wants directors with whom he is comfortable and who have the patient investment outlook that has served him so well for decades. Nevertheless, it does not change the fact that as a public company, Berkshire Hathaway is obligated to shareholders to have a strong, independent board of directors.

The Bottom Line

Given Warren Buffett’s extensive business career, it’s unsurprising that several controversies have emerged over the decades. These include scrutiny over his firm’s role in the Goldman Sachs investment during the 2008 financial crisis and the SEC investigation involving Blue Chip Stamps. While these incidents drew significant attention and raised questions about his business practices, they had a limited impact on his reputation, reflecting Buffett’s ability to maintain his credibility in the financial world.