Tobacco profits ruled safe from federal seizure

U.S. sought $280 billion under racketeering law

Main lever on industry removed

Conspiracy, fraud trial continues in lower court

February 05, 2005|By Myron Levin | Myron Levin,LOS ANGELES TIMES

The tobacco industry won a resounding victory yesterday when a federal appeals court barred the Justice Department from seeking forfeiture of $280 billion in allegedly ill-gotten gains as part of its fraud and racketeering case against the top cigarette makers.

In a 2-1 ruling, the U.S. Court of Appeals for the District of Columbia ruled the government may not seek "disgorgement" of illicit profits in civil suits filed under the racketeering statute known as RICO.

The decision does not end the huge case - the government can still seek other sanctions - but it wipes out by far the most worrisome threat from the tobacco companies' point of view.

The decision sparked wide speculation that the Justice Department might seek to settle the case rather than appeal the ruling and continue the trial - which has been puttering along since September in U.S. District Court in Washington, D.C.

A Justice spokeswoman declined to comment, saying only that department lawyers were reviewing the decision. They could seek reconsideration by the full appeals court or file an appeal with the Supreme Court

"We are extremely pleased that the appellate court agreed with our long-held belief that disgorgement is not an appropriate remedy," said Charles A. Blixt, executive vice president and general counsel of R.J. Reynolds Tobacco Co. "This ruling dramatically transforms the DOJ suit."

Filed in 1999 during the Clinton administration, it is the largest civil racketeering suit in history and involves the biggest sum ever sought by the Justice Department in a civil case. The parties listed about 73,000 trial exhibits and took more than 300 depositions prior to trial. The government has run up legal costs of at least $139 million; with their armies of top-flight corporate defenders, the tobacco companies are believed to have spent several times more.

The suit accused cigarette makers of engaging in a decades-long conspiracy to distort the risks of smoking and second-hand smoke, of targeting minors with cigarette advertising, and of regulating nicotine levels to keep customers hooked.

It alleged 145 acts of wire and mail fraud - linked to specific ads and public statements - along with civil violations of the RICO law, which was passed to fight organized crime but has also been turned on corrupt businesses and unions. RJR and its co-defendants, including Altria Group Inc.'s Philip Morris USA, British American Tobacco, and Loews Corp.'s Lorillard unit, have denied all the charges.

Along with forfeiture of past profits, the government has been seeking court-ordered changes in industry practices, such as use of bigger warning labels, advertising restrictions and industry-funded smoking cessation programs.

But "the primary focus for the industry and Wall Street investors was on the amount of profits tobacco interests would be forced to disgorge," said Mary Aronson, a legal and financial analyst based in Washington, D.C. Thus, the decision is "a major disappointment for the Department of Justice and a big relief for the tobacco industry," Aronson said.

The outcome was not unexpected, given the conservative majority of the panel and the tenor of questions at the November hearing on the industry's disgorgement appeal.

Even so, tobacco investors were turning cartwheels on news of the ruling. In trading on the New York Stock Exchange yesterday, industry leader Altria rose $3.26, or 5.1 percent, to close at $67. Reynolds American Inc., parent of RJR, claimed $3.69 to close at $85.60; Carolina Group, a tracking stock for Loews' Lorillard unit, gained $1.52 to close at $33.50; Vector Group Ltd., owner of Liggett tobacco, rose 47 cents to $16.53; and British American's U.S. traded share rose 75 cents, or 2 percent, to $36.15.

Tobacco foes tried to put the best face on the decision, pointing out that U.S. District Judge Gladys Kessler can still order significant changes in industry practices if she finds the companies did engage in fraud.

Since fall, the case has been proceeding on two tracks. The government has called more than 40 witnesses to testify in Kessler's courtroom, including prominent tobacco whistle-blowers and top industry executives. Meanwhile, the court of appeals had been considering an industry challenge to Kessler's ruling that the government could proceed with its $280 billion disgorgement claim.

The astronomical sum was an estimate of 30 years of gross profits from sales to 33 million "youth-addicted" smokers - defined as those who became smokers of at least five cigarettes a day before the age of 21 between 1971, when the RICO law took effect, and 2001.

The figure represents $75 billion income from those sales, plus more than $204 billion in interest.

Cigarette makers charged that the number was basically pulled from thin air to coerce them into settling. In their appeal, they argued that disgorgement is not permitted in a civil RICO case.

Judges David Sentelle and Stephen Williams, appointees of President Ronald Reagan, agreed.

"We can find no justification for considering any order of disgorgement," Sentelle wrote for the majority. "We need not twist the language to create a new remedy not contemplated by the statute."

Clinton appointee David Tatel dissented, arguing that the ruling "disregards Congress's plain language" and "controlling Supreme Court precedent."

The Los Angeles Times is a Tribune Publishing newspaper.

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