FEDS TO GET THEIR DAY IN COURT,
BUT THEY HAVE A TOUGH ROAD AHEAD IN TOBACCO SUIT
The Department of Justice's case against the tobacco industry is
finally went to trial on Sept. 21. The underlying issues have not
changed, and our opinion remains that the federal government will
have difficulty winning its case.
Ironically, the trial began in mid-September, more than two months
before the Court of Appeals of the District of Columbia is scheduled
to hear oral arguments on a defendant appeal of whether the industry
can be compelled to disgorge $280 billion of "ill-gotten gains"
for fraudulent activities over the last 50 years. It is possible
that disgorgement could be thrown out while the trial continues.
Already, Judge Gladys Kessler has dismissed two claims or "counts"
against the defendants demanding monetary damages for federal health
care costs. The remaining counts allege conspiracy violations under
federal racketeering statutes. This case will be difficult because
the federal government will have to prove that tobacco companies
conspired to misrepresent the health effects of smoking in the past,
that they do so now and are likely to continue to do so in the future.
Tough case to make
The government argues that a meeting among tobacco company executives
in 1954 initiated a conspiracy to mislead the public on the dangers
of smoking. Tobacco companies deny the allegation. It would seem,
in our eyes, difficult to make the case that tobacco companies can
be expected to continue conspiring in light of the scrutiny the
industry has been under since 1998 when the Master Settlement Agreement
was signed; there is a major split in the industry between companies
favoring federal regulation of tobacco, led by Altria (Philip Morris),
and those bitterly opposed (Reynolds American). The trial is likely
to be decided in the spring of 2005 with appeals to follow.
If the federal government wins the case and disgorgement is required,
it is more likely that the payout would take place over a number
of years, similar to the MSA, and that cigarette prices would be
raised to pay the award. If disgorgement is disallowed, but the
case succeeds, tighter regulation of the tobacco industry would
likely result.
ANALYST CERTIFICATION
SEC Regulation AC
I, Jay H. Abrams, hereby certify that the views expressed in this
research report accurately reflect my personal views about the subject
securities and issuers. I also certify that no part of my compensation
was, is, or will be, directly or indirectly, related to the specific
recommendations or view expressed in this report.
09/17/2004
About Dr. Abrams
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