Former Berkshire Hathaway executive David Sokol deliberately misled Warren Buffett when pitching an investment to him, the company's board concluded in a scathing report that may add fuel to a pending SEC probe of Buffett's one-time heir apparent.

The board said it may sue Sokol to recover the $3 million of trading profit he made when Berkshire bought chemicals company Lubrizol Corp and could seek damages from him for harm to the company's reputation. The company will cooperate with any government probe in the matter as well.

The U.S. Securities and Exchange Commission is probing Sokol, a person familiar with the matter said on Wednesday.

Sokol's high-profile attorney disputed the board's report and said his client is a man of uncommon rectitude and probity.

I have known Mr. Sokol and have represented his companies in business litigation since the mid 1980s, said Barry Levine of the Washington firm Dickstein Shapiro. He would not, and did not, trade improperly, nor did he violate any fair reading of the Berkshire Hathaway policies.

Levine said in a statement late on Wednesday that Sokol had been studying Lubrizol for personal investment since the summer of 2010 and such investments are specifically allowed by his employment agreement.

Buffett was told twice, not once, about Sokol's ownership of Lubrizol stock before Buffett engaged in any discussions with Lubrizol, Levine said.

Levine, who has done work for Sokol's former company MidAmerican Energy, co-heads Dickstein's white collar criminal defense practice and has also represented attempted Ronald Reagan assassin John Hinckley.

The report is an unusual statement from a board that has historically been very close to Buffett, who is CEO and chairman. It may begin to answer the demands of shareholders who expected Buffett to address the controversy at the company's annual meeting in Omaha, Nebraska this weekend.

Buffett previously said he would have nothing further to say about Sokol's actions, a stance that became untenable over time given the intense pressure on the conglomerate.

The report paints a picture of Buffett as having been duped by Sokol. However, one shareholder said it was also crafted to exonerate Buffett from wrongdoing.

This report makes it clearly look like this was not Warren Buffett's fault, this was Sokol's fault, said Michael Yoshikami, chief executive of wealth manager YCMNET Advisors and a Berkshire shareholder. There really is an effort here to make clear that this was not Warren Buffett's behavior in any way, this was Sokol's behavior.

GAIN AT RISK

Buffett announced Sokol's resignation in March, noting that Sokol bought shares in Lubrizol before suggesting to Buffett that Berkshire buy the company. While Sokol mentioned to Buffett in passing that he held some Lubrizol stock, Buffett said he only later found out that Sokol held nearly 100,000 Lubrizol shares worth about $10 million.

Sokol made a profit of about $3 million -- a gain that could be at risk. The Berkshire board said it was still considering legal action against Sokol to, among other things, recover any trading profits he made.

It hardly sounds like Berkshire is trying to circle the wagons to protect Sokol, said Francis Pileggi, a partner at Fox Rothschild LP in Wilmington, Delaware. If I had my druthers, I would rather be representing Berkshire in this matter than Sokol in a Delaware court.

Besides the potential civil recovery, Berkshire's board also said it would cooperate with any government investigation. A spokesman for the Securities and Exchange Commission declined to comment.

Legal experts said Sokol appears to be in more trouble now than was first thought.

I think Mr. Sokol has a real problem here, said Duke University Law Professor James Cox. This is not a close call at all.

FALLEN HEIR

Sokol, who used to run Berkshire subsidiaries MidAmerican and NetJets, was widely seen as Buffett's heir apparent, an image Buffett biographers say the Oracle of Omaha cultivated.

Yet Sokol, in his one public appearance since the scandal broke, told CNBC he had no aspiration to the job. In Wednesday's statement, Berkshire said Sokol reiterated as much to Buffett before Buffett announced Sokol's resignation.

When Buffett made that announcement, he said he believed Sokol had not done anything unlawful. The statement Wednesday seemed to suggest otherwise.

His misleadingly incomplete disclosures to Berkshire Hathaway senior management concerning those purchases violated the duty of candor he owed to the company, the board said -- noting that an executive's duty of candor was part of the duty of loyalty under Delaware law where Berkshire is incorporated.

Berkshire's board also said certain answers Sokol gave to Buffett in response to questions about the nature of his holdings appeared intended to deceive.

In total, the 18-page statement uses variations on the word violation some 11 times.

The board's audit committee held three meetings this month to consider the report.

Berkshire attorney Ron Olson said Sokol was interviewed at least three times regarding his Lubrizol trading and contacts with Citigroup Inc bankers. In connection with the preparation of the audit committee report, a request for a further interview with Mr. Sokol was made to his attorney. Mr. Sokol was not made available, Olson said in the statement.

The audit committee members are chairman Thomas Murphy, 85, and a decades-long Buffett friend; Donald Keough, 84, a former president of key Buffett holding Coca Cola Co; and former Microsoft executive Charlotte Guyman, 54.

Their report is likely to take some pressure off Buffett this weekend when tens of thousands of shareholders descend on Omaha for Berkshire's annual festival-cum-general-meeting.

One way or another, Mr. Buffett will have to address this. It's conceivable that this release relieves Mr. Buffett from the chore of addressing what is an unpleasant issue, said Jerry Bruni, CEO and portfolio manager at J.V. Bruni and Co, which owns Berkshire shares and has $450 million of assets under management.

Berkshire's actively traded class B shares were flat at $82.99 in after-hours trading. (Additional reporting by Jonathan Stempel, Moira Herbst, Matthew Goldstein, Dan Wilchins, Alina Selyukh and Jonathan Spicer in New York, Sarah N. Lynch in Washington and Sakthi Prasad in Bangalore. Editing by Robert MacMillan)