Aug. 17 (Bloomberg) -- A federal judge ruled that Altria Group Inc.'s Philip Morris USA and other U.S. cigarette makers violated anti-racketeering laws by marketing low-tar cigarettes as healthier alternatives to full-flavored brands.

U.S. District Judge Gladys Kessler, while deciding the Justice Department had proved its claims at a nine-month trial that ended in June 2005, declined to order the companies to fund large-scale programs to help smokers quit.

Altria shares rose $1.89, or 2.3 percent, to $82.64 in trading after the close of U.S. exchanges. The stock climbed as high as $83.55 after the ruling. Reynolds American Inc. rose $1.23, or 1.9 percent, to $65.30, while Carolina Group, representing Loews Corp.'s tobacco unit, rose $1.18, or 2.1 percent, to $57.31.

The ruling clears the way for Altria, owner of the world's largest cigarette maker, to break up the company to make it more valuable for shareholders. A spinoff of Kraft Foods Inc. could occur by year-end, analysts say. The company had fended off multibillion dollar cases in Florida and Illinois which were possible roadblocks for the breakup.

``They now have an opportunity to move forward on restructuring,'' said Thomas Russo, who oversees more than $3 billion at Gardner Russo & Gardner in Lancaster, Pennsylvania, including 3.5 million shares of Altria, his largest holding.

`Lethal Products'

Altria said the Justice Department suit was a possible obstacle to the spinoff.

Kessler ruled that the industry must stop marketing ``low tar'' and ``light'' cigarettes. The tobacco companies ``have marketed and sold their lethal product with zeal, with deception, with a single-minded focus on their financial success, and without regard for the human tragedy or social costs that success exacted,'' she wrote.

Kessler said ``unfortunately'' she lacks authority to order a costly smoking-cessation program. The government had sought billions of dollars from the tobacco companies to help smokers quit and to reduce youth smoking.

The Justice Department said in a statement it was disappointed the court didn't impose all suggested penalties, though they are ``hopeful that the remedies that were imposed by the court have a significant, positive impact on the health of the American people.''

Six-Year-Old Case

David Howard, a spokesman for Reynolds American's R.J. Reynolds Tobacco Co., said it was disappointed the judge found in the Justice Department's favor and was considering appealing.

``Philip Morris USA and Altria believe much of today's decision and order are not supported by the law or the evidence presented at trial, and appear to be Constitutionally impermissible or infringe on Congress' sole right to provide for the regulation of tobacco products,'' William S. Ohlemeyer, Altria's associate general counsel, said in a statement. Altria will study the decision and then decide whether to seek a review of the decision in trial court or appeal to the U.S. Circuit Court of Appeals for the District of Columbia.

The government's win ends a six-year-old suit that once threatened to bankrupt the cigarette industry. Several court decisions weakened the case to the point that, by the end of the trial, government lawyers reduced their claim to $14 billion from $280 billion.

More Changes

The government claimed in the suit that cigarette makers conspired in a five-decade campaign of misinformation to deny the dangers of smoking and sell cigarettes to kids.

The tobacco companies denied the claims and said a $206 billion settlement they reached with 46 states in 1998 ensured they would follow the law by disclosing the health risks of cigarettes and by keeping children from smoking.

Kessler found more changes were needed in the tobacco industry. In addition to barring the ``low tar'' and ``light'' labels, cigarette makers are also forbidden from using ``mild,'' ``natural'' or ``ultra light'' in packaging or advertising. The companies also will be required to affix statements regarding the health of smoking for at least two years, starting no later than February 2007.

The companies also must place full-page ads in more than 30 newspapers across the country containing ``corrective statements'' regarding the health effects of smoking, their addictiveness, the lack of health benefits from ``light'' cigarettes and the defendants' manipulation of the cigarette design, and adverse effects of secondhand smoke.

Clinton Administration

The companies also must make public marketing data and documents requested by the government, Kessler wrote. She ordered the tobacco industry to pay for all the remedies.

The Clinton administration filed the suit in 1999, seeking to recover hundreds of billions of dollars the government claimed it spent treating sick smokers. The Justice Department suffered an early setback in 2000 when Kessler threw out the health-care reimbursement claims.

At the same time, Kessler decided that the government was entitled to go forward with a claim that the industry violated the Racketeer Influenced and Corrupt Organizations Act, or RICO, which was passed in 1970 to target organized crime.

The tobacco industry appealed that decision, and the trial started in September 2004. Kessler heard the case without a jury.

Justice Department lawyers asked her to order the companies to forfeit $280 billion, a figure that represented the proceeds from cigarette sales to people addicted to smoking before age 21, according to the government.

Smoking Cessation

The Court of Appeals for the District of Columbia in February -- during the trial -- threw out the $280 billion claim. Kessler called it a ``body blow'' to the government's case.

In a 2-1 decision, the appeals court said the government could seek only ``forward-looking'' remedies intended to ``prevent and restrain'' future violations of the RICO act rather than penalties for past violations.

On June 7, 2005, during his summation in the case, Justice Department attorney Stephen Brody told Kessler the government was asking for a five-year, $10 billion smoking cessation plan in place of the 25-year, $130 billion plan advocated less than a month earlier.

The government also asked Kessler to order the companies to fund a $4 billion education and anti-smoking ad campaign.

Last-Minute Switch

Anti-smoking advocates and Democrats in Congress claimed the last-minute switch was imposed on the government's trial team by political appointees in the Justice Department, including Associate Attorney General Robert D. McCallum Jr., head of the Civil Division.

The defendants included Brown & Williamson Tobacco Corp., a unit of Reynolds American; Loews Corp.'s Lorillard Tobacco Co.; British American Tobacco Plc's British American Tobacco (Investments) Ltd.; and Vector Group Ltd.'s Liggett Group.

Kessler found that Liggett, which became an industry pariah in 1996 when it became the first company to settle a health- related smoking suit, isn't likely to engage in future violations and isn't required to follow any of the court-imposed remedies.

The Florida Supreme Court last month removed a hurdle to the breakup by refusing to reinstate $145 billion in punitive damages against cigarette makers in a state-wide class action.

Altria Breakup

Chief Executive Officer Louis Camilleri, 51, first mentioned breaking up Altria in 2004 to reward shareholders once the Florida case and other major tobacco lawsuits were resolved in the industry's favor. Once separated, Altria's units would be valued at as much as $89 a share, Citigroup Inc. analyst Bonnie Herzog in New York wrote July 17. Altria owns 88 percent of Kraft.

In December 2005, the Illinois Supreme Court threw out a $10.1 billion verdict against Philip Morris in a case filed by light cigarette smokers in that state. The plaintiffs claimed the company had misled them into believing that light cigarettes posed less of a health risk than other cigarettes.

The decision doomed similar cases against other cigarette makers in Illinois.

The case is U.S. v. Philip Morris USA, No. 99-CV-2496, U.S. District Court, District of Columbia.

To contact the reporter on the story: Bob Van Voris in New York at rvanvoris@bloomberg.net.

Last Updated: August 17, 2006 20:47 EDT