Tobacco Shares Fall as U.S. Pursues Suit

Shares of Altria Group Inc. and R.J. Reynolds Tobacco Holdings Inc. fell after reports that the U.S. government said cigarette makers should forfeit $289 billion in profits made through allegedly fraudulent marketing.

The Justice Department says U.S. cigarette makers continue to lie about the risks of smoking, market cigarettes to children and manipulate levels of nicotine in their products, according to proposed findings of fact filed in January to support a 1999 suit.

The six volumes of findings are the clearest indication that the Bush administration is aggressively pursuing the suit, which it inherited from the Clinton administration. The suit originally asked for $20 billion in damages. The figure demanded by the department would surpass the industry’s $246-billion settlement with U.S. states to settle health-care claims.

“It’s the overall weight of issues on the industry that’s weighing the stocks down right now,” said Tim Drake, an analyst for Banc One Investment Advisors Corp., which holds Altria and R.J. Reynolds shares.

Shares of Altria, which owns Philip Morris, fell $2.12 to $32.60 on the New York Stock Exchange. R.J. Reynolds dropped $3.12 to $33.57, also on the NYSE.

“It’s hard to reconcile the government’s position with the way cigarettes are manufactured, marketed and distributed today,” said William Ohlemeyer, associate general counsel for Philip Morris USA.

In addition to that case, investors are concerned that an Illinois judge may soon order Philip Morris to pay billions of dollars in a suit brought by smokers of “light” cigarettes.

Also, the biggest manufacturers have had to hike spending and cut prices to compete with makers of cheaper brands, Drake said. Altria reported its first quarterly profit decline in almost two years in January.

The industry agreed as part of the settlement with U.S. states more than four years ago to restrict advertising, lobbying and marketing of its tobacco products.

“The government’s repackaging of old allegations has no more legal merit than when the government filed this suit in 1999,” R.J. Reynolds spokesman Seth Moskowitz said.

The industry has filed its own documents of fact and will file a rebuttal to the Justice Department’s by mid-April, he said.

Some of the government’s claims are “extraordinarily weak,” said Kenneth N. Bass, a lawyer with legal firm Kirkland & Ellis, which represents Brown & Williamson Tobacco, a unit of British American Tobacco.

The proposed findings of fact were reported Tuesday by the New York Times.

Investors had thought President Bush wouldn’t aggressively pursue the lawsuit after Judge Gladys Kessler two years ago threw out two of the three claims brought by the government. Atty. Gen. John Ashcroft, as a senator, had opposed government litigation against the tobacco industry.

Kessler, who is presiding over the suit, has scheduled a trial for September 2004.