Misleading. Deceiving. The reverse of truth.                      

Those aren't my words. They're from Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) audit committee, which just released a report on former executive David Sokol's resignation. Sokol purchased $10 million worth of Lubrizol shares earlier this year. Berkshire bought Lubrizol weeks later after Sokol's lobbying, making the trades smell awfully fishy. (For more background, see here.)

Here's the committee: 

"On the morning of March 14, Berkshire Hathaway and Lubrizol announced the signing of the merger agreement. A Citi representative with whom Berkshire Hathaway did business congratulated Mr. Buffett on the merger agreement, and told Mr. Buffett that Citi's investment bankers had brought Lubrizol to Mr. Sokol's attention. This was the first time Mr. Buffett heard that investment bankers played any role in introducing Lubrizol to Mr. Sokol, and did not square with Mr. Sokol's remark in January that he had come to know Lubrizol by owning the stock.

"At Mr. Buffett's request, Berkshire Hathaway CFO Marc Hamburg phoned Mr. Sokol on March 15. Mr. Hamburg asked Mr. Sokol for the details of his Lubrizol stockholdings. Mr. Sokol provided the dates and amounts of his Lubrizol purchases. Mr. Hamburg also asked about Citi's role in introducing Mr. Sokol to Lubrizol. Mr. Sokol answered that he thought he had called a banker he knew at Citi to get [Lubrizol CEO James] Hambrick's phone number. When Mr. Hamburg commented that it sounded as if the banker must have exaggerated his role when he spoke with his colleagues, Mr. Sokol did not contradict him."

Buffett's March 30 press release doesn't make any note of what appears to be skepticism of Sokol's trades. There's no mention of Hamburg's call, which is odd, because it seems like step one of a behind-the-scenes investigation. The original announcement implies that Buffett took no issue with the timing of Sokol's trades, which the audit committee's report now somewhat contradicts.

But how Sokol disclosed his stake to Buffett, and why Buffett was originally OK with it, now seems clearer:

"It did not cross Mr. Buffett's mind at that time that Mr. Sokol might have bought Lubrizol shares after seeking through investment bankers to initiate discussions with Lubrizol concerning a possible Berkshire Hathaway acquisition of Lubrizol. Because Mr. Sokol's comment about owning the shares was in response to Mr. Buffett's question how Mr. Sokol had come to know the company, it implied that Mr. Sokol had been following Lubrizol as an owner of its shares, and in that way came to think of Lubrizol as a possible Berkshire Hathaway acquisition."

That's really the crux of this issue. That Sokol bought Lubrizol shares even before Berkshire bought the company isn't what's fishy. It's that he bought shares after a Citi banker brought the company to his attention in the context of a possible Berkshire acquisition.

The audit committee continues: 

"Mr. Sokol's actions did not satisfy the duty of full disclosure inherent in the Berkshire Hathaway policies and mandated by state law. His remark to Mr. Buffett in January, revealing only that he owned some Lubrizol stock, did not tell Mr. Buffett what he needed to know. In the context of Mr. Buffett's question how Mr. Sokol came to know Lubrizol, its effect was to mislead: it implied that Mr. Sokol owned the stock before he began considering Lubrizol as an acquisition candidate, when the truth was the reverse.

"Mr. Sokol's answer to Berkshire Hathaway's CFO, Mr. Hamburg, concerning the investment bankers similarly fell short of the degree of candor required of a corporate fiduciary, and suggests his answer to Mr. Buffett's earlier inquiry noted above was intended to deceive."

No mincing words there. "Mislead" and "deceive" is about the harshest language I can see a former employer using in a situation like this, where Berkshire's credibility, not just Sokol's, is at stake. If Berkshire felt Sokol did nothing wrong yet chose to resign merely for optical issues, it would have said so. But the report makes it clear: This wasn't an innocent mistake. Whether Sokol initially bought Lubrizol in good faith is unknown. How he handled the aftermath, however, is. And it doesn't look good.

Does this hurt Berkshire's reputation? Not materially, I don't think. If anything, it underlines that the company has zero tolerance for anything short of ethical perfection. "Mr. Sokol threatened Berkshire Hathaway's reputation -- or would have done so had he remained with the Company," writes the audit committee. That Sokol would have been fired had he not resigned seems likely. Remember Buffett's warning from the early 1990s: "Lose money for my firm and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless." 

Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Follow him on Twitter @TMFHousel. Berkshire Hathaway is a Motley Fool Inside Value pick. Berkshire Hathaway is a Motley Fool Stock Advisor selection. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.