A Breach In The Walls Of Fortress Tobacco

Will settling Liggett's lawsuits clear a path for RJR's breakup?

In times of crisis, the weakest link always is the most dangerous. In the $45 billion tobacco industry, the weak link is Liggett Group, a gnat of a cigarette company run by renegade Florida investor Bennett S. LeBow. On Mar. 13, Liggett broke ranks in outrageous fashion, announcing that it has settled an enormous class action and that it is close to an agreement on anti-tobacco lawsuits brought by four states.

Liggett's highly risky action may not work. And it threatens to derail a legal strategy that, for years, has served Big Tobacco extraordinarily well: Never buckle, never settle, and never break ranks. Under the terms of a pending agreement, Liggett--which holds just a 2% share of the tobacco market--settles four suits brought against the industry by Mississippi, Florida, West Virginia, and Massachusetts.

BAD BLOOD. In a separate agreement, Liggett also settled what's known as the Castano class action--brought by the friend of a deceased smoker on behalf of all addicted smokers. The terms of Liggett's withdrawal from the two legal actions: At most, a relatively modest 12% of pretax earnings over 25 years, or some $2 million a year. By withdrawing from the suits, moreover, Liggett will significantly reduce its $10 million in annual legal costs.

Liggett's giant rivals were nonplussed by the company's legal capitulation. "Our clients intend to defend the litigation, continue to litigate, have no intention of settling, and didn't know what Mr. LeBow was doing," says David A. Hardy, outside counsel to Philip Morris Cos. and Lorillard Inc., and a partner at Shook, Hardy & Bacon in Kansas City, Mo.

Few within the industry, it turns out, knew about LeBow's settlement plans--including Liggett's own litigators. But if his negotiations were secret, his motives are obvious. First, he wanted to cap Liggett's exposure to a courtroom loss--one that could bankrupt his company. More important, the deal clears the decks for LeBow's long-term effort to force RJR Nabisco Holdings Corp. to spin off its profitable food unit from the tobacco company. On Apr. 17, RJR shareholders will vote on the plan, proposed by LeBow and investor Carl C. Icahn.

The agreement could help LeBow in his proxy battle by addressing RJR management's argument that anti-tobacco forces would legally block any attempt at a Nabisco spin-off. "This knocks [RJR-Nabisco's] defense right out from under them," says Michael L. Hirschfeld, LeBow's New York-based counsel and a partner with Milbank, Tweed, Hadley & McCloy. Moreover, LeBow's camp believes the settlement even makes Liggett an attractive takeover target by allowing an acquirer the same generous terms granted Liggett. "The deal is structured in a fashion to bring RJR into a settlement. It's being done through financial means instead of through the courthouse," says Joseph F. Rice, a lawyer with Ness Motley who helped negotiate the settlement on behalf of both Castano plaintiffs and the states.

The problem: LeBow's strategy likely won't work. For one thing, Liggett's settlements won't alleviate the long-term risk of new lawsuits. And investors say LeBow's go-it-alone style makes them wary of LeBow pulling the strings in an RJR spin-off. "The problem with LeBow is that he is always looking out for himself," says Gregory L. Jackson, a portfolio manager at Yacktman Asset Management in Chicago who says he will vote Yacktman's one million RJR shares against LeBow in April. "If we can't trust the people we're working with, we do not want to do business with them."

"HISTORIC." Investors also worry that Liggett's move has seriously damaged the industry's long-term legal viability. The deal resolves the Castano class action, advocates point out--but that action may ultimately be voided anyway. And the agreement does nothing to address other class actions pending. Rather, they say, Liggett has set a precedent that antismoking plaintiffs can use to extract similar or more generous terms in future actions. "If there's any fantasy by Liggett that they can settle it all and come out O.K., I think it's just that--a fantasy," says Richard Daynard, chairman of the Tobacco Products Liability Project at Northeastern University.

Anti-tobacco advocates are celebrating the Liggett settlement as a key turning point in their long-fought battle. "It shatters the myth of tobacco industry invulnerability," says John Banzhaf, executive director of Action on Smoking & Health. Adds antismoking advocate Matthew Myers: "This is truly of historic proportions."

Tobacco executives remain in a life-or-death struggle with their critics. Until now, few of them worried about sneak attacks from within their ranks. Perhaps they should have paid more heed to Bennett LeBow.

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