OMAHA, Nebada (AP) ― Berkshire Hathaway’s annual meeting on Saturday was dominated by somber topics, as Warren Buffett explained to roughly 40,000 shareholders how the company had been battered by a trusted former employee’s misdeeds and a string of natural disasters.

Buffett assured the crowd at an Omaha convention center that Berkshire is strong enough to withstand both the David Sokol scandal and the estimated $1.7 billion in insurance losses that drove profits down 58 percent in the first quarter.

Buffett said he doesn’t think he will ever understand why Sokol bought stock in Lubrizol shortly before recommending that Berkshire buy the chemical company. Buffett said he believes Sokol clearly violated Berkshire’s ethics and insider trading policies.

“It’s a situation that’s sad for Berkshire and sad for Dave,” Buffett said.

Buffett acknowledged that he made a mistake by not asking Sokol more about his Lubrizol stock when they first discussed the company in January. Buffett said he had no reason to think Sokol had just bought the stock the week before.

Buffett previewed Berkshire’s earnings at the annual meeting, ahead of their scheduled release on Friday. He said the biggest factor in the earnings drop was roughly $1.7 billion in pretax losses related to the Japanese earthquake and tsunami, Australian floods and the New Zealand earthquake.

“We had probably the second-worst quarter for the insurance industry in terms of disasters around the globe,” Buffett said.

Reinsurance companies, like Berkshire’s General Re and National Indemnity, sell backup insurance to primary insurers so the industry can cover big losses.

Buffett estimates that Berkshire will report $1.5 billion in net income, down from $3.6 billion last year. He did not offer earnings per-share figures.

Buffett and Berkshire Vice Chairman Charlie Munger spend nearly six hours answering questions at the annual meeting.

One of the early questions asking why Buffett wasn’t tougher on Sokol drew mild applause from the audience because Buffett has always promised to be ruthless with anyone who hurts Berkshire’s reputation.

Buffett said he didn’t have all the information about Sokol when he announced the former MidAmerican Energy chairman’s resignation in March. Buffett said he learned that Sokol had met with investment bankers about Lubrizol only after the deal was announced.

Buffett and Munger both acknowledged that the March 30 news release, which included a line where Buffett defended Sokol’s conduct as legal, was poorly written.

Sokol denies any wrongdoing. Before his departure, Sokol had served as chairman of Berkshire’s MidAmerican Energy, NetJets and Johns Manville units.

Buffett said part of the reason he finds Sokol’s actions inexplicable is that years before Sokol rejected a compensation plan that might have paid him a $50 million bonus. Instead he shared the bonus equally with one of his fellow managers at MidAmerican.

Jeff Matthews, a shareholder who wrote “Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett” and another Buffett book, said that story about Sokol helps explain why Buffett was surprised by his actions. Matthews said he appreciated Buffett’s explanation and his willingness to take questions.

“I think he did exactly what he should have done,” Matthews said. “He didn’t duck anything.”

Buffett said all of Berkshire’s policies on ethics and insider trading will be reviewed to see if changes are needed, but he doesn’t think it makes sense to create a large compliance office to keep tabs on employees’ personal investments. Buffett said there are currently only three people at Berkshire authorized to make stock investments.

Munger said he believes the greatest companies generally pick trustworthy people for important positions and then grant them significant responsibility.

“Some of the ones with the biggest compliance departments have the most scandals,” Munger said.

Buffett has dealt with scandals before at Berkshire Hathaway, most notably at Salomon Inc. in 1992 and at General Re in 2005. He took the helm at Salomon after it was revealed that the company repeatedly submitted false bids during Treasury auctions.

When Berkshire-owned General Re was implicated in an accounting scheme at American International Group, Buffett fired the General Re executives involved. He also testified before federal regulators.

Sokol’s roughly $10 million Lubrizol investment turned into about $13 million after Berkshire announced its $135 per share offer for the company. The $9 billion deal also includes Berkshire assuming about $700 million in Lubrizol debt.

Berkshire’s audit committee said Wednesday that the board may consider legal action against Sokol to recover his trading profits and compensate Berkshire for any damage it sustained.

Shareholder Kevin Gednalske said the report on Sokol’s actions was troubling, especially if he was acting on Berkshire’s behalf when he bought Lubrizol stock for himself.

“Whether it was lawful or not, it wasn’t ethical,” Gednalske said.

But Gednalske and other shareholders said the hands-off way Buffett runs Berkshire’s subsidiaries means that there will occasionally be problems within the company.

Berkshire is highly decentralized with just 21 employees in Omaha to oversee about 260,000 employees worldwide. Buffett tells shareholders that he and Munger “delegate almost to the point of abdication” and let the managers of Berkshire’s subsidiaries run their businesses.

Buffett sends a letter to his managers every two years reminding them to “zealously guard Berkshire’s reputation.” And Buffett encourages his managers to avoid any behavior that comes close to being unethical.

Brad Kinstler, CEO of Berkshire subsidiary See’s Candy, said he doesn’t expect Berkshire to impose new controls on executives because of Sokol’s actions. Kinstler said there is a level of trust required in any business.

“You have to always have a watchful eye, but you can’t watch everything,” Kinstler said.

Sokol’s departure has renewed speculation about Berkshire’s succession plan because Sokol was widely viewed as leading contender to eventually replace the 80-year-old Buffett as CEO. Buffett told shareholders Saturday that the company has strong candidates for the chief executive job, and the person he considers the leading contender also has strong ethics. He refused to name specific candidates.

“The Bible says the meek will inherit the Earth. The question is whether they will remain meek,” Buffett said.

Berkshire plans to split Buffett’s job into three parts after he steps down ― CEO, chairman and several investment managers. Buffett, however, has indicated that he has no plans to retire yet. He says he loves his work and remains in good health.

Buffett has recommended that his son Howard take over as chairman to ensure Berkshire’s culture is preserved. That decision will be made by Berkshire’s board. Howard Buffett is a member of the board.

Buffett said having an independent chairman who controls a sizeable amount of stock would help protect the company if a mistake were made when the next CEO is chosen.

Buffett said most of Berkshire’s companies continue to improve gradually along with the overall economy ― except for those tied to residential construction. Those subsidiaries haven’t improved significantly since the recession slammed the home-building industry.

Berkshire’s railroad and utility division, which includes Burlington Northern Santa Fe railroad and MidAmerican Energy, posted a big jump in profits. That unit will add $908 million to Berkshire’s net income in the quarter, up from $505 million last year.