- Warren Buffett's Berkshire Hathaway is so large it's causing headaches for federal judges.
- Judges who own Berkshire's stock don't always realize one of its subsidiaries is in their court.
- A federal judge described it as a "thorny" problem and a "conflict nightmare."
Warren Buffett has acquired scores of businesses across dozens of industries during the nearly six decades he's been running Berkshire Hathaway.
The vast scale of the investor's conglomerate, with its subsidiaries within subsidiaries, has led to federal judges who own Berkshire stock presiding over cases involving Berkshire-owned businesses, without realizing their conflicts of interest.
Ralph Erickson, who sits on the US Court of Appeals for the 8th Circuit, flagged the issue in a recent letter to the heads of two judicial-rules committees. He revealed that several judges have told him they've made substantial gains on Berkshire stock, and don't want to incur capital-gains taxes by selling the shares and investing in an ETF or mutual fund instead.
The judges contacted Erickson upon discovering Berkshire was the parent or ultimate owner of a company in their court, sometimes after they had presided over the case. While litigants have to disclose their immediate parent, they don't have to trace their ownership any further, meaning conflicts aren't always being caught before cases are assigned or judges rule, Erickson wrote.
Erickson gave the example of Orange Julius, a chain of fruit-drink stores owned by International Dairy Queen, which is itself owned by Berkshire. He noted the problem extends beyond Berkshire too; he pointed to Citigroup, which has controlling interests in roughly 300 companies.
"The conflict is a thorny one for judges to maneuver in the field," Erickson wrote, adding that judges owning Berkshire shares and deciding cases involving Berkshire-owned businesses created a "conflict nightmare."
In other words, judges who are Berkshire shareholders stand to profit if the company's stock rises, so the risk is they might rule in favor of a Berkshire subsidiary or be more lenient towards it in the hope of enriching themselves.
Erickson proposed making it easier for judges to defer capital-gains taxes if they preemptively divest themselves of holdings such as Berkshire, and called for companies to be required to disclose their ultimate owners.
Buffett's businesses includes Geico, See's Candies, Fruit of the Loom, MidAmerican Energy, BNSF Railway, Precision Castparts, Duracell, NetJets, Dairy Queen, and Marmon, an industrial holding company that owns over 100 businesses.
Berkshire's cheaper "B" shares have more than tripled in value over the past decade, boosting Berkshire's market value to north of $600 billion.
Read more: Insider recently interviewed the CEOs of 5 Berkshire Hathaway businesses: See's Candies, Dairy Queen, Borsheims, Cort, and Brooks Running. They offered a rare glimpse inside Warren Buffett's company, and shared how they're dealing with the pandemic and inflation.