Warren Buffett said he had made a mistake by not asking more about David Sokol's purchases of Lubrizol Corp stock while his former top lieutenant was pitching the chemicals company as a possible takeover target for Berkshire Hathaway Inc.

Sokol was widely considered a leading candidate to succeed Buffett as Berkshire's chief executive, but he resigned last month after it was revealed that he had bought $10 million of shares in Lubrizol. Sokol got a roughly $3 million profit on that stake when Berkshire agreed to buy Lubrizol.

The U.S. Securities and Exchange Commission is probing Sokol, a person familiar with the matter has said, and the controversy has put Buffett's management style into question.

Speaking on Saturday to shareholders from the stage at Berkshire's annual meeting in Omaha, Nebraska, Buffett said he should have probed more deeply when Sokol first revealed in January that he owned Lubrizol stock.

This was after Sokol had spoken with Citigroup Inc bankers about Lubrizol, and two months before Berkshire agreed to buy the chemicals company for roughly $9 billion.

I obviously made a big mistake by not saying, 'Well when did you buy it,' Buffett told shareholders. He called the Sokol situation inexplicable and inexcusable.

In a scathing report, a committee on Berkshire's board this week found that Sokol deliberately misled Buffett about his Lubrizol investments, and that his misleadingly incomplete disclosures violated his duty to be candid.

It also said some of Sokol's responses to Buffett's questions about the stake appeared intended to deceive.

I think that for reasons that are laid out in the audit committee report, I don't think there's any question about the inexcusable part, Buffett said.

Buffett said he did not understand Sokol's actions, and added, We hope to get some value out of this experience.

Berkshire's Vice Chairman Charlie Munger, seated beside Buffett, attributed Sokol's behavior to hubris.

Barry Levine, a lawyer for Sokol, did not immediately reply to an e-mailed request for comment.

SUCCESSION

Berkshire is expected to split the CEO and chief investment officer roles after Buffett leaves. Buffett hired hedge fund manager Todd Combs as a potential successor for the latter.

Prior to Sokol's departure, Berkshire had said it had four internal managers to potentially succeed Buffett as chief executive.

Ajit Jain, who oversees many Berkshire insurance businesses and speaks with Buffett almost daily, is widely thought to be on that list. Many analysts believe Burlington Northern Santa Fe railroad chief Matthew Rose is also on that list.

Others may include Geico auto insurance chief Tony Nicely, MidAmerican Energy chief Greg Abel and reinsurer General Re chief Tad Montross.

Buffett, 80, told shareholders he was not sure it had been warranted to assume Sokol was his most likely successor.

Certainly the candidate that I think is the leading candidate now, I would lay a lot of money on the fact that he is as straight as an arrow, Buffett said.

Some of Buffett's comments drew polite applause from the audience. The event is expected to draw close to 40,000 people.

EARTHQUAKES HIT PROFITS

Buffett also revealed that losses from earthquakes in Japan and New Zealand and other catastrophes would likely drive Berkshire's first-quarter profit down 58 percent.

Preliminary results indicate that net earnings fell to $1.51 billion from $3.63 billion a year ago. Operating earnings fell 28 percent to $1.59 billion from $2.22 billion.

Buffett said Berkshire had lost $821 million from insurance underwriting in the quarter, and would in 2011 likely post its first full-year insurance underwriting loss in nine years.

The company relies on insurance businesses as a low-cost funding source for investments because it receives premiums well before it pays out money to cover insurance losses. Such losses can effectively raise funding costs.

Berkshire lost $1.07 billion from the Japan earthquake, and $412 million from the New Zealand quake. Buffett said that pretty much all of Berkshire's roughly 80 other businesses, apart from those tied to residential housing, were getting better.

(Reporting by Ben Berkowitz; Additional reporting and writing by Jonathan Stempel in New York; Editing by Toni Reinhold)