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Verdict burns tobacco
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June 7, 2001: 12:59 p.m. ET
$3.5B jury verdict concerns investors, sends tobacco stocks falling
By Staff Writer Mark Gongloff
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NEW YORK (CNNfn) - Tobacco stocks fell at midday Thursday as investors worried that a $3 billion jury verdict against Philip Morris Cos. in a smoker's lawsuit could mean more such blockbuster verdicts are coming.
Philip Morris, (MO: down $2.14 to $47.86, Research, Estimates), which makes Marlboro, Virginia Slims and other popular cigarette brands and also owns Kraft Foods Inc. and Miller Brewing Co., led the sector's fall.
A Los Angeles jury on Wednesday ordered the No. 1 cigarette maker to pay more than $3 billion -- the largest individual award ever in a tobacco case -- to Richard Boeken, a cancer-stricken securities and oil broker. Boeken claimed the company didn't warn him of the health risks of smoking, a claim Philip Morris finds unbelievable.
"It really strains credibility to suggest that an intelligent person like Mr. Boeken... wasn't aware of the risks of smoking and somehow was mislead about those risks," Bill Ohlemeyer, associate general counsel for Philip Morris, told CNNfn's The N.E.W. Show Wednesday.
Wall Street analysts said the verdict would likely be reduced. That could happen either on appeal or earlier, when the trial judge hears post-trial motions -- one of which will likely be a motion by Philip Morris to reduce or throw out the verdict.
Salomon Smith Barney analyst Martin Feldman told CNNfn's Money Gang program the verdict's punitive damages amount -- a whopping $3 billion -- was out of proportion to the $5.5 million in compensatory damages. (346K WAV) or (346K AIF)
Feldman also said most verdicts in past tobacco suits have been reduced or even thrown out on appeal, and there were a number of legal problems with this verdict, including errors in the instructions to the jury.
"We do not believe that the scale of this award will remain intact, and the appeal prospects appear good," Feldman said.
Setting a trend?
Still, tobacco stocks fell after delayed openings Thursday, as investors worried about the possibility of more such verdicts.
Among them was R.J. Reynolds Tobacco Holdings (RJR: down $2.99 to $55.89, Research, Estimates), maker of Camel, Winston, Salem and other cigarette brands.
Loews Corp. (LTR: down $2.72 to $65.28, Research, Estimates), which through its subsidiary Lorillard Tobacco Co. makes Newport and other cigarette brands, also lost ground, as did American depositary receipts of British American Tobacco PLC (BTI: down $0.25 to $15.04, Research, Estimates), which makes Benson & Hedges, Kool and other cigarette brands.
The flood of negative information about tobacco companies that began in 1994 -- when the public began to learn they'd hidden information about the harmful effects of smoking -- has helped made mega-verdicts increasingly likely, some analysts said.
"All that accumulation of negative stuff really sunk into the minds of people," said Mary Aronson, analyst of tobacco policy and litigation at Aronson Washington Research. "And these are the people who serve on juries."
Juries are also convinced that tobacco companies are rich and are adjusting their punitive awards accordingly, Aronson said.
"You're dealing with an exceedingly wealthy industry. If you hit them with a verdict of few million dollars, they could probably take that out of small change," Aronson said. "The point of a punitive damage verdict is to punish the company for its wrongdoing. $3 billion (would) punish it."
Truly punitive damages
Anti-tobacco forces certainly seemed satisfied that the industry had been punished.
"This verdict is both just and proportionate to the enormous damage that Philip Morris has inflicted on Mr. Boeken and millions of the company's other customers," said Edward Sweda Jr., senior attorney for the Tobacco Products Liability Project, a non-profit group that backs suits against tobacco companies.
Indeed, the $3 billion represents 3.8 percent of Philip Morris' net worth, 35.6 percent of its net income and 86.3 percent of after-tax operating profit for Philip Morris' U.S. tobacco operations, according to Bill Pecoriello, analyst with Sanford C. Bernstein.
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Pecoriello said the award would likely be reduced to somewhere between $20 million and $100 million, closer to two recent California verdicts against tobacco companies. Those verdicts could be thrown out altogether if the California Supreme Court decides later this year to outlaw any suits that arose from industry conduct before 1998.
Pecoriello said he expects the California Supreme Court to rule in favor of the tobacco industry, but an unfavorable ruling could be bad news for tobacco.
"A ruling against the industry by the California Supreme Court, coupled with continued individual (verdicts) in the $100 million range, would present a challenge for the industry," Pecoriello said. 
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