Tobacco Stocks Tumble on Legal Setback

WASHINGTON – A federal judge dealt tobacco companies a blow on Monday that sent their stocks sliding by refusing to limit $280 billion worth of penalties the government is seeking at a trial due to start in September.

Shares of Altria Group Inc.(MO), whose Philip Morris USA unit is the largest U.S. cigarette maker, fell 6.75 percent, and R.J. Reynolds Tobacco Holdings Inc. (RJR) declined by 5 percent after U.S. District Judge Gladys Kessler denied their motion to disallow the government's bid for "disgorgement" of some of their past profits.

A suit filed by the Clinton administration in 1999 accuses tobacco companies of deliberately misleading the public about the risks of smoking in a conspiracy going back to the 1950s.

Kessler, in her ruling, said the question of what penalties, if any, should be imposed on the industry should be determined at trial.

A spokesman for R.J. Reynolds said the company was considering appealing the ruling directly to a federal appeals court.

An Altria spokesman said the company was still reviewing the ruling and had no immediate comment. Spokesmen for R.J. Reynolds and another tobacco company, Brown & Williamson (search), continued to express optimism about the case.

"We have no doubt that once we get to trial, the evidence will demonstrate that this claim is absurd," said Brown & Williamson spokesman Mark Smith.

The government has brought claims against Philip Morris USA and Altria; R.J. Reynolds Tobacco Co., the main unit of R.J. Reynolds Tobacco Holdings; Loews Corp.'s (LTR) Lorillard Tobacco (search) unit, which has a tracking stock, Carolina Group (CG); British American Tobacco Plc's (BTI) Brown & Williamson; and Vector Group Ltd.'s Liggett Group (search).

Kessler agreed with the industry's contention that the government must show a reasonable likelihood of future violations before imposing major penalties against the tobacco companies.

But she rejected the tobacco companies' argument that the potential sanctions are severely restricted by legal precedent.

Kessler said the disgorgement of past profits need not be limited to "funds that are being used or remain available to fund future (racketeering) violations," as the tobacco companies have argued.

She also rejected the industry's argument that disgorgement was inappropriate because it amounted to punishment.

The judge said the disgorgement of past profits found to be ill-gotten would serve as a legitimate deterrent to future racketeering violations.

The ruling won applause from the anti-tobacco group Campaign for Tobacco-Free Kids (search).

"It will allow the government to put on the strongest possible case and to seek the strongest possible remedies," the group's executive director, Bill Corr, said in a statement.

The tobacco companies say the industry has changed its ways since 1998 because it has been operating under a landmark settlement with the states that severely restricts cigarette marketing and subjects the companies to oversight.

Justice Department (search) lawyers had argued that decades of past misconduct was all the evidence it needed to show the likelihood of future deception. They have also said they will demonstrate the industry continued to flout the law even after the companies signed on to the settlement.

The department contends the tobacco industry has violated the settlement agreement, has continued aiming its ads at "youth-oriented" publications, and uses "imagery and messages that they know appeal to teenagers."